TheChek News Flow

The conflict in Ukraine highlights the need for governments and private companies to collaborate on national security

Ever since the first recorded battle in the 15th century BC at Megiddo, where Pharaoh Thutmose III’s forces crushed the rebellious Canaanites (and gave rise to the term Armageddon), our species has been steadily, and depressingly, expanding the domains in which we kill each other. 

The chariot-borne ancient Egyptians defeated their enemies on land. But conflict later spread to the sea and in more recent times to the air. Nato doctrine now recognises five domains of warfare, including space and cyber space. The Russian assault on Ukraine, ranging from a land invasion to a cyber attack on the Viasat satellite network, has spanned all five.

But one military commentator argues that the experience of Ukraine suggests warfare now extends to a sixth domain: the private sector. It has certainly been striking to see the vital role that Ukrainian start-ups and big US tech firms, such as Microsoft, Palantir and Starlink, have played in resisting Russian aggression. Whether it has been repurposing civilian drones to drop bombs, securing sensitive government data on the cloud, using machine-learning systems to process battlefield data or providing satellite communications to frontline troops, private sector companies have been central to Ukraine’s defence. 

Such is their importance that these spheres of activity should now be formally considered a sixth domain and included “as part of the warfighting constructs, plans, preparations, and actions if the United States and its allies are to prevail in future conflicts”, writes Franklin Kramer in a recent paper for the Atlantic Council. 

The war in Ukraine has been a “watershed in many ways”, Kramer tells me, highlighting the need for war planners and private companies to collaborate before any conflict erupts and figure out appropriate ways to pay for national security-related work. Both have an acute interest in protecting critical industrial, energy, and financial infrastructure, satellite communications, information systems and undersea cables — the arteries of a modern economy that are mostly run by the private sector. “Resilience is extremely important and making resilience operational will require the engagement of the private sector,” Kramer says.

Many will question whether the private sector should count as a separate sphere of military activity given it has long infused all the other five domains. For as long as there has been a private sector, it has been central to the ability of nation states to wage war. Many companies would also be alarmed, if not disgusted, to be considered part of any country’s military-industrial complex. The environmental, social and corporate governance lobby has been pressing investors to pull out of defence-related companies. And the employees of some tech companies, including Google, have themselves rebelled against involvement in some military projects, such as the Pentagon’s Project Maven.

There is also a danger that by formally including private companies in war planning, potential adversaries will regard them as hostile entities, harming their commercial interests. Last year, Moscow designated Meta, which runs Facebook, WhatsApp and Instagram, as a “terrorist and extremist” organisation and this month added one of the company’s spokesmen to its wanted list. 

In spite of these misgivings, there is an overwhelming logic for the private sector to engage more closely with national security priorities within the Nato bloc. The war in Ukraine has transformed attitudes, in Europe in particular. Faced with a revanchist Russia, defence has re-emerged as a democratic imperative. Once-neutral Finland has joined Nato and soon Sweden will do so, too. Atomico’s 2023 State of European Tech report, published this week, found that European start-up founders and investors were more concerned about geopolitical risks than any other issue apart from access to capital. 

To deepen ties with the private sector, Nato has launched a €1bn Europe-focused innovation fund to act as a “commercialisation machine” for promising civilian technologies with military applications. “People understand that if you cannot defend yourself then no contract is worth anything. The S in ESG needs to also stand for security,” Klaus Hommels, chair of the Nato fund, tells me. “Suddenly people are launching start-ups in this area and they are getting financed. Four years ago there was no will or interest.” 

The shifting nature of conflict in our digital world means that even if you want to stay away from the frontline, the frontline may find you. Far better to prepare for that cold reality than retreat into the more comforting, but delusional, world of yesteryear.

Nov. 29, 2023 5:30 PM PST · Comments by Robert Dvorak and Daniel Poarch

Microsoft is to become a non-voting observer on the non-profit board that governs OpenAI, newly reinstated CEO Sam Altman told employees on Wednesday, while confirming he had officially rejoined the firm.

Microsoft’s new status will give it some insight into the board’s deliberations, but it won’t have a vote, thereby limiting its ability to influence decisions. Microsoft is the biggest shareholder in OpenAI, with a more than 49% stake in its profits, but OpenAI’s charter severely limits the power of investors in its governance. Microsoft executives had been given little notice by the outgoing board’s decision to fire Altman.

THE TAKEAWAY

• Microsoft will have non-voting role

• Former directors Sutskever, Toner, McCauley off board

• Role of former chief scientist Sutskever to be determined

A newly reconstituted board, put in place as part of a deal struck to reinstate Altman after his surprise firing, includes Chair Bret Taylor, the former Salesforce co-CEO, former Treasury Secretary Larry Summers, as well as Quora CEO Adam D’Angelo, who was already on the board. Altman, as part of his compromise to rejoin the firm, is not a director.

