Nvidia’s crisis has corporate governance experts reaching for the popcorn

Nvidia shares fell 5.47% on Tuesday after a 4% decline on Monday, wiping out roughly 9.5% in two sessions with little news from the company itself. The most concrete step was the board's decision to retain the law firm Wachtell, Lipton, Rosen & Katz to run an investigation led by the directors' own outside counsel. Chief executive Jensen Huang has reportedly continued trying to conduct business as usual.

The trigger is Huang's acknowledgment of an extramarital affair with Alice Huang, a former executive at Megaspeed, a Nvidia customer that U.S. intelligence agencies believe she spied for on China's behalf. Nvidia's board said in a Sunday statement that the company has "no reason to believe that either national security or NVIDIA secrets were compromised." What Alice Huang obtained, if anything, remains unknown; corporate governance professor Todd Henderson of the University of Chicago notes that secrets about fabs or chip designs would matter to the Justice Department, while ordinary corporate information likely would not.

Ann Lipton of the University of Colorado said she knows of affair and sexual harassment cases but none that also involve potential national security compromises, calling the board's investigation with independent directors and separate counsel perhaps the most standard element so far. Lipton outlined three lines of inquiry: whether the law was broken, whether Huang violated internal policies, and whether the board was misled. Wired reported Monday that Huang hired a PR crisis firm known for handling sex scandals a full year ago, and Henderson frames the key question as what Huang knew and when: a PR firm retained over embarrassment alone, versus hiring one while aware the woman was a suspected Chinese spy. He said failing to disclose that to directors would seem "a fireable offense."

Litigation appears likely. Lipton expects two categories: a securities fraud claim, which is "only about lying," and a harder mismanagement claim under Delaware law, where Nvidia is incorporated. A proposed class action already alleges Nvidia and Huang misled investors by describing the company's Megaspeed dealings as routine; as Lipton puts it, "You can have as many affairs with Chinese spies as you like" but cannot lie under federal securities laws. Derivative suits require showing the board is incapable of acting — courts, as a McDonald's harassment-related case showed, usually presume otherwise.

Even if Huang's job is untouched, structural questions linger: a famously flat organization with more than 60 direct reports to Huang, no apparent succession plan that Lipton called "a danger for any company," and family members in senior roles, including son Spencer as a director of product management, daughter Madison as senior director of product marketing, and son-in-law Nico Caprez in business development.

What to watch: how forthcoming Huang was and when he learned of the suspected espionage, whether the independent directors' scope expands, and whether shareholder suits reach the disclosure question or stall at board independence.