Alibaba is a US-listed online marketplace company originating in China. It has four major business segments covering e-commerce, cloud, digital media and entertainment and other innovative initiatives.
The group started out in 1999 when its founder and executive chair created Alibaba.com, a business-to-business portal connecting Chinese manufacturers with overseas buyers. In September 2013, the company sought an initial public offering (IPO) in the US after the Hong Kong Stock Exchange rejected its proposed partnership structure which gives a small founder-led team the right to nominate up to a simple majority of the board for election by all shareholders.
With $25 billion raised, the IPO has been the largest one to date globally. The company uses variable interest entity structures (VIEs) to hold internet content provider licences and other licences and approvals for businesses in which foreign ownership is restricted or prohibited under local regulations in China. These VIEs have exclusive contractual relationships with subsidiaries of the listed company registered in Cayman Islands. The legal and shareholding structure has been a controversial topic among investors. Nevertheless, we felt that within the existing structure, if the company showed openness towards engagement, we could engage and improve its ESG performance and disclosure.
What we did
We initiated contact with the company in the third quarter of 2015 with the objective to improve its disclosure and shareholder communication. Through our dialogue, we gained insights into the changes in board dynamics and governance strategy that have occurred since it was a private company. We pushed for a breakdown of the performance of its different businesses.
To understand the rapidly growing company and its culture better, we met its stakeholders and representatives. For example, we spoke separately to the board director of its entrepreneurship fund to obtain more information about the company’s mission and values. We also paid a visit to its headquarters in Hangzhou in February 2016 to improve our understanding of its big data systems and analysis and find out how the company manages counterfeits, cyber security and data privacy issues. We were pleased with our visit and the positive attitude of the company towards the questions we raised.
One of the biggest issues facing the company is the way it deals with the authenticity and quality of goods available on its various platforms. We brought to the company’s attention allegations of human rights violations by its suppliers in May 2016. The matter was attended to within a week and a response published.
In June 2016, the company held its first investor day and for the first time provided annual revenue guidance for its businesses. Starting with the 2016 June quarter earnings announcement, it also provided historical financial information for its different businesses which was not previously available.
With regard to business synergies, the company explained to us the characteristics of its approach to human capital management and how cultural assessment is embedded within the decision-making processes on mergers and acquisitions.
Alibaba has created a number of initiatives to fight counterfeits. For example, it has made significant efforts to reach out to industry bodies to establish joint anti-counterfeit programmes, such as the IP Joint Force System. The company’s statement submitted to the US trade representative as part of the US government’s review of notorious markets also demonstrated its committed efforts to addressing the issues. To ensure sufficient buyer protection is in place, it has established a seven-day unconditional refund policy to reimburse affected customers. It also uses its global payment network system to follow the flows of funds, which helps to trace illegal business activities. This was explained by the group’s president at a public forum. On numerous occasions, the company has helped local authorities in China and overseas in clamping down on illegal operations. It has also set up an impact-driven scheme called ‘Made in China’ to educate small businesses on how to develop their own brands and businesses.
Furthermore, the company continues to leverage its growing data sets and improve its pattern recognition system that identifies hackers in its customer base. The company also makes increasing use of public disclosure through a number of websites, such as its own news platform Alizila, the research platform Ali Research Institute which provides regional e-commerce data in China and articles on industry trends and Taobao university, which was set up to educate online buyers and sellers. It offers a module on intellectual property protection, authenticity of product information and on how to identify fraudulent transactions. All of the above websites help to improve disclosure, transparency and potentially user discipline. Last but not least, the executive chair was appointed as special adviser to the UN on youth entrepreneurship and small businesses, opening up further channels for disclosure and communication.
As we continue to build mutual trust, we also aim to step up our engagement on governance-related issues.
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This case study has been prepared by Hermes Equity Ownership Services Limited (Hermes EOS). Hermes EOS has endeavoured to ensure that any factual information set out in this case study is correct.
Social & ethical: Cyber security/ Data privacy/ Fighting counterfeits
Strategy, risk and communication: Improve information disclosure/ Improve shareholder communication