In a memo to employees, Altman also said Mira Murati, who was briefly appointed interim CEO following Altman’s firing, is returning to her role as chief technology officer. Murati had been replaced by former Twitch CEO Emmett Shear as interim CEO for a couple of days, before a staff rebellion helped persuade the OpenAI board to reinstate Altman.

Greg Brockman, who was ousted from the board of directors and resigned from the company shortly after Altman’s firing, is returning as president and will not rejoin the board.

As part of the board shakeup, directors Helen Toner, Tasha McCauley and Ilya Sutskever left the board, according to a person familiar with the matter. That finalizes a change, underway since last Tuesday, when the company announced a three-person board that did not include Toner, McCauley or Sutskever. There continues to be a search for additional board members, according to the person.

Altman said the role of Sutskever, previously the company’s chief scientist and a member of the six-person board that fired Altman, is still being determined. “While Ilya will no longer serve on the board, we hope to continue our working relationship and are discussing how he can continue his work at OpenAI,” Altman said. The incoming board will oversee an independent review into the recent events, Altman said.

In a post on X, the site formerly known as Twitter, Wednesday evening, Altman addressed the board’s allegations that he had not been “consistently candid” with its members, limiting their ability to oversee the company. “It is clear that there were real misunderstandings between me and members of the board,” he wrote.

The board members who fired Altman on November 17 have never specified what led to their decision except to cite a lack of candor on Altman’s part. But in the weeks leading up to his temporary ouster, Altman argued with board member Toner over a paper she wrote about AI safety and tried to get her off the board, The Information reported last week. And employees had argued over AI safety, or whether the company had adequate safeguards to ensure fast developments in AI would not harm humanity.

Toner, in a post on X Wednesday evening, said “our decision was about the board's ability to effectively supervise the company,” and “we were not motivated by a desire to slow down OpenAI’s work.”

OpenAI was founded as a nonprofit in 2015 but restructured four years later to bring in outside investors and accelerate the pace of its development. As part of that process, the organization established a for-profit subsidiary. In an unusual arrangement, the non-profit board controls the for-profit unit and is beholden to a mission of “ensuring the creation and adoption of safe and beneficial” artificial general intelligence, rather than financial incentives.

That structure has limited Microsoft, which has invested more than $11 billion in the company, and venture investors such as Thrive Capital and Khosla Ventures from holding traditional voting roles. Only a minority of board members can hold financial stakes in the for-profit entity at one time, and only board members without a financial stake can vote on decisions where there is a potential conflict between financial stakeholders and the nonprofit’s mission, according to the company.

A board observer seat gives Microsoft the right to attend regular board meetings but not the voting power or the right to participate in discussions.

In his note to staff, Altman suggested the company’s governance structure could soon change. Taylor, the new board chair, also said in a separate note to employees that one of the board’s top priorities was improving its governance structure “so that all stakeholders – users, customers, employees, partners, and community members – can trust that OpenAI will continue to thrive.”

The Verge first reported on the memo.

Weakening manufacturing and services activity show stimulus efforts falling short

SINGAPORE—A brief rebound in China’s struggling economy showed worrying new signs of flickering out, heaping pressure on Beijing to take bolder steps to rev up growth.

Factory activity slid deeper into contraction in November as domestic and foreign orders dried up, while, in an ominous sign for consumer spending, activity in the services sector shrank for the first time this year, according to business surveys released Thursday. Only construction registered any expansion compared with the previous month as government spending on infrastructure increased.

Together, the surveys show that China’s economy is in need of more government help to avoid a pronounced year-end slowdown, economists say. Businesses are finding few buyers for their goods overseas as growth slows in the U.S. and other major economies.

China’s huge real-estate sector is mired in a protracted downturn, putting the squeeze on consumer confidence and households’ willingness to spend. House prices fell in 70 major cities at a faster clip in October than a month earlier, while nationwide the amount of new home sales measured in floor space was around 20% lower than a year earlier.

China’s woes add to the headwinds facing the global economy, which is being buffeted by war in Ukraine and the Middle East and a sharp rise in borrowing costs by central banks determined to tame inflation.

The survey results suggest China’s economy will likely slow in the final quarter of the year after staging a modest revival in the summer. Next year could pose an even bigger growth challenge unless the government and central bank step up stimulus to revive consumer and business confidence and boost spending and investment, economists say.

Thursday’s survey results will likely make Chinese officials “a little bit nervous,” said Louise Loo, lead China economist at Oxford Economics in Singapore. “They will probably look into today’s data and decide more [stimulus] needs to be in the pipeline.”

China’s official purchasing managers index for the manufacturing sector slipped to 49.4 in November from 49.5 in October, the National Bureau of Statistics said, marking the second month in a row when the reading has been below the 50 mark that separates an expansion in activity from contraction.

The result missed the forecast of 49.8 expected from a Wall Street Journal poll of economists. New orders at home and abroad declined, while a measure of companies’ appetite for hiring new workers weakened, indicating China’s powerhouse factory sector is feeling the pinch from a slowing global economy as well as sluggish spending at home.

