The upcoming IPO has attracted media and market attention as one of the first efforts by a Chinese company to list on a U.S. Exchange. Founded 15 years ago, Alibaba is a giant in China’s e-commerce business, with online shopping sites combining the power of an Amazon and eBay with the ubiquity of a PayPal.
Among many interesting features, the IPO invites investor scrutiny of its novel corporate governance arrangements. While following the recent trend of IPOs that include corporate governance policies designed to maintain control in the hands of insiders and limit accountability to outside shareholders, the company does not use a dual-class share structure that empowers insiders at the expense of the rights of other shareholders. Instead, insider control is maintained through the director nomination process.
Alibaba Partners, an entity controlled by company insiders, will nominate a simple majority of directors. Softbank, the largest shareholder, will nominate one director. Yahoo will relinquish the board seat previously held by one of its executives. The nominating and governance committee will nominate the remainder of the directors. Director candidates who do not receive a majority vote will be replaced by a nominee selected by the same entity that controls that particular board seat.
The company calls its system a “hybrid” and claims that it both insulates management from the fluctuations of market sentiment and provides shareholders with meaningful rights to elect independent directors. However, this model of governance, and the details of the company’s policies, raise concerns that shareholders should consider as they evaluate the IPO.
Combined with Alibaba Partners, the two top shareholders, Softbank and Yahoo, control a majority of shares. The three entities have agreed to support the others’ director nominees. Does this raise concerns about whether the largest shareholders can be an independent source of management accountability?
The nominating and governance committee will itself not be composed entirely of independent directors. There does not appear to be any requirement that the committee nominate independent directors. Moreover, the board will adopt a classified board structure which raises further barriers to removing underperforming directors. What assurances do shareholders have that director nominees will be fully independent and free from conflicts? Given the relationship between management and the top shareholders, is there a realistic ability of shareholders to reject these nominees?
What practices will ensure that the minority independent shareholders have a meaningful voice in the boardroom? Will there be an independent lead director? Will independent directors meet separately? Do they have any meaningful right to influence the board agenda?
Many shareholders question whether insider control of boards protects management from short-termism, or simply exacerbates the principal-agent conflict at the expense of shareholder interests. A well-designed compensation plan can help to assure shareholders that management interests are aligned with theirs. However, the company has stated explicitly that proxy materials, including any Compensation Discussion and Analysis, may not be presented in a timely way. What disclosures will assure shareholders that management will act in their interests, even in the absence of meaningful accountability to shareholders?
We will continue to monitor the emerging details of Alibaba’s corporate governance to assess how the company plans to address concerns about its governance and align management incentives with long-term shareholder interests.