The cost of fragmentation

Meghan Day: Hi, everyone, and welcome back to the Corporate Director Podcast, the voice of modern governance. My name is Meghan Day, strategy leader here at Diligent, and I'm joined today by my co-host, Kira Ciccarelli, senior research and program manager for Diligent Institute. Kira, how are you? I'm good, Meghan. How are you?

I'm good. I'm hanging in there. And I want to start off today's episode with a little bit of a scenario, if you're game. Sounds good. All right. So you're a director, and one morning a letter arrives addressed to the board of directors. It's not from a regulator or an activist investor. It is from three people who worked on your company's safety team, and they say they were fired for raising concerns I'll pause there.

What's your, uh, terror level?

Kira Ciccarelli: Um, I think my terror level is probably somewhere in the middle of the road until I figure out whether or not this has gone public yet.

Meghan Day: Very fair. Well, this is not a hypothetical. Late last week, three former OpenAI safety researchers published a letter addressed to OpenAI's board and its safety committees, and they say that the reason they were given for their firings were simply not adding up.

Uh, of course, OpenAI sees it very differently. The company says they were let go for mishandling sensitive information, there was a significant breach of trust, and that this wasn't about raising safety concerns. Very much not here to referee that discussion. Certainly don't have the facts. But what interests me is what it shows about where governance is under strain.

And we, we've talked a little bit about this on some of the other episodes since obviously AI is the, the hottest issue around for, for us and many others.

Kira Ciccarelli: Yeah, I mean, it's really interesting. I read both the, some coverage of the event, the letter that the three former employees had sent to leadership and to the board, and then I read OpenAI's tweet responding to all of that.

And like you said, definitely very hard to speculate, so we won't, uh, considering we don't really know everything involved. But I think a lot of folks out there who read all of these materials are probably wondering, well, what was the significant breach of trust? Definitely. But

Meghan Day: even without those facts, I mean, this is not necessarily a standalone issue, if you will, related to concerns about safety, and I think we touched upon this even in our last, uh, episode.

A couple of weeks ago, the Anthropic researcher Jacob Cox had resigned and publicly warned about where AI is heading, and Axios reported that several colleagues still inside the company very much endorsed his concerns. Anthropic is also reportedly headed toward an IPO with a perspective that reportedly devotes around 80 pages to r- risk factors.

There's also been reporting in Axios as well that more than 1,000 employees across OpenAI, Anthropic, Google, signed a petition called Pacing the Frontier and described researchers as having unusual leverage over their employers. So- When you have people closest to this technology speaking up in public on Twitter or X, in open letters, and in resignations, I mean, if you're a board member, it comes back first, Kira, I think, to, to your, your comment if there's dissent inside the company, does it reach the board through a proper channel or does the board find out the way everybody else does?

Um, and the second one, which is very much top of mind for me, is when a company tells its investors the downside could actually be catastrophic, but it keeps going, it keeps competing full speed anyway, who inside the organization actually has the

Kira Ciccarelli: authority to say, "Slow down"? Or the knowledge. What I keep thinking of, um, and this is referenced in the letter from the three former employees, just the fact that this technology, it is similar to previous technological advancements in some ways, but I think to a lot of people and a lot of folks would argue that it is pretty much unlike any other technological development that has come before it.

So I think let alone being a researcher, an engineer, someone who's working with this technology every day, if you're a board member, how do you

Meghan Day: oversee that and how do you know enough about it? Well, it looks like there i- is some early data that boards are starting to formalize this a little bit more. Uh, according to some research from ISS on the most recent proxy season, the share of S&P 500 companies disclosing some level of board AI oversight went from 24% to 31% over the past year.

That's definitely progress, but it still means, you know, two-thirds or so still don't disclose any. One other thing that I wanted to mention is that there's actually a proposal, and I don't know if you've seen this. I, I o- only came across it in my research for this particular episode. There's a proposal from, um, Richard Falkenrath, who is from the Council on Foreign Relations.

