Poor Corporate Governance in Alibaba Holdings Ltd
Table of Contents
Delisting in Hong Kong Stock Exchange
Locked in Control
Variable Interest Equity
Signs of Poor Governance
Unsound Policies by the Management
Not Adapting to Changes
The report aims at analyzing the governance issues that revolve around Alibaba Holdings. The corporation is one of the largest in China but having poor governance issues that have affected its performance. The report aims at discussing the specific problems in the corporation and various effects of the problem along with solutions and recommendations. The corporation has created different opportunities for many clients who have benefited largely from its services. However, the corporation has had several mistreatments of its clients that have almost pushed them away. The problem of poor governance has also affected potential investors having interests in investing into the corporation. The sole source of governance issues has been monopoly management in the corporation. The report aims not only at investigating the governance problems in the corporation, but also at giving the possible recommendations to the respective governance issues in the corporation.
Alibaba Group Holding Limited is a company dealing with online sale of goods and services to clients. It can be termed as a Chinese e-commerce company. Its sales platform involves providing consumer-to-consumer, business-to-consumer, and business-to-business sales services through the use of web portals. This means that the company provides healthy social interactions between its business partners. Its platform has by-benefits other than sales services. It favors an effective environment for the improvement of goods and services through the business partners’ interactions. The e-commercial activities of Alibaba holdings involve electronic payment services, a search engine basically used for shopping and a data-center cloud computing services. Initially, the corporation was started to serve the Chinese manufacturers and the overseas buyers. The platform was only allowed business-to-business interactions. The corporation underwent improvements that led to its current market diversification. This paper is a voluminous report on the issue of poor corporate governance in Alibaba Holdings Ltd considering the fact that even despite the high performance of the company, it has been undergoing challenges in its corporate structure hence the need for engaging conclusive solutions and recommendations or effective control was also present.
The corporation was founded in 1999 by Jack Ma who created the website Alibaba.com (Leng 43). The business premises of the corporation initially were in Jack Ma’s apartment. A very interesting story lies behind the name Alibaba that Jack Ma decided to give to the corporation. The decision to name it Alibaba was inspired by the prominent businessman, Alibaba. Jack had visited San Francisco and asked different people whether they knew Alibaba. Surprisingly, all the people he asked informed that they knew Alibaba. Basically, they confirmed Alibaba’s identity by referring to the community voluntary program commonly referred to as open sesame. Alibaba was also popular in India, Germany, Tokyo, and China. He was a kind businessman who was smart in his business endeavors. He had created numerous small and medium sized companies. He aimed at helping the countryside through his program, the Open Sesame. Therefore, Jack Ma registered his corporation using the name of Alibaba (Russinovich and Johnny 54). Afterwards the corporation was named ‘Alibaba Online’. Figure one is an illustration of the company’s trademark.
Figure 1: Alibaba’s Trademark
The corporation travelled a long way throughout its development. In September, 2013, it sought for an initial public offering (IPO) (Russinovich and Johnny 66). The corporation sought the IPO in New York because in its home town, Hong Kong, the regulators made it complicated for the seeking of the Hong Kong’s Stock Exchange IPO. In September 5, 2014, the IPO in the New York Stock Exchange (NYSE) was announced. The announcement was after a regulatory filing that was done between the corporation, U.S Securities, and the Exchange Commission (Vakkur and Zulma 80). The filing set a price per share from sixty dollars to sixty-six dollars. However, the final price after an international roadshow that would start in US cities is to be changed. The IPO was targeting twenty billion dollars income from the IPO, making it the largest in the U.S technology listing history. The roadshow that was held at the moment aimed at checking the investors’ interest in Alibaba shares. The final price was fixed in September 18 at the level of sixty eight dollars. The IPO raised in total 21.8 billion dollars for the corporation and the investors. This IPO was the biggest in U.S history (Russinovich and Johnny 6). Figure 2 is an illustration of NYSE ratings of Alibaba Holdings Ltd.
Figure 2: NYSE Ratings
The IPO ratings are represented by figure 3 below.
