With a weak board and no successor, Nvidia confronts a governance crisis

The News

Nvidia CEO Jensen Huang’s spy scandal shines a spotlight on thin corporate governance and opaque succession planning at what has become the world’s most important company.

Huang’s chances of remaining as CEO, after admitting to an affair with a woman suspected of spying for Chinese intelligence services, are now in the hands of a board of directors that lacks the experience and stature typically found at companies of Nvidia’s size and importance. They have allowed Huang to run the company with no obvious successor and a leadership structure with little precedent in corporate America, in which he has more than 50 direct reports.

Top of mind, too, is what Nvidia would be without Huang, its CEO since he co-founded the company in 1993. He has nearly single-handedly turned Nvidia from a niche maker of graphics chips for video games into the centerpiece of the world’s AI boom — and, depending on the day, its most valuable company.

“It appears [Huang] did mislead the public,” said Gary Gensler, the former chair of the Securities & Exchange Commission under the Biden administration, referencing earlier denials by Huang and the company that his dealings were “all completely normal and not unusual.”

“It’s really a question of is that material, and today’s stock drop will suggest to a court it was material,” Gensler said. Nvidia’s shares were down 5% in afternoon trading, slicing more than $200 billion from its market value. When asked if the SEC was going to investigate, an agency spokesperson declined to comment.

For its part, Nvidia’s board has said it still has confidence in Huang.

Cozy Ties, Light Resumes

The average Nvidia board member has been there almost 15 years — nearly twice as long as the average S&P 500 director. Nvidia’s lead director is a 77-year-old former law-firm executive. None of the board members are current or former S&P 500 CEOs or have national-security experience. (Meta and Microsoft each have four big-company CEOs on their boards.) Huang and two other directors have been on the board since the company’s founding 33 years ago.

“The board composition suggests this is… a CEO exercising effective control over the board instead of vice versa,” said Jill Fisch, a professor at The University of Pennsylvania’s Carey Law School, adding that long tenure on a board can reduce directors’ independence and breed complacency.

At the same time, she said, Nvidia exemplifies how limited boards’ ability to check executives’ power can be when their CEO is known as an industry visionary: “How do you say no to someone with this track record of success?”

Succession Questions

Nvidia has never publicly signaled a succession plan for Huang, both of whose adult children work for the company. It also lacks a clear No. 2, with no president or chief operating officer. The word “succession” appears nowhere in its most recent annual report to shareholders, versus 25 times for Microsoft and 16 for Alphabet.

The Nvidia board has for years enabled Huang’s unusual management style, in which he has more than 50 direct reports. It’s a nearly unheard-of management structure that is meant to enable Nvidia to operate at what Huang has called the “speed of light,” but leaves the company without an obvious internal replacement for Huang, should the board’s investigation unearth facts that make it untenable for him to remain CEO.

It also sets up a talent drain: If Huang is ultimately fired and replaced with an insider, “you’re going to have 59 people who will all think ‘it should have been me,’” said Jason Schloetzer, a professor at Georgetown University who co-authors an annual report on CEO succession planning. “A horse race with 60 horses has no good solution.”

That will likely force directors to look outside, with a short list of CEOs from seasoned chipmakers such as AMD’s Lisa Su or Broadcom’s Hock Tan.

Beyond the Usual Sex Scandal

Huang’s case has implications beyond those raised by “the usual sex scandal in the corporate boardroom,” said John C. Coffee Jr, a Columbia Law School professor and veteran corporate governance expert. “Other companies have fired the CEO [for infidelity] but those companies probably didn’t have quite as important a figure as CEO,” he said. “It’s possible he was at most negligent,” Coffee said, “but negligence doesn’t require that you shoot yourself in the foot by firing a well regarded CEO.”

The company’s investigation, and likely congressional hearings, will help determine whether Huang did anything during the course of his extramarital relationship to compromise company secrets or US national security in an industry of intense significance to the geopolitical competition between the US and China. The board said on Sunday it had “no reason to believe that either national security or NVIDIA secrets were compromised,” and President Donald Trump expressed confidence in Huang.

The company will also face questions about an earlier investigation it said it conducted into the allegations. Any suggestion that Huang misled the board, or that the company knowingly misled investors about a material issue could expose it to even more shareholder litigation. Enforcement action is another risk, though Gensler said “I think this administration does things differently. The President has already spoken on the matter.”

Notable

• The scandal, and governance crisis, adds to the company’s list of challenges, including a Democratic Congress that threatens to slow down the AI infrastructure buildout, Semafor wrote.