He says, "Put a presidentially nominated Senate-confirmed director on the boards of certain tech companies."

Announcer: Hmm.

Meghan Day: You love or hate that idea. Yeah, that'd be something. But it does take, uh, you know, tells you how seriously we need to start taking this question about who is accountable, who understands, and who owns this.

Kira Ciccarelli: And I think also just the interconnectedness of it all. It's not necessarily something that I think, you know, if we just, like, put together an ad hoc AI committee at the board, like, that's probably not gonna cut it. Yeah. It touches so many other things, and I think this news story is a great example of that.

Like, it's workforce, it's reputational, it's touching all of those things.

Meghan Day: Well, this is a perfect lead-in to today's guest. I had a chance to speak to Cristina Alfonso, who leads the Council on Global Competition and Innovation, and her work sits at the intersection of capital markets, technology, national security, and she has a pretty clear view on what boards should be asking management right now.

And definitely give it a listen all the way to the end because she does start to bring up some of these exact AI stories herself. So let's get into it. Sounds great.

Joining us on the Corporate Director podcast today is Cristina Alfonso, executive director and president for the Council on Global Competition and Innovation. Cristina, welcome to the podcast.

Christina Alfonso: Thank you so much, Meghan. Glad to be here.

Meghan Day: Well, to get us started, could you tell us a little bit about yourself and the work you're focused on?

Christina Alfonso: Sure. I've spent my career at the intersection of capital markets, technology, and national security, uh, first as an entrepreneur and investor, and now advising, um, across government and private sector. Today, I lead CGCI, where we focus on mobilizing private capital for technologies, eight areas in particular, and, um, capability central to US and allied economic competitiveness and security.

I'm also a senior fellow at the Harvard Belfer Center's Intelligence Project.

Meghan Day: Well, it is great to have you on the show, and I think there's lots we can dive into today. But I want to start sort of at a high level, and I think, as is often discussed, boards are navigating an unprecedented risk environment that's shaped by inflation, interest rates, geopolitical competition, supply chain fragility, rapid technological change.

Of all of those forces, which macroeconomic risks do you think directors are most likely to underestimate right now, and why?

Christina Alfonso: I think the biggest risk directors may underestimate is the cost of fragmentation. There's still a tendency to treat tariffs or reshoring, allied sourcing, and higher defense and energy costs as temporary friction.

It's something to be managed through the next quarter or two, but many of these forces are resetting companies' long-term cost structures, their supply chain designs, and, and some of their capital requirements as well. I think the second is the downstream effect of geopolitical shocks, uh, of which there are many these days.

The, the first impact may look manageable, you know, whether it's a disruption in energy or trade or a critical supplier. Uh, but I think the larger exposure often emerges later, uh, through whether it's renewed inflation or tighter financing conditions, uh, or a broader repricing of risk across the market.

So I think what boards should consider stress testing not only the direct exposures, but also those knock-on effects across the business. And I think finally, technology concentration risk is worth, worth adding to that. Many boards understandably see AI as an opportunity story, but I think they should also ask where the dependencies are.

Those dependencies can be strategic vulnerabilities very quickly, as I think a lot of companies are seeing today. In some sectors, the technology can change the economics of a business model faster than its governance processes can, you know, are, are designed to respond effectively. So I think, you know, many of us would, would think of the global semiconductor shortage as sort of a case example of that.

Meghan Day: Well, through your work with the council and your experience advising government leaders, you've seen how closely economic competitiveness and national security are connected. How should that connection shape the way boards think about strategy, capital allocation, resilience?

Christina Alfonso: Yeah, I think what's important to note here is that economic competitiveness and national security are now mutually reinforcing, so the, the technologies, the supply chains, the industrial capacity, that determines a company's ability to compete a- as well as shape national resilience.

So at CGCI, we encourage boards to assess capital allocation through both lenses. So not only what return does this generate, but what strategic capability does it build, or which dependencies does it reduce? I think TSMC's Arizona expansion is, is probably one of the sharpest examples. They... You know, building a trusted domestic capacity is simultaneously a commercial growth investment, but it's also national security hedge against, you know, Taiwan.

