THE IPO of China’s largest e-commerce platform Alibaba has drawn frenzied interest from investors worldwide, with the company expected to raise at least $21bn on the New York Stock Exchange. But the listing has also prompted serious questions about the firm’s governance structure.
Alibaba is, of course, a very successful business and investors have been salivating at the prospect of buying into founder Jack Ma’s Chinese dream. However, as the eminent Harvard professor of law Lucian Bebchuk warns, “it is important investors… keep their eyes open to the serious governance risks accompanying an Alibaba investment.” The crux of the issue is that the firm’s current governance structure is effectively run by 27 individuals.
This group, known as the partnership, collectively owns around 10 per cent of the company, but has the authority to control the majority of board appointments. This means that they will be entitled to appoint who they want without, as Bebchuk argues, “the need for any additional shareholder approval”. Investors should be concerned about the relatively small stake held by members of the partnership. Even if they cash out over time, they will still control board appointments.
This listing should be a wake-up call for investors and regulators everywhere. It certainly was for the Hong Kong regulators, who raised significant concerns about Alibaba’s governance structure. In the UK, shareholders are the asset owners of a listed company, and directors have a responsibility for the wellbeing and good conduct of the firm. By contrast, investors in Alibaba will not have the same power to hold the management to account, deviating a long way from the fundamental principle of one share, one vote.
Ultimately, it is a case of caveat emptor – no one is obliged to buy shares, and if they don’t like the way the company is being run, they can always sell. However, Alibaba’s structure illustrates a trend in the US of downgrading the role of shareholders in the governance of major global technology firms. This is justified by the founders of these companies on the basis of the perceived short-termism of hands-off investors. But such an approach would not be tolerated in the UK.
All companies with a premium listing in the UK must “comply or explain” with the provisions outlined in the UK Corporate Governance Code, whose most recent incarnation was published on Wednesday by the Financial Reporting Council. The governance arrangements of most UK publicly-listed firms are generally of a very high standard. There are exceptions and, even on the FTSE 100, some have fallen below our high expectations. However, the UK’s corporate governance system has become, to quote Glen Moreno, a “centre of excellence.”
Globally, however, we all need to strive to improve the relationship between boards and investors to ensure close engagement and mutual trust, in support of long-term value creation. It is important to remember that UK-based pension funds do invest in global equities and could very well have decided to gamble on Alibaba. But before jumping in, investors looking to participate in this listing orgy must be aware of the governance risks they would be taking.