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The Case for Letting Alibaba Ignore Its Shareholders

Geplaatst op sep 26, 2013 in News

When the prototype of the modern publicly traded corporation, the Dutch East India Company, was established in 1602, its outside shareholders didn’t have a lot of say in the matter.

They were welcome to put in money — and to take it out by selling their shares to others. But the company was chartered by the Dutch parliament not as a vehicle for investment but to promote the country’s interests. Those who bought shares in 1602 and after were to play no role whatsoever in its governance. They didn’t choose directors, who were appointed for life by the mayors of five Dutch cities. They were supposed to get dividends, but it turned out to be quite unclear when they’d be paid or how big they’d be.

In fact, as J. Matthijs de Jong details in a fascinating 2010 paper on the subject, no dividends were paid for the first eight years of the company’s existence. The cost of equipping a ship and maintaining a base of operations in what is now Indonesia, and the conservatism of the directors, meant no rewards for the shareholders. A payout finally came in 1610 — in mace (a spice), not cash — only after a short-selling campaign by a disgruntled former investor.

After that the company did start paying occasional cash dividends, but didn’t do much else to accommodate its outside shareholders. It was only when its charter came up for renewal in 1623 that a real opportunity presented itself for change. A group of dissident shareholders, angry about the low dividends and the growing wealth of the company directors, published a series of pamphlets blasting governance at the company and demanding a big payout, in cloves. The Dutch government listened, and the new charter ended up providing for regular audits of the company’s books, limited terms for the directors, annual dividends, and the appointment of a second board (still appointed by the cities, not the shareholders) to oversee the inside directors.

There are two ways to look at this. One is as part of an inevitable progression toward a truly modern corporate form in which shareholders reign supreme and corporate managers efficiently do their bidding. Another is an indication that the governance of corporations is about compromise and conflict, and different structures are most appropriate for different kinds of companies and different stages of their development. By neglecting shareholders in its early years, the Dutch East India Company was able to hold onto and reinvest its profits, allowing it to build itself into a formidable economic and political force. Later on that structure lent itself to abuse, and it was good for shareholders to get more say. But there is not one right way to organize a corporation.

This brings us to Jack Ma and his company, Chinese Internet giant Alibaba. Ending months of speculation, the privately held company broke off negotiations this week with the Hong Kong Stock Exchange and began moving toward an initial public offering in New York. The reason: the Hong Kong exchange was not willing to bend its rules against dual-class shares, while Ma and his management team want a share structure in which they maintain control of the company even if they sell the majority of it to outside investors. The models he reportedly has in mind are Google and Facebook, whose founders have used special shares with extra voting rights to maintain tight control even as the companies have waded into public markets. But it could just as well be the Dutch East India Company.

The Hong Kong Exchange doesn’t allow this kind of thing because it follows the modern British model in which outside shareholders are to be protected and catered to at all costs. The U.S. is more conflicted, and allows for multiple classes of shares and lots of other violations of the shareholder-first ethos — although laws and regulations here have been headed in a more shareholder-oriented direction for the past couple of decades.

This difference in rules has been depicted in some quarters as reflecting poorly on the U.S. As “deal professor” Steven Davidoff wrote in The New York Times, “the United States has become the place to avoid more stringent regulation.” But are the Hong Kong rules really more stringent, or just less imaginative?

Davidoff cites evidence — a paper by Paul Gompers of Harvard Business School, Joy Ishii of Stanford Business School, and Andrew Metrick of the Wharton School — that dual-class shares lead to inferior share-price performance. In fact, there is a ton of evidence that pretty much any governance structure or rule that entrenches current managers and makes it harder for outside shareholders to throw them out depresses share prices. The question is whether that’s really the only metric we should be paying attention to.

In his book Firm Commitment and in a piece he wrote for HBR.org, economist Colin Mayer, the former dean of the University of Oxford’s Saïd Business School, argues that extreme attention to shareholder rights may be partly responsible for the sorry state of the British economy and the weakness of the country’s corporations. He writes:

Exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one.

It may be that all Jack Ma and his fellow Alibaba executives are looking for is a lax regulatory environment where they can keep their jobs and fill their pockets without constant harping from outside shareholders. But it may also be that they’re trying to carve out space for the kind of commitments that can make their company endure. The evidence from the Netherlands 400 years ago suggests that it’s probably a bit of both.

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