Nvidia's Spy Affair Crisis Has Corporate Governance Experts Reaching for the Popcorn

Stock Slides as Board Launches Internal Investigation

Nvidia's stock fell 5.47% on Tuesday, following a 4% drop on Monday—a roughly 9.5% loss over two days—despite little fresh news from the company itself. CEO Jensen Huang has reportedly been trying to conduct business as usual after admitting to an extramarital affair with Alice Huang, whom U.S. intelligence agencies believe was spying for China. The biggest development so far: the board has hired law firm Wachtell, Lipton, Rosen & Katz to conduct an internal investigation.

Into Uncharted Territory

What comes next is largely a guessing game—even for scholars 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 examine, like everyone else, they're watching to see how it unfolds.

"There have actually been affair cases and sexual harassment cases," Lipton said, but she was quick to add that she doesn't 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 yet have—including, most importantly, what, if anything, Alice Huang obtained from Jensen Huang. Secrets about Nvidia's fabs or chip designs would matter to the Justice Department. Ordinary corporate information probably would not.

The 'Standard' Parts of an Unprecedented Scandal

Lipton described the investigation led by Nvidia's independent board members, with their own outside counsel, as perhaps the most "standard" aspect of the affair so far. She also observed that an investigation will be "exactly as thorough" as the directors running it want it to be—which is also standard. Henderson made a related point about incentives, noting that Washington law firms conducting internal investigations "know who pays their bills." He did not suggest that is happening here.

Three Lines of Inquiry

Lipton sees three lines of inquiry: whether the law was broken, whether Huang violated Nvidia's internal policies, and whether the board was misled—including how forthcoming he was and when he was on notice. Notably, as Wired reported Monday, Huang hired a PR crisis firm known for handling sex scandals a full year ago. Of course, the driver could have been the affair alone. It is unclear when Huang learned Alice Huang was a suspected spy. In a Sunday statement on the matter, the board said Nvidia has "no reason to believe" that either national security or Nvidia secrets were compromised.

What Did Huang Know, and When?

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. "I think that's very different," he said. "If 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't tell me." Failing to tell the board that you have cancer "or that you've been sleeping with a Chinese spy," said Henderson, "seems to me to be a fireable offense."

Shareholder Suits on the Horizon

Either way, Lipton expects shareholder suits, and she said two kinds are possible. Securities fraud, which she said is "only about lying," is the most obvious—and as we reported yesterday, Nvidia is already facing a proposed class action alleging that Nvidia and Huang misled investors by concealing Huang's relationship with Alice Huang while describing dealings with her former employer as routine. "You can have as many affairs with Chinese spies as you like," Lipton said. "You just can't lie about it under the federal securities laws."

A mismanagement claim under Delaware law, where Nvidia is incorporated, is much harder. Employees do "stupid or reckless or damaging things all the time," she said, and courts don't let shareholders sue every time. Shareholders...

via TechCrunch AI