Governance Scholars Say What Huang Told Nvidia's Board Is the Key Question in the Inquiry

Nvidia's independent directors have hired the law firm Wachtell, Lipton, Rosen & Katz to examine Huang's admitted extramarital affair with Alice Huang, whom US intelligence agencies believe was spying for China. Ann Lipton of the University of Colorado and Todd Henderson of the University of Chicago told TechCrunch there is no real precedent for a CEO caught up in a suspected honeypot. "There have actually been affair cases and sexual harassment cases," Lipton said, but she said she knew of none that also involved possible national security compromises.

For investors in the world's most valuable chip company, the answers will decide whether the matter stays a reputational problem or becomes a question of Huang's tenure and legal exposure.

Three Lines of Inquiry

Lipton said she expects the investigation to examine whether any law was broken, whether Huang breached Nvidia's internal policies, and whether the board was misled, including how forthcoming he was and when he was on notice. She called a review led by independent directors with their own outside counsel the most "standard" part of the affair so far, while noting that such an investigation will be "exactly as thorough" as the directors running it want it to be.

Henderson drew a line between two scenarios: Huang hiring a crisis firm to manage an embarrassing affair without knowing who the woman was, or doing so knowing she was 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." He said failing to tell the board something of that kind "seems to me to be a fireable offense." Henderson added that much depends on what, if anything, Alice Huang obtained; secrets about chip designs would matter to prosecutors in a way ordinary corporate information probably would not.

Nvidia's board said in a statement on Sunday that the company has no reason to believe that national security or Nvidia secrets were compromised.

The Lawsuits Lipton Expects

Lipton said she expects shareholder litigation of two kinds. A securities fraud claim, which she said is "only about lying," is the most obvious. Nvidia already faces a proposed class action alleging that the company and Huang misled investors by concealing his 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, would be far harder, she said, because shareholders suing on the company's behalf must first show the board cannot handle the problem itself. The independent directors' investigation makes that difficult to argue, even though Nvidia's 10-member board has a record of deferring to Huang.

The episode has also drawn attention to other governance features. Huang has more than 60 direct reports and the company does not appear to have a succession plan, which Lipton called "a danger for any company." Three of Huang's relatives work at Nvidia: his son Spencer, his daughter Madison and his son-in-law Nico Caprez.

Nvidia reports quarterly earnings on November 17, the first scheduled occasion for executives to face analysts' questions since the affair became public.