A similar gauge of activity in the services sector slid to 49.3 in November from 50.1 in October. Services-sector activity had been healthier than manufacturing throughout 2023 as consumers returned to shops, restaurants and tourist spots following the dismantling of almost all Covid-19 restrictions around the turn of the year. But a hoped-for consumer boom never really took off, as the real estate crunch and high youth unemployment sapped households’ appetite for spending. Thursday’s data suggest consumers have become gloomier still.

The gauge of construction activity edged up to 55 from 53.5 previously, driven by government investment in infrastructure, a favorite tool of policy makers to lift growth when other sources of growth are lagging.

Chinese officials have taken steps to shore up the economy, with cuts to interest rates and a variety of efforts to juice the moribund property market, such as easing restrictions on home purchases in some cities.

Those measures have helped. China’s central bank as well as many economists expect China will manage to register an expansion of around 5% this year, in line with the government’s relatively modest goal. But economists say the broad weakening in activity indicates stimulus so far hasn’t been sufficient to foster a durable recovery.

“Although they have effectively put a floor on growth, we are not entirely out of the woods yet,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privé in Hong Kong. “They really need to continue providing support.”

Many economists say government help should be aimed at the housing market. Stabilize the property sector, they say, and consumer confidence will return. Options include further loosening restrictions on purchases originally aimed at quelling real estate speculation, and prodding banks to lend more to healthier developers so they can complete unfinished projects.

Some economists say the government should also consider direct handouts to households to get them spending, while others advocate financial assistance for small and midsize businesses that are finding the current environment much tougher than large firms and state-backed companies. Many economists expect China’s central bank to cut interest rates further or tweak other policy settings in the coming months to encourage more borrowing.

The piecemeal approach to stimulus adopted so far reflects the wariness of China’s Communist leadership to big-ticket policies since a blowout package in 2008 fueled a property bubble they are still dealing with today. Leader Xi Jinping has also spoken of his aversion to Western-style handouts to juice demand, believing them wasteful, preferring instead to focus on building roads and factories and other supply-enhancing measures.

As well as its short-term difficulties, China’s economy is also facing longer-term challenges that are starting to bear down on its capacity to keep growing at the kind of pace it has managed for years. They include skirmishes over trade and national security with the U.S. and its allies, and a rapidly aging society.

Officials are also trying to pull off a difficult rebalancing of China’s economy toward a model where growth is driven more by consumption and sectors such as advanced manufacturing and less by heavy investment in real estate and infrastructure, a potentially painful transition that implies a spell of weaker growth as the economy adjusts.

In a recent speech in Hong Kong, People’s Bank of China Governor Pan Gongsheng said China’s ongoing economic transformation “will be a long and difficult journey, but it is a journey we must take.”

Deal could value CrownRock well above $10 billion including debt

Occidental Petroleum OXY 0.45%increase; green up pointing triangle is in talks to buy CrownRock, a major energy producer in the west Texas area of the Permian basin, continuing a frenzy of deal making in the oil patch.

A deal for the closely held company, which could be valued well above $10 billion including debt, could come together soon assuming the talks don’t fall apart or another suitor doesn’t prevail, according to people familiar with the matter.

CrownRock owns more than 80,000 net acres in the northern part of the Midland Basin in Texas, part of the Permian, the largest oil producing region in the U.S. It is led by Texas businessman and billionaire Timothy Dunn, and backed by the private-equity firm Lime Rock Partners.

The company is one of the last remaining sizable private companies in the Permian, alongside Endeavor Energy Resources. Before the shale boom took off, Dunn accumulated leases in the region before trading and swapping land to build the enviable position CrownRock now sits on in a coveted part of the basin.

The company produces about 150,000 barrels of oil equivalent a day, according to Fitch Ratings.

Oil and gas producers have faced pressure to scale up, especially after Exxon Mobil struck a nearly $60 billion deal for Pioneer Natural Resources in October. Days later, Chevron agreed to buy Hess for $53 billion.

Occidental has a market capitalization of around $53 billion. Its last major purchase—the $38 billion acquisition of Anadarko in 2019—saddled the company with debt and attracted activist investor Carl Icahn.

Chief Executive Vicki Hollub spent the ensuing years cutting jobs and slashing spending. Rising oil prices following Russia’s invasion of Ukraine helped the company report banner profits in 2022. Icahn sold his shares and gave up his board seats that same year.

Meanwhile, Warren Buffett’s Berkshire Hathaway, which had helped Hollub finance the Anadarko deal, boosted its stake and now owns around 26%, according to FactSet. Buffett has lauded Hollub’s leadership.

Under Hollub, the company has developed ambitious plans to suck carbon dioxide out of the atmosphere, an effort the CEO sees as enabling her goal to produce so-called net-zero oil.

Lime Rock, a Houston private-equity firm, first invested in CrownRock in 2007. It later raised a nearly $2 billion fund to buy CrownRock outright in 2018.