Corporate Governance and Open AI

Written by Brody Gray
JD Candidate 2024 | UCalgary Law

The OpenAI Story
The recent news story of OpenAI brings the question of corporate governance and control into the spotlight. The story began on Friday, November 17th, when OpenAI announced they would be parting ways with CEO Sam Altman. The board ousted Altman after losing confidence in his ability due to an apparent lack of communication.[1] This news kicked off a weekend of high-tech corporate drama the likes of which Hollywood can only dream of.
            By Monday morning, Altman had secured employment at Microsoft. Quickly after this announcement, an OpenAI employee letter began circulating in which employees flipped the script.[2] Employees claimed they had lost faith in their board and demanded their resignation,[3] going as far as threatening their resignation if their demands were not met.[4] To further the drama, a board member of OpenAI publicly posted about their regret towards the board's actions and alluded to efforts to bring Altman back.[5]
            This dramatic plot seems to have concluded, with Altman returning to OpenAI as CEO, as announced in an OpenAI blog post by Altman.[6] Included in the blog post was a comment from the new Chair of the Board, Bret Taylor, stating how much he wants to express gratitude to OpenAI, and specifically OpenAI employees, "who came together to help find a path forward for the company over the past week."[7] What began as a board of directors ousting a CEO ends in the CEO's return and the board's dismissal.
 
So, Who is Actually in Charge?
            This whole saga seems to run counter to our ideas of the corporate hierarchy and begs the question of who is actually in charge. To answer that question, I will begin by echoing the ever-applicable legal answer of 'It depends.'
 
What the Law Says
            Corporate legislation is rather clear on who is in charge. All ultimate authority rests with shareholders, who are the company's owners. Yet shareholders are not expected to give their opinion on every single issue. For efficiency, expertise, and practical reasons, shareholders elect directors. Corporate legislation states that with more than 50% of the voting shares, directors can be elected to act in the interest of the shareholders.[8]
            Once directors are elected, they form a board of directors, which is given very broad authority to manage or supervise the business.[9] This authority to run the business includes the power to manage the corporation's affairs, yet directors typically will not concern themselves with the day-to-day management. Corporate legislation grants directors the authority to appoint officers and then delegate powers to these officers.[10] There are a few specific categories of authority that directors are forbidden from granting to officers. In the Alberta Business Corporations Act, those are laid out in section 115(3).
            Directors then have the power to appoint officers. They will appoint the CEO, CFO, CTO, COO, and various other positions depending on the context of the company and the business they operate. Officers are typically granted broad management powers, and the officers oversee the corporation's day-to-day management.
            The above structure is laid out in corporate legislation, but it is also subject to unanimous shareholder agreements, articles of incorporation, and bylaws. The exact share percentage required to elect a director or the powers directors can delegate to officers may change from corporation to corporation, but this describes a general structuring and chain of authority found in most corporations.
            It would, therefore, appear that the law paints a clear picture. Shareholders elect directors to manage on their behalf. Directors take this authority and oversee the company's strategy and long-term planning, elect officers, and further delegate the day-to-day management. Officers then manage the company on a day-to-day basis, reporting back to the board of directors. The chain places directors higher than officers, and it would seem clear that it is the directors in charge.
 
So, What's the Catch?
            The reality is that corporate governance is not necessarily this clear-cut, as shown by the OpenAI story. For starters, CEOs often sit on the boards of corporations they manage to increase communication and efficiency. Some CEOs may be highly prominent figures or exceptionally well liked and respected within the company. The reality of social context and working relationships should always be considered when assessing the power dynamic.
            There is also the reality, as shown by OpenAI, that corporations require the efforts of multiple parties, including their employees, to function correctly. A board of directors may have the legal authority to fire a CEO, but if employees refuse to work for anyone else, this authority is of little use in practice. The board of directors should be wary that they cannot afford to alienate large portions of the corporation, even if they have the legal authority to act in such a way.
            This discussion is particularly relevant to entrepreneurs and those working in start-up companies. This nuanced power dynamic is even more prominent, as start-up companies are often close-knit groups with intricate social relationships. Founders who sit on the board of their companies may have the legal authority to dismiss officers, but they should not conflate legal authority with practical ability. Directors dismiss CEOs frequently and can exercise their authority to do so without complaint. Still, these decisions should be made with an understanding of the contextual dynamic within any specific corporation.


[1] “OpenAI employees threaten to quit en masse after former CEO Sam Altman joins Microsoft”, NBC News, (20 November 2023), online: https://www.cbc.ca/news/business/microsoft-sam-altman-openai-chatgpt-1.7033588.

[2] “Majority of OpenAI employees threaten to quit as backlash against ouster CEO continues”, CBC News, (20 November 2023), online: https://www.nbcnews.com/business/business-news/sam-altman-joins-microsoft-openai-ouster-rcna125940.

[3] “Majority of OpenAI employees threaten to quit”, ibid.

[4] “OpenAI employees threaten to quit en masse”, supra note 1.

[5] “Majority of OpenAI employees threaten to quit”, supra note 2.

[6] “Sam Altman returns as CEO, OpenAI has new initial board”, OpenAI Blog, (29 November 2023), online: https://openai.com/blog/sam-altman-returns-as-ceo-openai-has-a-new-initial-board.

[7] “Sam Altman returns as CEO, OpenAI has new initial board”, ibid.

[8] Alberta Business Corporations Act, RSA 2000, c B-9, 2(2)(a).

[9] ABCA, ibid s. 101(1).

[10] ABCA, ibid s. 121(a).