Figure 3: IPO Ratings of Alibaba Holdings Ltd
Alibaba Holdings is a broad corporation that has various affiliate sub-companies. Among many others, these sub-companies include Alibaba.com, Taobao, Tmall.com, Juhuasuan, e Tao, Alipay, Alibaba Cloud Computing, AliExpress, and China Yahoo! (Leng 71). Alibaba.com was the primary company that provided the largest business-to-business platform. It was listed in Hong Kong’s Stock Exchange but was later excluded in 2012. Taobao is the largest consumer in terms of consumer shopping platform that offers products for retail sale. Tmall was created to complement to Taobao’s activities. Alipay is an online payment platform for Alibaba with no transaction charges. Alibaba Cloud Computing is the branch being responsible for the corporation’s data. It creates a platform for e-commerce data, its processing and customization. All the affiliate companies were aimed at simplifying various tasks appeared within the corporation (Leng 37).
Alibaba has been experiencing many challenges during its activity. Its share price has been falling in the NYSE. The good reputation of the corporation is at stake of being tainted if the challenges would not solved. The root cause of the challenges in the corporation has been claimed to be poor governance within it. Since the corporation’s creation, it was under the management of Jack Ma until 10th of May, 2013 when he stepped down. Jonathan Lu became the new CEO and since then the corporation has been taking significant steps (Leng 88). For instance, the IPO venture in 2013 happened under the management of Lu. However, governance issues did not disappear even after Lu’s management beginning. An example of the governance problem is the failure to be allowed to Hong Kong Stock Exchange. It was largely contributed by poor governance within the corporation.
The purpose of the report is to outline deeply the poor governance aspects in the corporation and provide efficient possible recommendations for the problems to be sold. The report also aims at analyzing how the poor governance has affected the corporation’s performance and environment.
The report is bounded by the poor governance issues within the corporation. Furthermore, it specifically focuses on its internal affairs. The public should learn the effects of poor governance from the given report and the possible solutions to poor governance problems that may arise in their workplaces.
Alibaba Holdings Ltd has been a brilliant corporation with many achievements. It has flourished in many fields: the IPO, its income, and also its public appearance (Russinovich and Johnny 97). However, critics have come out clear defining the corporation’s hidden poor corporate governance issues. In reality, Alibaba faces governance problems that are not publicly evident. The governance issues can only be felt by a shareholder or an associate of the corporation. Alibaba should have free governance with a freely and fairly elected board of directors. It should be running on the basis of the ideas that are initiated by the board. In a successful corporation, no one should have more decisive power than the others. However, Alibaba Holdings portray a totally different picture. It is managed mainly by one person, Jack Ma, who owns most of the share holding in the corporation.
The corporation is mainly controlled by the decisions of Jack Ma. It gives Jack Ma complete control of the dealings. This enables him to manipulate his intentions and wishes about the corporation, which affects its other parties. The company has an executive council that does not own much of the corporation’s shares but has much influence on the corporation. The governance enables the executive council to have much control of the corporation. The executive council is a group of a few executives who directly control the company’s business activity. The executive council and Jack Ma have the mandate to elect the corporation’s board members and enforce decisions on behalf of the company. In order to reject the elected board members, the shareholders have to vote 95% against the elected board members. This is an unlikely scenario because most of the shares in the corporation are owned by Jack Ma (Vakkur and Zulma 38). This defines governmental monopoly in the corporation. Consequently, it has led to poor governance issues. The executive council can vote in unfit board members due to the issues of nepotism. In return, the elected members may result in poor governance. Therefore, the concept of governmental monopolism in the corporation leads to its poor governance (Morck, Wolfenzon, and Yeung 65).
Poor governance was illustrated when the corporation was asked by the Hong Kong Stock Exchange (HKSE) to base its operations in the stock market in terms of ‘one share, one vote’. The corporation could not keep up the request by HKSE (Graham, Sonali, and Krishnamoorthy 27). This had been this way after the HKSE had realized that the corporation was largely owned by Jack Ma. The corporation did not want to lose the monopolistic governance. Thus, they rejected the legal request by HKSE. As a result, the corporation was delisted from the HKSE listings. Although the corporation had not been wholly listed there, the affiliate company, Alibaba.com, which was listed, had to obey the legal request. This showed bad governance within the corporation because it did not follow the legal requirements. Due to the delisting, the corporation sought the NYSE IPO, which did not have the rule of ‘one share, one vote’.
Poor governance within the corporation is also demonstrated through the disadvantaging of investors by Alibaba. Most investors were eager to be involved with Alibaba Holdings due to its market success and its luring IPO (Morck, et al. 79). However, the investors fail to see the corporation’s poor governance. The insiders exercise their permanent control in the corporation. They hold a very small ratio of equity capital. In the corporation, there are several ways to divert value to the affiliated entities but the mechanisms to prevent it are totally weak. This means that the amount of wealth the corporation accumulates as a profit would not be shared among the shareholders who have invested in Alibaba Holdings. This fact leads to disadvantage of the shareholders because they are not able to return their investments (Russinovich and Johnny 54). Therefore, the poor governance of the corporation leads to the mistreatment of the investors.
