\n<\/p>\n
Nvidia\u2019s stock sank 5.47% on Tuesday, following a 4% drop on Monday, a loss of about 9.5% in two days, even though there wasn\u2019t much news out of the company. CEO Jensen Huang has reportedly been trying to conduct business as usual<\/a> after admitting to an extramarital affair with Alice Huang, whom U.S. intelligence agencies believe was spying for China. The biggest development: the board hired the law firm Wachtell, Lipton, Rosen & Katz to conduct an internal investigation.<\/p>\n What comes next is mostly a guessing game, even for the people who study how boards are supposed to handle crises. Two corporate governance professors, Ann Lipton of the University of Colorado and Todd Henderson of the University of Chicago, say there is no real precedent for a CEO caught up in a suspected honeypot. And while they have views on what the investigation should ask, like everyone else, they\u2019re watching to see how it plays out.<\/p>\n \u201cThere have actually been affair cases and sexual harassment cases,\u201d Lipton said, but was quick to add that she doesn\u2019t know of previous cases that also involve potential national security compromises. Henderson, whose research interests include corporations, securities regulation, and law and economics, said much depends on facts few people have yet, including, most importantly, what, if anything, Alice Huang got out of Jensen Huang. (Secrets about Nvidia\u2019s fabs or chip designs would matter to the Justice Department. Ordinary corporate information probably would not.)<\/p>\n Lipton described the investigation led by Nvidia\u2019s independent board members, with their own outside counsel, as perhaps the most \u201cstandard\u201d aspect of the whole affair so far. She also observed that an investigation will be \u201cexactly as thorough\u201d as the directors running it want it to be, which is also standard. Henderson made a related point about incentives, saying that Washington law firms that conduct internal investigations \u201cknow who pays their bills.\u201d He didn\u2019t suggest that\u2019s happening here.<\/p>\n Lipton said she sees three lines of inquiry, including whether the law was broken, whether Huang violated Nvidia\u2019s internal policies, and whether the board was misled, including how forthcoming he was and when he was on notice. It\u2019s notable, as Wired reported Monday<\/a>, that Huang hired a PR crisis firm known for handling sex scandals a full year ago. Of course, the driver could have been about the affair alone. It\u2019s unclear when Huang learned Alice Huang was a suspected spy. The board said in a Sunday statement about the matter that Nvidia has \u201chas no reason to believe<\/a> that either national security or NVIDIA secrets were compromised.\u201d<\/p>\n Henderson similarly stressed the importance of what Huang knew and when. He described two scenarios. In one, Huang hires a PR firm because an extramarital affair is embarrassing, without knowing who the woman is. In the other, he knows she is a suspected Chinese spy. \u201cI think that\u2019s very different,\u201d he said. \u201cIf I were a board member and the CEO of a company with very sensitive technology was in that situation, I would be furious if they didn\u2019t tell me.\u201d Not telling the board that you have cancer \u201cor that you\u2019ve been sleeping with a Chinese spy,\u201d said Henderson, \u201cseems to me to be a fireable offense.\u201d<\/p>\n Either way, Lipton expects shareholder suits, and she said two kinds are possible. Securities fraud, which she said is \u201conly about lying,\u201d is the most obvious, and as we reported yesterday, Nvidia is already facing a proposed class action<\/a> lawsuit that alleges Nvidia and Huang misled investors by concealing Huang\u2019s relationship with Alice Huang while describing dealings with her former employer as routine. \u201cYou can have as many affairs with Chinese spies as you like,\u201d Lipton said. \u201cYou just can\u2019t lie about it under the federal securities laws.\u201d<\/p>\n A mismanagement claim under Delaware law, where Nvidia is incorporated, is much harder. Employees do \u201cstupid or reckless or damaging things all the time,\u201d she said, and courts don\u2019t let shareholders sue each time. Shareholders bringing such a claim on the company\u2019s behalf, known as a derivative suit, must first show the board is incapable of handling the problem, usually by proving directors are implicated or so beholden to the CEO that they can\u2019t act independently. <\/p>\n Nvidia\u2019s 10-member board has a track record of loyalty and deference <\/a>to Huang, as outlined by a New York Times piece Tuesday morning. Still, the investigation those \u201cindependent\u201d directors have announced with outside counsel makes that very hard. Lipton cited, for example, a shareholder suit over alleged mismanagement at McDonald\u2019s several years ago, after its chief people officer was accused of harassment and its CEO had a relationship with a subordinate. Ultimately, the court found no reason the board couldn\u2019t deal with the misconduct on its own. <\/p>\n Even if none of this ends up threatening Huang\u2019s job, the episode raises other governance questions that don\u2019t look great in retrospect. Nvidia is run with a famously flat structure, with more than 60 direct reports to Huang, and the company doesn\u2019t appear to have a succession plan, which Lipton called \u201ca danger for any company.\u201d<\/p>\n Huang\u2019s children also work at Nvidia. His son Spencer is a director of product management, his daughter Madison is a senior director of product marketing, and his son-in-law, Nico Caprez, works in business development. Some employees believe he is grooming successors, and asked last month by Bloomberg whether Madison is in line for the job, Huang didn\u2019t shoot down the idea, saying instead that it\u2019s not something he\u2019d wish on her. <\/p>\n Lipton called hiring the kids poor corporate hygiene, even though founders have long done it. (Kimbal Musk is on Tesla\u2019s board because he\u2019s Elon Musk\u2019s brother, she noted.) Directors are supposed to act only for stockholders, but founders get more rope as long as the company is thriving. <\/p>\n Henderson similarly calls himself a strong \u201canti-nepotism person,\u201d sharing that when his father worked at Westinghouse\u2019s nuclear research lab, there was an absolute ban on hiring employees\u2019 children. \u201cLike, fine for them to be working there,\u201d he said of Huang\u2019s children working at Nvidia. But \u201cthe idea that one of his kids would succeed him\u201d at a publicly traded company the size of Nvidia \u201cseems crazy,\u201d he added.<\/p>\n What Nvidia may have gotten more right, from a governance standpoint, is what it doesn\u2019t have, which is dual-class shares. Huang reportedly owns about 3.6%, so he doesn\u2019t control the vote. That makes him \u201ceasier to dislodge,\u201d Lipton said, even though he is deeply integrated into the company in other ways. <\/p>\n Neither professor is rooting for or against Huang, each made clear. The simple truth is that with voting control on top of Huang\u2019s holdings, the board would have even less flexibility. Without it, the board has a few more options.<\/p>\n<\/div>\n When you purchase through links in our articles, we may earn a small commission<\/a>. This doesn\u2019t affect our editorial independence.<\/em><\/p>\n