BEIJING Aug 13 Jack Ma, founder and executive
chairman of Alibaba Group Holding, holds deep sway
over executive and board appointments at China's biggest
e-commerce company, and that influence is set to strengthen
further at the firm, which is heading towards a New York IPO
that is expected to raise more than $15 billion later this year.
In Alibaba's latest filings with the U.S. Securities and
Exchange Commission (SEC), it said Ma this year initiated a
bonus program that allowed senior executives and Alibaba staff
to acquire share rights at an affiliated company he controls.
Alibaba on Tuesday underscored the potential conflict of
interest from Ma's role as Alibaba's executive chairman and as
the controlling shareholder at the company which holds Alibaba's
affiliated Alipay payment business - even as the company said it
was forging a closer relationship with the unit.
"If conflicts arise," Alibaba said in an amended SEC filing,
"such conflicts may not be resolved in our favor."
Companies routinely amend their filings ahead of an IPO. In
Tuesday's filing, Alibaba expanded its "risk factors" comments,
but it was not clear whether this reflected any concerns raised
by the SEC or potential investors.
Alibaba's CEO Jonathan Lu, chief people officer Lucy Peng,
and chief risk officer Shao Xiaofeng, are among 20 senior
executives who have benefited from the bonus program, taking
share rights which provide the holder with the economic benefits
of the stock, company registration documents show.
All 20, along with Ma, are members of the Alibaba
Partnership, the 27-member group which will have the exclusive
right to nominate a majority of Alibaba's board of directors,
A bonus scheme granting employees at a listed company shares
in an unlisted affiliate doesn't raise any legal concerns, but
it is unusual for a firm to allow an executive to independently
determine compensation, corporate governance experts say.
The scheme potentially further separates Alibaba investors
from voting control of the company, said Charles Elson, director
at the Center for Corporate Governance at the University of
Delaware. "For investors, it's a troubling structure. Public
shareholders are going to put up lots of capital, but get very
little back in terms of control."
The rewards program, which Ma intends to continue using, may
also deepen the 49-year-old executive chairman's control of
Alibaba's executive management, and allow him to further
influence how the company's board is selected.
"Alibaba is doing many things that go against what is
considered best practice in corporate governance," said Paul
Gillis, an accounting professor at Peking University's Guanghua
School of Management. "These kinds of structures can be
dangerous in a large organization because they lack transparency
and may misalign the interests of shareholders and employees."
PAYMENT, FINANCIAL SERVICES
Ma this year began distributing share rights for Zhejiang
Alibaba E-Commerce (Small and Micro Financial Services Co), a
Hangzhou-registered company that holds Alipay and other
financial services licenses. Ma stripped Alipay from Alibaba
four years ago in a controversial move that damaged relations
with major shareholders, led by Yahoo Inc.
Alibaba's 20 executives acquired about 42 percent of Small
and Micro Financial Services' shareholding rights through
participation in Hangzhou Junao Equity Investment Partnership,
an entity registered late last year which is controlled by Ma
through a separate unit, Hangzhou Yunbo Investment Consultancy
Alibaba said on Tuesday that Ma believes the equity-related
awards tied company employees "to the success" of Small and
Micro Financial Services, which has entered into a more
far-reaching framework agreement with the e-commerce firm.
As of March, the Alibaba executives agreed to pay 921.3
million yuan ($149 million) for the share rights, company
registration documents show. The rest of Small and Micro
Financial Services was recently transferred to Hangzhou Junhan
Investment Partnership, another entity controlled by Ma, Alibaba
said in its filings.
In March, Ma also used Junhan to give similar share-based
awards to most Alibaba employees, Alibaba said in a July SEC
filing. Ma intends to "issue additional share-based awards" to
Alibaba staff "from time to time in the future," it added.
The Junhan share-based employee awards will be vested "upon
the fulfilment of requisite service," Alibaba said. Similar
awards by Junhan will be subject to the approval of the
company's audit committee.
The awards, to be settled in cash, are similar to share
appreciation awards and are linked to the valuation of Small and
Micro Financial Services. Junhan has the right to buy back the
awards if the company should sell shares in a public offering.
Ma's own stake in Small and Micro Financial Services would
be "reduced over time" to equal his 8.9 percent shareholding in
Alibaba Group, with the share reduction to take place over the
next 3-5 years, Alibaba said on Tuesday.
While Alibaba isn't obliged to pay for the awards, and the
Alibaba founder pledged not to receive "any economic benefit"
from the reduction in his shareholding in Small and Micro
Financial Services, the company will record future related
costs, it said.
"Jack (Ma), through his role with us and his control over
Junhan could be in a position to propose and promote further
share-based grants that result in additional, and potentially
significant, expenses to our company," Alibaba said in Tuesday's
(1 US dollar = 6.1684 Chinese yuan)
(Editing by Ian Geoghegan)