The way ahead

The three most prominent tycoons in their respective home markets of Hong Kong, Macau and Taiwan are CK Hutchison’s Li Ka-shing, casino magnate Stanley Ho and Morris Chang of semiconductor heavyweight TSMC. Notably they all stepped down this year from the empires they have created.

The trio, who average 91 years in age, grew into the most influential figures in their industries so their retirements have cast a strong shadow of a ‘fin de siecle’ sentiment.

This year also marks the 40th anniversary of the launch of China’s economic reforms. That four-decade period of growth has enriched a newer generation of tycoons. According to a research study widely cited by Chinese media last December, the first generation of mainland entrepreneurs are already between 55 and 77 in age. As it grows older, about 70% of the country’s family-run businesses must tackle the succession issue.

In some cases these bosses are already looking beyond their kin for professional managers to run their businesses. But the importance of drawing up retirement plans – plus the perils of ‘key person’ risk – are subjects that have been hogging the headlines in recent days because of different dramas at the country’s top two e-commerce firms.

What dramas?

The commotion began with the shock news early this month that Liu Qiangdong, the founder of internet retailer JD.com, had been arrested on suspicion of criminal conduct in Minnesota.

The story spread initially on social media on the first weekend of this month before the news was later confirmed by the Minneapolis police department. Liu had been taken into custody after an allegation of rape on September 1. The JD.com chairman and chief executive, who goes by the name Richard Liu in the English-speaking world, was freed without bail after a day in custody and has since returned to China.

Having inked important partnerships with American firms such as Google and Amazon in recent years, US-listed JD.com has positioned itself to investors as the major rival to China’s biggest e-commerce player Alibaba.

The 45 year-old Liu is also a high-profile figure in China – in part because of his spats with fellow tycoons but also as a result of his marriage to Zhang Zetian, a 24 year-old internet sensation formally known as “Milk Tea Girl” (see WiC231), in 2015.

News of his detention stoked explosive interest and a photo of him in orange jail garb went particularly viral.

Internet users even played with memes of the image, photoshopping Liu into another orange costume, the kung-fu outfit of Son Goku, a character in the popular Japanese manga Dragon Ball. Gear of the same name quickly went on sale on Alibaba’s e-commerce platform Tmall with the description “the same style as worn by Liu Qiangdong”.

The item was soon taken down from sale, however, and Liu owed Alibaba’s founder Jack Ma another big thank you on Monday when Ma displaced him from the news cycle by announcing his retirement plan.

So Jack Ma’s leaving?

In an interview published on September 7, Jack Ma told the New York Times that he was planning to step down from Alibaba to “pursue philanthropy in education”. He confirmed it in an open letter penned on Monday September 10, the day he turned 54, and which also happens to be Teachers’ Day in China.

The former English teacher co-founded Alibaba from his apartment in Hangzhou in 1999. What started out as a way of listing products for sale online has evolved into one of China’s most important firms. As of this week, its market value was $400 billion (although it was worth about $100 billion more earlier this year).

On September 10, 2019 – which also happens to be Alibaba’s 20th anniversary – Ma will retire as chairman and the role will pass to group CEO Daniel Zhang. Ma will stay on the board of directors, at least until the New York-listed firm’s annual shareholders meeting in 2020, so as to ensure a smooth transition.

This was not a hasty decision, Ma insisted, because he had been preparing this course of action for more than a decade. His succession plan is designed to deliver on Alibaba’s promise to last 102 years (thus spanning three centuries). “However, we all knew that no one could stay with the company for 102 years. A sustainable Alibaba would have to be built on sound governance, culture-centric philosophy, and consistency in developing talent. No company can rely solely on its founders,” he explained.

What is Ma going to do?

The South China Morning Post, a newspaper that Alibaba acquired two years ago, notes that Ma has complained repeatedly about his hectic travel schedule since moving from group CEO to executive chairman five years ago.

“When I retired from the CEO position, I told the CEO team I should have more time playing golf on the beach,” Ma was quoted as saying during a conference in Detroit in 2017. The description is a strange one – playing golf on a beach is hardly fun – but Ma has been looking to lessen his workload. “The thing is, I don’t want to die in my office. I want to die on the beach,” he also explained.

In the open letter, Ma promised he would continue to contribute to the work of the Alibaba Partnership (more about this later) but that he wants to “return to education”.

The company then uploaded an image of his new businesscard. His Chinese name “Ma Yun” is followed first by the title laoshi, which means “teacher”, and below it there are 11 different titles for his various roles with charity foundations and United Nations bodies. Indeed, Ma has taken on quasi-diplomatic roles in recent years (see WiC410 for his designation as China’s CDO, or “chief diplomatic officer”). These responsibilities – often unrelated to Alibaba’s core business – have been partly responsible for his crisscrossing of the globe.

