Nvidia CEO's affair with suspected Chinese spy triggers crisis

Stock plummets after affair revelation

Nvidia's stock sank five point four seven percent on Tuesday, following a four percent drop on Monday, losing about nine point five percent in two days.

CEO admits to affair with suspected spy

CEO Jensen Huang admitted to an extramarital affair with Alice Huang, whom U.S. intelligence agencies believe was spying for China. Huang has reportedly been trying to conduct business as usual.

Board hires law firm for investigation

Nvidia's board hired the law firm Wachtell, Lipton, Rosen and Katz to conduct an internal investigation into the matter.

No precedent for this type of crisis

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.

What matters most: what Huang knew

Henderson stressed the importance of what Huang knew and when. If Huang knew Alice Huang was a suspected Chinese spy and did not tell the board, that seems to be a fireable offense.

“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.”

PR firm hired a year before scandal

Huang hired a PR crisis firm known for handling sex scandals a full year ago. It is unclear when Huang learned Alice Huang was a suspected spy.

Three lines of investigation identified

Lipton identified three lines of inquiry: whether the law was broken, whether Huang violated Nvidia's internal policies, and whether the board was misled about his conduct.

Securities fraud suits already filed

Nvidia is already facing a proposed class action lawsuit alleging Nvidia 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. You just can't lie about it under the federal securities laws.”

Governance problems exposed by crisis

Nvidia is run with a famously flat structure with more than sixty 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 work at Nvidia

Huang's 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.

Experts call family hiring poor governance

Lipton called hiring the kids poor corporate hygiene, even though founders have long done it. Henderson called himself a strong anti-nepotism person, saying the idea that one of Huang's kids would succeed him seems crazy.

Huang's voting control is limited

Huang reportedly owns about three point six percent of Nvidia, so he does not control the vote. This makes him easier to dislodge than if he held dual-class shares with voting control.

Board has limited options but some flexibility

Without voting control on top of Huang's holdings, the board has more options than it would otherwise. With it, the board would have even less flexibility to act.