Nvidia shares fell 5.47% on Tuesday, continuing a 4% drop from Monday for a total loss of roughly 9.5% in two days despite the lack of major company news. CEO Jensen Huang is reportedly conducting business as usual after admitting to an extramarital affair with Alice Huang, whom U.S. intelligence agencies believe was spying for China. The board has hired Wachtell, Lipton, Rosen & Katz to lead an internal investigation.
What happens next is mostly a guessing game, even for experts who study how boards handle crises. 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 in a suspected honeypot. While they have views on what the investigation should ask, they are watching to see how it plays out.
“There have actually been affair cases and sexual harassment cases,” Lipton said, but she added she does not know of previous cases involving potential national security compromises. Henderson, whose research includes corporations and securities regulation, said much depends on facts few people have yet, most importantly what, if anything, Alice Huang received from Jensen Huang. Secrets about Nvidia’s fabs or chip designs would matter to the Justice Department. Ordinary corporate information probably would not.
Lipton described the investigation led by Nvidia’s independent board members with their own outside counsel as perhaps the most “standard” aspect of the whole 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, saying that Washington law firms that conduct internal investigations “know who pays their bills.” He did not suggest that was happening here.
Lipton said she sees three lines of inquiry, including 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. It is notable, as Wired reported Monday, 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 is unclear when Huang learned Alice Huang was a suspected spy. The board said in a Sunday statement that Nvidia “has no reason to believe that either national security or NVIDIA secrets were compromised.”
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.” Not telling 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.”
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. As reported yesterday, Nvidia is already facing a proposed class action lawsuit that alleges 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 do not let shareholders sue each time. Shareholders bringing such a claim on the company’s 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 cannot act independently.
Nvidia’s 10-member board has a track record of loyalty and deference to Huang, as outlined by a New York Times piece Tuesday morning. Still, the investigation those “independent” directors have announced with outside counsel makes that very hard. Lipton cited, for example, a shareholder suit over alleged mismanagement at McDonald’s 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 could not deal with the misconduct on its own.
Even if none of this ends up threatening Huang’s job, the episode raises other governance questions that do not look great in retrospect. Nvidia is run with a famously flat structure, with more than 60 direct reports to Huang, and the company does not appear to have a succession plan, which Lipton called “a danger for any company.”
Huang’s 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 did not shoot down the idea, saying instead that it is not something he would wish on her.
Lipton called hiring the kids poor corporate hygiene, even though founders have long done it. (Kimbal Musk is on Tesla’s board because he is Elon Musk’s brother, she noted.) Directors are supposed to act only for stockholders, but founders get more rope as long as the company is thriving.
Henderson similarly calls himself a strong “anti-nepotism person,” sharing that when his father worked at Westinghouse’s nuclear research lab, there was an absolute ban on hiring employees’ children. “Like, fine for them to be working there,” he said of Huang’s children working at Nvidia. But “the idea that one of his kids would succeed him” at a publicly traded company the size of Nvidia “seems crazy,” he added.
What Nvidia may have gotten more right, from a governance standpoint, is what it does not have, which is dual-class shares. Huang reportedly owns about 3.6%, so he does not control the vote. That makes him “easier to dislodge,” Lipton said, even though he is deeply integrated into the company in other ways.
Neither professor is rooting for or against Huang, each made clear. The simple truth is that with voting control on top of Huang’s holdings, the board would have even less flexibility. Without it, the board has a few more options.
What it means
For the people making things at Nvidia, the immediate impact is limited to the internal investigation and the legal risk facing the company. There is no change to customer products, accounts, privacy, or API behaviour. The focus remains on whether the board can act independently and whether Huang’s tenure is secure, rather than on changes to the technology or services available to users.
