Nvidia’s stock experienced a sharp decline, falling 5.47% on Tuesday following a 4% drop on Monday, totaling approximately 9.5% in just two days despite the absence of major company announcements. CEO Jensen Huang is reportedly attempting to maintain business as usual following the revelation of an extramarital affair with Alice Huang, a former executive at Nvidia customer Megaspeed who U.S. intelligence agencies suspect of spying for China. The most significant development thus far is that Nvidia’s board has retained the law firm Wachtell, Lipton, Rosen & Katz to conduct an internal investigation.
The immediate future is uncertain, even for experts who study corporate governance. Two professors, Ann Lipton of the University of Colorado and Todd Henderson of the University of Chicago, noted that there is no clear precedent for a CEO involved in a suspected honey trap. While they have opinions on what the investigation should address, they, like everyone else, are merely observing the unfolding situation.
“There have actually been affair cases and sexual harassment cases,” Lipton remarked, but quickly added that she is unaware of previous cases involving potential national security compromises. Henderson, whose research interests include securities regulation, emphasized that the outcome depends heavily on facts not yet known, specifically what, if anything, Alice Huang may have obtained from Jensen Huang. Information regarding Nvidia’s fabrication plants or chip designs would be of interest to the Justice Department, while ordinary corporate data might not.
Lipton described the investigation being led by Nvidia’s independent board members with outside counsel as perhaps the most “standard” element of the affair so far. She observed that the inquiry will be “exactly as thorough” as the directors running it desire, which is typical corporate procedure. Henderson added a point about incentives, noting that Washington law firms conducting internal investigations “know who pays their bills,” though he did not suggest this was occurring in the current scenario.
Lipton identified three primary lines of inquiry, including whether the law was broken, whether Huang violated Nvidia’s internal policies, and whether the board was misled regarding his knowledge or notification. It is notable, as Wired reported Monday, that Huang retained a PR crisis firm known for handling sex scandals a full year prior. While the reason could be the affair alone, it remains unclear when Huang learned of Alice Huang’s suspected espionage. Nvidia’s board stated in a Sunday announcement that there is “no reason to believe” that national security or NVIDIA secrets were compromised.
Henderson similarly stressed the importance of knowing when Huang became aware of the situation. He outlined two scenarios: one where Huang hires a PR firm solely because an affair is embarrassing without knowing the woman’s background, and another where he knows she is a suspected Chinese spy. “I think that’s very different,” he concluded. “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.” Henderson argued that failing to disclose such information, akin to not telling the board about cancer, seems like a “fireable offense.”
Regardless of the outcome, Lipton anticipates shareholder lawsuits, categorizing them into two types. Securities fraud, which she defined as “only about lying,” is the most obvious route, especially since Nvidia is already facing a proposed class action lawsuit alleging that the company and Huang misled investors regarding routine Megaspeed dealings. “You can have as many affairs with Chinese spies as you like,” Lipton stated. “You just can’t lie about it under the federal securities laws.”
A mismanagement claim under Delaware law, where Nvidia is incorporated, presents a steeper challenge. Since employees frequently engage in “stupid or reckless or damaging things,” courts do not allow shareholders to sue every time. To succeed in a derivative suit, shareholders must first prove the board is incapable of handling the problem, typically by demonstrating that the directors are implicated or too beholden to the CEO to act independently. Lipton cited a shareholder suit against McDonald’s several years ago, where the court ultimately found no reason the board could not manage the misconduct internally.
Nvidia’s 10-member board has a track record of loyalty and deference to Huang, as highlighted by a New York Times report Tuesday morning. However, the investigation announced by these “independent” directors makes this dynamic difficult to maintain. The company operates with a famously flat structure boasting more than 60 direct reports to Huang and lacks a succession plan, a situation Lipton described as “a danger for any company.”
Liu’s children also hold positions at Nvidia, including his son Spencer as a director of product management, daughter Madison as a senior director of product marketing, and son-in-law Nico Caprez in business development. While some employees speculate that he is grooming successors, Huang did not dismiss the idea when asked last month by Bloomberg whether Madison was in line for the top job, merely stating that he would not wish that upon her.
Lipton deemed hiring family members poor corporate hygiene, despite the historical practice of founders doing so, noting that Kimbal Musk sits on Tesla’s board because he is Elon Musk’s brother. Directors are theoretically obligated to act solely in the stockholders' best interests, but founders are granted more leeway as long as the company continues to thrive.
Henderson also described himself as a strong “anti-nepotism person,” recalling how his father’s workplace strictly banned hiring employees’ children. He suggested that while it may be acceptable for Huang’s children to work at Nvidia, the notion that one of them would succeed him at a publicly traded company of Nvidia’s magnitude “seems crazy.”
From a governance standpoint, Nvidia may have done something right by not having dual-class shares. As Huang reportedly owns about 3.6%, he does not control the voting power, which Lipton noted makes him “easier to dislodge,” even though he is deeply integrated into the company. Neither professor expressed a desire for Huang to leave; they simply observed that without dual-class shares, the board retains a few more options.
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