Meghan Day: Yeah, super interesting, and I think one that, um, we haven't talked a lot about here. Another area you've focused on is, is mobilizing private capital and industrial capability and technology and defense-related sectors. You know, what questions should directors be asking management about exposure to government policy, export controls, tariffs, sanctions, dependence on strategically important suppliers and markets?

I think very topical right now.

Christina Alfonso: Sure. Yeah, we would encourage boards to look beyond whether management is compliant today and consider whether the strategy remains durable if policy changes tomorrow, right? So a useful question in that instance is which supplier or customer or technology or even market could become unavailable through government action, and what would that mean for our revenue or margins or strategic capability?

Meghan Day: So what kind of financial and, and non-financial information should boards be looking at to identify emerging macroeconomic risks before they appear in maybe traditional performance metrics?

Christina Alfonso: The strongest boards are probably looking beyond reported results to the assumptions, you know, those underlying assumptions holding those results up.

So they would be asking things like, you know, what portion of growth or margin or, or valuation depend on conditions that may not persist, uh, like access to a specific market or low-cost capital, you know, a single technology platform. So basically, treating the shock as a temporary operational disruption is the concern here, right?

Rather than immediately asking whether it has permanently changed the company's markets or dependency. BP is probably a great example here. Their exit from Russia, I think, cost them to, to the tune of $25 billion, but, um, that was, you know, a, a necessary decision taken by the board at the time.

Meghan Day: From your perspective and experience, you know, what does a genuinely resilient board look like in practice?

You know, how can directors balance that near-term pressure for returns and efficiency with long-term investments that are needed for innovation, for cybersecurity, for supply chain resilience now?

Christina Alfonso: A genuinely resilient board wouldn't treat long-term investment as the opposite of returns, I think is what we're seeing more of.

So it, it's asking whether today's efficiency gains, are they quietly borrowing from the company's future capacity, whether it's to innovate or to secure itself or retain talent, even deliver through disruption. So I think in practice, what directors should be requiring of management is make those trade-offs visible, right?

Show them what is being deferred, what capability are we losing, you know, what would it cost to rebuild if these conditions change, right? So testing, testing the assumptions. A- Apple's, Apple's a great example here, expanding their, you know, production outside of China.

Meghan Day: For directors who want to strengthen their oversight of macroeconomic risk but don't necessarily know where to start, what's one conversation they could have with their CEO or executive team at the next board meeting?

Christina Alfonso: I would likely start with two questions. The first, uh, you know, which assumptions in our strategy would break first if the world becomes more fragmented, you know, ha- hard to imagine, but possible. Uh, you know, m- more, more expensive, less predictable. Uh, what happens in tho- you know, in those conditions? And then second, um, where do we have the least visibility into risk that could materially affect the business?

So the first essentially tests the durability of the plan we have in place, but then the second exposes some blind spots around it. So effectively, we're talking about boardroom red teaming.

Meghan Day: I love that. Those are some great questions. And, well, to wrap up here, we actually have a couple of questions that we ask all of our guests that I want to pitch to you.

Christina Alfonso: Okay.

Meghan Day: The first is, what do you think will be the biggest difference between boardrooms today and 10 years from now?

Christina Alfonso: Ooh, that's a good one. I would guess 10 years from now, things are moving at such a rapid clip, what can we say? I would say the best boardrooms will not be treating national security, technology, and geopolitics as specialist risk topics, right?

They, they'll, they'll be using them more as a core lens for capital allocation, and that will help to dictate, you know, market entry, partnerships, long-term value creation. So, um, from, from CGCI's perspective, I think the shift is really from, you know, what is the return to what's the capability, you know, what capability does this investment build, you know, what dependency is it creating?