The governance of Alibaba Holdings is driven by the factor of control lock. The control over the corporation is under the executive council and Jack Ma. They form the insiders of the corporation (Graham, et al. 43), which control is not fully possible because the corporation is governed by the insiders. They dictate it what is to be done and what the corporation is to deal with. Although the corporation has reached various successful achievements, the insiders have played a significant role in its success. Generally, most corporations in the world are governed through the locked in control because they consider the policy to be protective to the corporation’s internal affairs. Google and Facebook are other successful corporations that apply locked in control. However, it leads to poor governance because it denies rights to other parties of the corporation (Vakkur and Zulma 25). For instance, investors are denied the right of having returns of their investment into the company. Additionally, it is the main cause of monopolism in the governance of the corporation.
Critics have put it that the corporation’s governance has been a liability. Governance liability means that the management of the corporation has led to failures it has experienced (Morck, et al. 91). This reveals the poor governance inside the corporation. Governance liability can be viewed in the aspects of monopolism and locked in control of Alibaba’s insiders. The governance of Alibaba has been blamed for the crisis the corporation experienced. The delisting of the corporation from the HKSE was a liability of its governance. The management of the corporation failed to comply with the law of ‘one share, one vote’, which led to the delisting of the company. The exclusion of the corporation was an expense to it and led to huge financial losses the corporation had invested in the stock market.
Variable Interest Equity (VIE) is a common phrase among Chinese investors (Graham, et al. 85). It encourages the Chinese to have complete control over their corporations. However, in Alibaba Holdings, the term VIE is abused. The corporation claims that it is governed by VIE yet it owned by its founder. The VIE policy comes into a corporation if it will be into an IPO. Therefore, considering Chinese corporations, the shareholders must be 100% Chinese. In terms of Alibaba’s Holdings’ interactions with US Securities and the Exchange Commission, the corporation claimed that the licenses issued to operate websites in China are held by the VIE beneficiaries. Jack Ma took advantage of the VIE, which was a Chinese law, and ensured that he owned the whole the corporation (Vakkur and Zulma 73). This marked the start of governance issues because Jack Ma was granted full rights to control the corporation. Moreover, Jack was granted the powers to transfer assets away from Alibaba in the future. For instance, Jack Ma has implemented this power once he transferred Alipay from Alibaba in 2011.
The main symptom of poor governance in any corporation is weak management. It is mainly seen through the senior management team of corporation’s hard times (Van, James, and Sudi 43). Alibaba Holdings have been revealing the problems within the management because the locked in control inside the corporation has been having some management issues with the external forces. For example, during the delisting in the HKSE, the insiders in the corporation had constantly been in a wrangle with the HKSE management (Hill 32). The management of Alibaba Corporation did not want to grant rights to investors because it would diminish the insiders influence within the corporation. Therefore, the corporation decided to fight the external forces by resisting to comply with the HKSE regulation. Finally, the corporation was delisted from the HKSE listings. This is a symptom of poor governance because it has cost the corporation losses in terms of invested capital.
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Lack of financial control protocols within the corporation is another symptom of poor governance. Alibaba Holdings has essentially been on financial disorganization whereby the finances have only been under the control of the insiders. The executives and the owner have been the only stakeholders on issues pertaining finances (Hill 57). The locked in control has enabled the financial monopoly within the corporation. This shows that Alibaba has not set any protocols on financial dealings. Lack of financial protocols in the corporation is mainly a result of poor governance.
The control over the board by one person is also a sign of poor governance. The evidence of Jack Ma’s control over the corporation proves this idea. For instance, Jack Ma has power to transfer assets from the corporation (Graham, et al. 74). This shows that he has control over the corporation’s success. He can even cause its closure. This can possibly be performed by the providing VIE rights. As a result, Jack is granted power to ignore advice, delegate or not delegate as required, and give orders without impartial consideration of their possible advantages and disadvantages.
Poor governance is also illustrated by the blurred structure and liability of the board of directors (Solomon and Aris 36). The executives in Alibaba Holdings elect the board in the corporation. This gives them total power to manipulate for their own interests by electing their allies to the board. This may lead to a deficient board of governors because being unqualified, it may be displaced from the position. As a result, the board of governors’ liability may be rendered blurred because it will be in a less favorable situation to handle management issues. The structure of the board of governors is also blurred because it will be in a disorganized pattern indirectly affecting the corporate liability.
