OpenAI wants to create a public benefit corporation. What does that mean?

After months of public pressure over its effort to convert from a nonprofit into a more traditional moneymaking business, OpenAI decided to partly walk back its plan and strike a complicated balance, reports Bloomberg.

While the ChatGPT owner still intends to form a public benefit corporation that is meant to be more appealing to investors, the overall business would continue to be overseen by OpenAI’s nonprofit entity.

The push to restructure reflects OpenAI’s growing business ambitions and the significant capital required to build cutting-edge artificial intelligence systems. However, OpenAI has faced pushback from former employees, academics and rivals including Elon Musk who raised concerns about the company prioritising profits over safe AI development.

So what is a PBC, and how would the status change affect OpenAI’s operations?

What is a public benefit corporation?

The designation was created under Delaware law and allows profit-making entities to pursue parallel goals to do with bettering society. Directors and managers of PBCs must balance the interests of shareholders against the interests of those “materially affected by the corporation’s conduct” and the public benefits identified in the company’s charter. Directors have no obligation to prioritize one set of interests over another.

Why set up a PBC?

Because a PBC structure gives companies the freedom to pursue social and financial goals in parallel. That could allow a company to more easily fund its heavy investments while still taking a stand against investors lobbying for the company to depart from its social mission and prioritise higher financial returns.

How does this compare to OpenAI’s current structure?

OpenAI currently operates under a hybrid structure in which OpenAI Inc is a nonprofit and OpenAI LLC, of which software giant Microsoft Corp. is a minority owner, serves as its for-profit subsidiary. This structure includes a “capped-profit” model, in which investors agree to limit their maximum financial returns while adhering to the nonprofit’s charitable goals.

Under the revised plan, OpenAI would convert the for-profit into a PBC and remove the cap on financial returns, a move that’s likely to appeal to current and future backers – even as the nonprofit entity remains in control. “As we were looking at various options, we definitely wanted something that works for investors, or at least works well enough for investors that they’re happy to continue to fund us to the degree we think we will need,” OpenAI Chief Executive Officer Sam Altman said on a call with reporters in May.

The governance structure remains a work in progress, however. Under the new plan, the nonprofit will have a separate board from the for-profit, but both will initially comprise the nonprofit’s current directors. Over time, the nonprofit will be able to select board members for the for-profit. But it’s still being determined whether the nonprofit will be able to fire OpenAI’s for-profit directors or executives, Bloomberg News has reported, citing a person familiar with the matter. That’s a crucial detail, given it was a prior incarnation of the nonprofit board that briefly ousted Altman as CEO more than a year ago.

What are the drawbacks of a PBC?

PBCs aren’t required to use any independent standards to evaluate compliance with their social or environmental goals, so it can lead to accusations of “ethics washing”.

This is a sensitive topic for OpenAI, which is under conflicting pressures to balance its goal of building “safe and beneficial artificial intelligence for the benefit of humanity” while still making a return on its heavy investments in computing capacity.

PBCs are a fairly new type of legal entity, so it’s unclear how courts will interpret and measure the mandates of increasing both profits and social goods when it comes to OpenAI. Only stockholders with at least 2% of the company’s shares can sue the company if it doesn’t uphold its commitment to be of public benefit.

Who else operates as a PBC?

The structure has been popular among emerging AI companies whose managers want to earn a profit, while responding to public concerns that the technology poses a threat to humanity. Anthropic, an AI company formed in 2021 as a PBC, has a public mission to “build reliable, interpretable, and steerable AI systems.” Elon Musk’s xAI is also a PBC.

Other prominent examples of PBCs outside of the tech industry are shoe brand Allbirds and eyewear company Warby Parker. But OpenAI’s approach differs given the continued power of its nonprofit.