How does this position the company in a more competitive world? And I think that's an important delineation that effectively is, was, was the impetus for CGCI's existence, is wanting to mark sort of 30 years of an era of globalization, roughly, entering this era of global competition and innovation, which is requiring sort of a fundamentally different skill set in the boardroom and response.

Meghan Day: Well, what is the last thing you read, watched, or listened to that made you think about governance in a new light?

Christina Alfonso: I wish I could say it was a recreational book, uh, Meghan, but- ... I would say, uh, probably most, most eye, eye-popping, uh, I would say the recent Anthropic IPO report. Sure. Um, you know, the resignation.

So basically, the day-to-day news, just in the last two weeks. I'm sure it's caught your- Yeah ... eye as well. So the resignation of several AI safety researchers. I think it's just made me increasingly see governance as a question of institutional restraint. You know, when you have organizations that are building these technologies, warning their investors of catastrophic downside while simultaneously competing intensely to advance it, I think that's where governance has to, you know, determine who can slow the system down, right?

Not simply how the system is monitored. So checks and balances, I think, is on everybody's mind.

Meghan Day: Definitely. Well, last but not least, Christina, what is your current passion project?

Christina Alfonso: It's, it's certainly tied to this topic. I have been, not, not quickly enough, but, uh, writing a book on national security in the American boardroom.

So it's- Hmm ... it's about how geopolitical competition and technological change, these national security considerations are reshaping corporate governance. So I think the central idea would be that these issues can no longer sit at the margins of enterprise risk discussions. So increasingly, you know, affecting core board decisions and, uh, you know, capital allocation strategy and the like.

So ad- advancing that through my work at, uh, The Intelligence Project.

Meghan Day: Fantastic. Well, we'll have to have you back on the show when that book is completed, and we look forward to, to checking that out. But Christina, thank you for joining us and sharing your perspective on how directors can think more strategically about these macroeconomic issues.

Christina Alfonso: Thank you so much for having me, Meghan.

Kira Ciccarelli: Great interview, Meghan. It's always great when we get a chance to catch up with Christina and see what she's up to and what she's thinking about.

Meghan Day: Yeah. It's such a nice perspective to have, and one, um, that I appreciate the chance to start to dig in on and, and, and more often than not leads me for additional questions rather than, uh, answers per se, but, um, really interesting stuff.

Uh, for me, what really stuck was this, this concept of two lenses for capital allocation. You know, not just what return does this generate, but what capability does this build? What dependency does it reduce? I think that's a great question, um, and great framing for, for boards to think about, both as a, you know, growth investment opportunities, but also maybe hedging against risks.

Kira Ciccarelli: Yeah, agreed. I always appreciate when we have a guest on who's talking about pretty existential and nebulous issues, just any advice for boards and management teams to get a little bit more practical and kind of into the weeds on some of this stuff is always helpful. I think for me, what really resonated is she said at one point that boards really have to stop viewing a lot of the risks that they're being asked to oversee and think about as short-term or segmented.

Meghan Day: Mm.

Kira Ciccarelli: Mm-hmm. Um, so I think one of the examples that she used was, like, supply chain disruption. I think a lot of organizations experienced that in the pandemic years, and then again, there were a lot of complications in the US with tariffs in 2025. But just starting to think about and test the underlying assumptions, like, is this really a short-term risk that we're navigating right now, or is this a wholesale change to the way that we need to think about our strategy and how these different risks are going to continue to impact them?

And I think we're seeing that backed up in a lot of our data and research at the institute as well. Um, I've got some preliminary results out of our latest GC Risk Index, and we're really getting the sneak peek here because, uh, this report isn't gonna be out for another few weeks. But I'll just speak to it briefly.

So this is a global survey of public and private company GCs and other legal leaders. We ask them to kind of rate the overall level of risk that they feel is facing their organization on a scale of one to 10. Uh, we started doing this survey in 2025, and what we basically saw is that perceived risk levels spiked over the course of that year from a 5.8 up to nearly an eight out of 10.