Unsound policies made by the management of the corporation also reveal the existence of poor governance. Governance usually revolves around the policies governing the corporation. Therefore, the development of unsound policies automatically reveals the presence of poor governance. Alibaba Holdings have illustrated unsound policies in several instances. Unnecessary high levels of stock are one proof of such policies. During its IPO, Alibaba set history in America’s technological listings as the largest stock sale.It had outdone the Google IPO that was initially the largest one (Hill 85). The high stock level revealed the overconfident sales target and over-production of the corporation. The overconfidence ties the working capital and restricts flow of cash through the corporation. Thus, this may lead to a liquidity crisis within the corporation. Therefore, high stock values prove to be a sign of poor corporate governance.
Dependence of the corporation on a small range of products and services may be an unsound policy of its activities. This happens because it leads to the corporation’s over-reliance on a small customer base. Alibaba Holdings shows this negative feature due to the fact that it relies on the customers for its survival in the market. Furthermore, it relies on the online customers in terms of making profit (Solomon and Aris 78). This grants the potential to customers in order to dictate price and margins for the corporation’s products. Consequently, the corporation is placed at risk of losing customers anytime through insolvency or losing the customer to a competitor. This makes the corporation to be always cautious of the customers’ trends. Therefore, the dependence policy proves to be a sign of poor corporate governance.
Corporations should be capable of adapting to future changes. It should be flexible for easier change in case technological or physical changes occur in the market. However, lack of flexibility in the company’s management shows poor state of its governance. Alibaba Holdings portray inflexibility to market changes. It was unable to change according to HKSE regulations (Simpson and John 62). Finally, the inflexibility of the corporation led to the loss of capital in the HKSE. If the corporation had adjusted to the regulations, it could have secured the capital and invest in better to participate in other stock markets.
As a result of poor governance in Alibaba Holdings, several outcomes have been experienced. Alibaba’s shareholders have been barely influencing future strategy (Van et al 92). It results from the fact that the board in the corporation has taken complete control over it. The executives of the corporation control forty four percent of the board seats, which puts them at a better position to control fifty five percent of the board seats in the near date. Currently, the board is controlled by fifty six percent of insiders. Therefore, the public shareholders have minimal impacts on the corporation’s planning.
The shareholder’s rights have been impaired as a result of poor corporate governance in the company. Their rights are also compounded by key assets that are withheld by the VIE company structure. Therefore, a questionable long-term legitimacy appeared and led to conflict in most of the transactions and the takeover defense arrangements. The shareholders were left in such a position that they could easily be mistreated by the corporation’s poor governance.
Alibaba’s 279 million buyers are placed at a risk of their personal information’s exposure because the company’s poor governance leads to Alibaba’s over-reliance on Alipay for the payment processing(Simpson and John 85). The corporation also suffers from lack of strong data security measures; it leads to a rise in customers’ concerns over their privacy while using Alibaba’s web portals. This may result even in hacking of clients’ accounts hence loss of their money.
Poor governance has led Alibaba to face significant short-term integration challenges (Wright, Donald, Kevin, and Igor 59). This happened because the management of Alibaba has employed over forty seven percent of new employees in the last five years. The company’s assets have made it hard for the workers to integrate into the corporation. As a result, the employees’ incentive packages and training programs suffer some challenges.
The company will gain more if it rectifies its governance issues. Its poor corporate governance has weakened its protection. Thus, the evident fact is that the company may turn out to be in financial difficulties, fraud, and a possible collapse. Lack of good governance may lead to loss of capital in the market. However, good corporate governance enhances trust in the investors and attracts outside investments. It leads to a sustainable economic development through the enhancement of the company’s performance. In addition to this, it may also result in increased company’s access to global capital.
By the implementation of the following recommendations, the company may be able to evade poor governance issues. It may also be able to reap profits of good governance as it was described above in the report’s conclusion.
- The corporation should enhance management diversification. This would help in ensuring that the monopolistic nature of the company is eliminated.
- Enhancement of the company’s adaptability to future changes. This would give the company good chances to successfully accept the future legal, technological, and physical challenges.
- Full adherence to the VIE policy should be practiced by the corporation. This would help in taking away Jack’s power of transferring assets hence ensuring the company’s security.
- The company should be involving the shareholders in management. This would help to reduce unsound management policies.