Chip developer: That's how big Nvidia's governance problem is

A board without chip experts, a global corporation without succession planning: In the wake of the espionage scandal surrounding Nvidia boss Jensen Huang, internal supervision is now also coming under fire.

Nvidia is launching an independent investigation into CEO Jensen Huang's alleged espionage scandal with the support of an outside law firm.

The board of directors has no chairman, and most members have no technical background or chip expertise.

Board members own shares worth a total of $11.1 billion, some of whom have held their positions for decades, which is an exception for US companies.

Jensen Huang has no deputy; more than 60 managers report directly to him. There is also no head of operations or head of technology in the top management.

Munich, Stuttgart. It was an indecisive statement with which the Nvidia board of directors reacted on Sunday to the alleged espionage scandal by company boss Jensen Huang. The control board said it was “initiating an independent investigation in light of recent reports that founder and CEO Jensen Huang was said to have been the target of a foreign espionage operation.” The investigation will be carried out by a committee with the support of an external law firm.

At the same time, the supervisory board emphasized that it had “no reason to believe that Nvidia’s national security or commercial secrets were at risk.” And further explained: “The board of directors has confidence in Jensen and his management team.”

Observers are critical of the company's handling of the incident. Tech journalist Kara Swisher said that if another CEO had had an affair with a Chinese spy - although the woman's background in Hunag's case is still speculative - "he would have been fired yesterday." It is all the more incomprehensible that the board of directors directly expressed its confidence in Huang.

Harry Kraemer Jr., ex-head of the healthcare company Baxter and lecturer at Northwestern University, sees it similarly. “To say there is no problem before you have conducted an investigation is not appropriate,” he told the Wall Street Journal: “That’s how you lose credibility.”

How problematic is the corporate governance of the most valuable company in the world, i.e. the question of how compliance with laws and regulations is monitored at Nvidia?

Growing worries on Wall Street

The $4.3 trillion chip giant lacks both a chairman of the board and a succession plan. And Huang's relationship with the alleged spy was initially denied by the company, only to later be admitted, which, according to observers, did not paint a good picture.

The stock market seems to share the concerns. After Nvidia shares fell more than four percent on Monday, they also closed more than five percent in the red on Tuesday.

Some observers, such as Shaun Maguire, a partner at venture capital giant Sequoia, called Huang “indispensable to U.S. AI leadership.” Others see the fact that there is no designated successor as a major problem. And above all, we hold internal supervision responsible.

Board of Directors without chip experts

Media reports speak of a “leadership vacuum at Nvidia”, for which the “board of directors without a chairman” is responsible. In fact, there is not a single internationally known name on the company's board. The position of “chairman” that is common in the USA does not exist either. The homepage only highlights Huang as “President and CEO.”

The remaining council members are well-deserved managers, often retired. They come from the following industries: Venture capitalists: Tench Coxe (Sutter Hill Ventures), Harvey Jones (Square Wave Venture), Brooke Seawell (New Enterprise Associates), Mark Stevens (S-Cubed Capital). Food and Health: Dawn Huson (Ex-Head of North America, Pepsico), Melissa Lora (Ex-President, Taco Bell), Aarti Shah (Ex-CEO, Eli Lilly). Law: Stephen Neal (Cooley LLP). Banking: Suzanne Johnson (former Vice Chairman Goldman Sachs). Science: Professor John Dabiri (Caltech University).

What is noticeable: Virtually none of the members have a technical background or detailed knowledge of the chip industry. Even Dabiri is a professor of aeronautical engineering and mechanical engineering, not a semiconductor expert.

The involvement on the board of directors is obviously worth it financially. At the end of June, board member Tench Coxe alone held Nvidia shares currently worth $4.7 billion, according to mandatory disclosures to the stock exchange. In total, the ten members of the board, excluding Huang, owned shares worth $11.1 billion.

Some of the board members have already cashed in on their shares. Mark Stevens, who has been a member of the board since 2008, has since sold Nvidia shares for a good $2.7 billion, as the mandatory disclosures show.

The board of directors has also hardly changed in recent years, despite Nvidia's meteoric rise. Three of the 10 independent members have held their posts for 25 years or longer, according to The Wall Street Journal, and two others have been in office for more than a decade.

This makes Nvidia an exception among the largest US companies where the average length of stay on the board of directors is less than eight years: According to the personnel consultancy Heidrick & Struggles, only ten percent of the members have been in office for more than a decade. The absence of a chairman is therefore an absolute exception. At Nvidia, Neal serves as a “senior member,” working with Huang to set the agenda for board meetings, according to filings.

CEO without deputy

The reason for this special situation can also be found in Huang as a person. The charismatic CEO has dominated the company since it was founded 33 years ago, something he has in common with other Valley greats.

Other tech founders exercise their control through large shares of stock or preferred stock with expanded voting rights. This is not the case with Nvidia: Huang only held 3.4 percent of the shares in mid-September. That currently equates to a market value of $137 billion, but does not give it dominant control.

Nevertheless, his position is central. At the most recent quarterly conference, for example, Huang answered most of the analysts' questions alone. Even his chief financial officer, Colette Kress, only had a small role. And his two children work in the company, but at lower levels.

How closely Nvidia is tailored to Huang is also reflected in the reporting lines: more than 60 managers report directly to him. There is no deputy like Gwynne Shotwell in Elon Musk's SpaceX empire. Not even the titles of Chief Operating Officer (COO) or Chief Technology Officer (CTO), standard positions at Silicon Valley companies, have been assigned in Nvidia's top management circle. In addition to Huang and co-founder Chris Malachowsky, this only consists of four managers.

Doubts about judgment

In recent years, Nvidia stock has only gone up as the artificial intelligence (AI) boom drove up demand for chips. Accordingly, governance issues were rarely discussed. That could now change.

Critical investors are asking why the board of directors did not respond in the spring to allegations from New York short seller Culper Research, which warned in a report of an “uncomfortably close” relationship between Jensen Huang and the alleged Chinese agent Alice Huang.

“The CEOs of McDonald’s, Nestlé and Intel were fired for relationships that raised safety concerns,” says Scott Galloway, a professor at New York University. If it turns out that Nvidia chips actually got into China illegally, that would be equivalent to transferring state secrets “to the Chinese Communist Party.” The US federal police are looking into the case.

Huang "showed such poor judgment in the affair that it compromised national security," Galloway said. “Typically a board will then declare that the CEO will resign from office until the outside counsel’s report is completed.” The situation at Nvidia is different: overlord Huang is still in office.