But then what happened in 2026, and what I found really interesting, is that the risk level kind of declined a little bit, the perceived risk level. Now it's back to a 6.6 out of 10. But I actually don't read this as like, "Oh, it's great. Risk levels are going down." I actually think that what's happening, and I think this is kind of backed up in what we are hearing when we speak to GCs, directors, other legal leaders anecdotally, is that risk levels are just sort of settling into this, like, always on kind of higher baseline.

And I think we're just changing our perception of, like, how big an alarm bell that is. Like, I think risk levels are just always high now. So interesting.

Meghan Day: And one thing that we didn't dive into, and maybe we'll save this for the next episode, but I think you take, take that concept, Kira, which I think is, is really spot on.

You take what Christine is saying around national security, technology, geopolitics becoming this core lens for boards and not a specialist topic. It does sort of, though, differ from what we're seeing boards, you know, say their biggest issues are. So I want to point everyone to PwC's annual corporate director survey.

They said 81% of directors said culture fit is very important when evaluating new directors. They have to do a ranking basically of what is most important or consider most important. But only 27% said the same about specialized expertise such as AI or cybersecurity. You know, it's interesting to see if maybe the ambition and the board composition will start to shift and, and line up in different ways.

Kira Ciccarelli: Yeah, it's so interesting, Meghan, too, because we ask a slightly, a slightly different question that I think is getting at a lot of the same ideas and tensions, and we sort of ask directors, "What are the most important traits that you're looking for in your next board member?" And what we kind of see is that directors are always looking for, like, former C-suite experience.

So they always want former CEOs. They want industry expertise. Um, and then what's kind of coming up right below that now, though, is tech and AI. So if you Frame the responses in terms of, okay, so in addition to the typical bread and butter expertise areas that they're always gonna be looking for, AI and tech are creeping up on that list very much.

And when you ask directors what are the skill set areas where you're feeling you're sort of deficient on your board, they will cite things like tech, and they will cite things like geopolitical expertise and say, "Hey, we really don't have as high a level of expertise in these areas as we do maybe for something like financial or legal backgrounds."

But I think there's maybe just a gap between recognizing where the board could use some upscaling and then actually wanting to make that change when it comes to board succession planning. Love that, Kira. And I think ties

Meghan Day: into the questions that Christina suggests that boards think about. So which assumptions in our strategy break first if the world becomes more fragmented?

Where do we have the least visibility into risks that could materially affect the business? And I think if you throw in a third one, which relates to the conversation we were having here, um, in the introduction, who in this company can slow the system down, and do they have a route to the board?

Definitely worth considering, uh, in some upcoming conversations.

Kira Ciccarelli: Absolutely, Meghan. And that also, um, ties in with what we're seeing again from that GC Risk Index, which is gonna be coming out in a few weeks. In addition to having our respondents rate the current risk level, we also ask them, "Okay, so what are some of the factors driving that?"

And the answer is essentially, like, everything under the sun. So the leading Q4 risk factors, again, this is coming from the legal audience, so they're very preoccupied with changes in the regulatory environment. Um, also coming up very highly on the list is AI-related risk and cyber threats, but then there's a bunch of other stuff thrown into that mix as well.

They're citing workforce culture, talent risks, geopolitical conflicts, supply chain and sourcing disruptions. And I think what's really telling is that- A lot of these things are tied together, kind of like Christina was mentioning. We're looking forward very

Meghan Day: much to diving into that survey when it comes out in a couple of weeks.

I think we could probably talk for hours, but let's call this episode and wrap things up here on this episode of the Corporate Director Podcast, The Voice of Modern Governance. A couple of special thank yous first to today's guest, Christina Alfonso, podcast producers and co-hosts, Kira Ciccarelli, Steve Clayton, and Terry Terry.

Our sponsors, KPMG, Wilson Sonsini, and Meridian Compensation Partners, and most especially to Diligent. If you like our show, be sure to give us a rating on your podcast player of choice. You can also listen to episodes and see more from Diligent Institute by going to diligent.com/resources. Thank you for listening.

Until next time.