Analysis-Nvidia's clubby board faces a sticky 'honey pot' test

By Ross Kerber

Nov 10 (Reuters) - Revelations that Nvidia Chief Executive Jensen Huang had an affair with a businesswoman suspected of being a Chinese spy have forced the chipmaker's board to confront more than ordinary executive misconduct, raising existential questions for the company and concerns about the board's ability to investigate its CEO independently.

Among corporate leaders, "There have definitely been affair scandals and sexual-harassment scandals. But honey-pot scandals? No," said Ann Lipton, a University of Colorado law professor who follows boardroom issues.

Lipton was using a term for an espionage ploy in which an operative entraps a target by feigning romantic interest. Historical examples include the Profumo Affair in the early 1960s and tend to involve diplomatic or political consequences.

US President Donald Trump said on Monday the FBI is investigating Huang's relationship, a day after Nvidia's board launched an internal investigation "regarding the national security concerns raised in news reports," according to an email Huang sent to Nvidia employees and released by the company. 

The stakes are high. While it is not clear if Huang violated the company's code of conduct or what penalties Huang could face, its bylaws allow his removal "with or without cause" by the vote of a majority of directors.

The company's advanced semiconductors are at the heart of a global race for AI superiority. China's Foreign Ministry called the spying claim "a groundless accusation, slander and a smear." 

Nvidia co-founder Huang, 63, has no obvious successor, as well as close ties to Trump. Huang owns 3.6% of Nvidia's stock and has dozens of direct reports, suggesting a tight grip on the company.

Shares in Nvidia were down 6% on Tuesday, extending their losses from Monday over fallout from Huang's affair. 

BOARD'S CREDIBILITY

Unusually among its peers, Nvidia operates without a board chair among its 11 directors. While the company considers all but Huang independent, three independent directors have served since the 1990s and a fourth, Mark Stevens, for most of that time. Only two have joined the board since 2021.

The clubby roster may not be so unusual by the standards of charismatic Silicon Valley company founders like Apple's Steve Jobs, who died in 2011. 

But the US probe has heightened scrutiny of whether directors who have worked alongside Huang for decades are sufficiently independent to investigate his conduct. 

"If you have a figure like Steve Jobs, I think people on Wall Street as well as in Silicon Valley would say they're entitled to some leeway or deference," said Marc Goldstein, head of US research for proxy adviser Institutional Shareholder Services.

Such deference could now raise questions about whether the board provided sufficient oversight of a CEO whose own judgment has come under scrutiny. 

Nvidia said on Sunday that while its board has no reason to believe that either US national security or Nvidia secrets were compromised, its inquiry would examine ​all available information. The board said it has confidence in the CEO and his leadership team.

Goldstein said board members running that investigation should be given the latitude to hire their own legal advisers to bolster their credibility. The company also might consider keeping long-serving directors away from the probe, Goldstein added, to avoid legal challenges from shareholders claiming it wasn't sufficiently independent. 

CALL LEGAL

A factor for the board to consider will be whether Huang reported the affair to the company. Nvidia's code of conduct lists "personal relationships" among the types of activities that may create conflicts of interest for employees, along with activities like taking on outside consulting work, board seats or advisory roles.

"If involved in a situation that could present a perceived or actual conflict of interest, contact Employment Legal for guidance," the document states.

Gil Soffer, a former US Justice Department official and now chair of law firm Katten, said via email a complete and accurate disclosure by Huang would be favorable for his situation now since it "would mean he didn't conceal the relationship, and that the board presumably had the opportunity to evaluate the relationship, set up guardrails and otherwise manage the potential conflict."

Soffer said more public facts are needed to know whether a conflict was in fact created by the relationship, whether the board acted appropriately so far, or what if any punishment of Huang might be justified. 

In a bad scenario such as Huang concealing the relationship and engaging in misconduct, "removal could be appropriate," Soffer said.

Huang was paid $120 million over the past three years, the company's latest proxy shows, largely through stock awards. The document states, "Our executive officers are 'at-will' employees and we do not have employment, severance or change-in-control agreements with our executive officers."

POLITICAL ECONOMY

Yale University management professor Jeffrey Sonnenfeld said the company faces additional national-security questions because of the ties between Huang and Trump. Trump, who has praised Huang, said on Monday that he had spoken to the CEO and thought he would "be in good shape." 

The United States has imposed restrictions on exports of advanced AI chips to China since ​2022. Last year the Trump administration allowed Nvidia to resume certain China shipments under arrangements in which the US government receives a cut of the company's China chip sales.

The deal makes any suggestion of foreign espionage more sensitive for both executives and US government officials, Sonnenfeld said. 

"That's why you don't want state capitalism arrangements. You don't want the US government to be so involved in private companies," Sonnenfeld said.

(Reporting by Ross Kerber; Editing by Christian Plumb, Will Dunham and Cynthia Osterman)