What has happened to Liu?

Of course, a few observers have been second-guessing Ma’s decision to step down, with suggestions that there were reasons other than his punishing travel schedule. And it’s true that there are other drawbacks to being a high-profile businessman in China, as testified by the experiences of some of his peers. The bosses of conglomerates like Wanda and HNA Group have come under pressure to rein back their businesses recently. Others have fared much worse: Anbang’s Wu Xiaohui has just started a lengthy spell in prison.

Ma has always played his political cards very deftly. He has also benefited from Alibaba’s casting as an equal to the American tech titans, something that gladdens the Chinese government. But there are limits to his room for maneouvre. The New York Times points out that the local business environment has soured for some of the country’s other tycoons, for instance, with more intervention from the authorities on behalf of state-owned enterprises (Ma himself said publicly in 2010 that “should the state find it necessary” he would be happy to hand over Alipay, the country’s leading payments app).

For Ma there could be some logic to the maxim: quit while you’re ahead. For Liu, the landscape is certainly looking a lot more complicated, although he too has supporters, including the many netizens who regard his arrest as “a conspiracy directed by the US to undermine the Chinese economy amid the ongoing Sino-US trade war,” the Global Times reports.

The newspaper also questions whether it was appropriate to publish the mugshot of Liu in his prison gear (it claims that the Chinese authorities only make public the photos of convicted criminals). Calling for “a rational and objective attitude” to Liu’s case, it advises readers not to jump to conclusions.

There is limited information about what happened during Liu’s weeklong residency at the University of Minnesota as part of a business administration programme. He was arrested following a dinner with 20 people, including the woman who alleges the assault, the Wall Street Journal reports. According to the same newspaper, the woman is a Chinese student also attending the university.

Meanwhile, Hong Kong’s Singtao Daily reported that China’s foreign ministry is taking an active interest in the case and that diplomats in the US have tried to make contact with the student, as well as her parents in China.

Could Liu learn from Ma?

“When a man says he is going to a business dinner, 99% of the time he is lying,” Ma told a conference of female entrepreneurs last year, winning loud applause, before adding that he has never tried to get deals done at the dining table.

Many bloggers in China believe that Liu has something to learn from his older rival vis-a-vis how to helm a business too. In a widely forwarded WeChat article titled “One group’s Alibaba; one man’s JD.com”, the author pointed out that Liu’s stake in JD.com has been diluted to around 15% after bringing in strategic investors such as Tencent. However, in a dual shareholding structure common among Chinese start-ups, Liu controls about 80% of the voting rights.

“Compared to the teams of influential managers at BAT [Baidu, Alibaba and Tencent], JD.com is more of the one-man kingdom of Liu Qiangdong,” the article points out.

With Liu caught up in a personal storm, his company found itself equally exposed. Its share price has been battered by the scandal, dropping nearly a fifth since the beginning of September, and wiping out more than $6 billion in market value.

“JD.com is now facing its biggest crisis since it was founded in 2004 but its shareholders and employees could do nothing but stare at its slumping market value,” Phoenix News suggested. “The sexual misconduct case [of Liu] is just a triggering point. What it has exposed is a deeper problem: one about the corporate governance of JD.com. If a company is centred on one individual, it runs into major trouble if anything happens to this key man.”

A case in point are company by-laws stipulating that board meetings can’t proceed unless Liu is present, the South China Morning Post says.

The only exclusions are cases in which Liu is found to be physically or mentally incapacited, the by-laws say, “which for avoidance of doubt, does not include any confinement against his will”.

“If it is correct that ‘confinement against his will’ is insufficient reason for JD to hold a board meeting without Liu, then the possible imprisonment of Liu essentially renders JD powerless,” Paul Haswell, a partner at international law firm Pinsent Masons, told the newspaper.

How to dilute “key man risk”?

Alibaba also adopts a dual-class shareholding structure. But instead of concentrating voting rights around Ma, it has introduced the ‘Alibaba Partnership’ which bestows the control across a larger group of founders and outperforming executives.

There were 27 such “partners” when Alibaba went public in New York and the partnership has since expanded to 38 members (according to Caixin Weekly). The group owns roughly 13% of the stock but it controls the voting rights to appoint a majority of the board members.

One of them is Zhang, the future chairman, who is credited with the creation of Singles’ Day, the annual shopping festival that has become a cornerstone of China’s internet economy. He, and his closest colleagues, are tasked with providing the continuity in leadership once Ma steps down.

“Even if Jack Ma is gone, there is Daniel Zhang, Joseph Tsai [group vice chairman], Lucy Peng [formerly Ant Financial chairwoman] and other Alibaba partners,” Phoenix News said. “In JD.com it is always Liu Qiangdong.”

The counterargument is that Ma’s influence will be felt long after he has relinquished the chairmanship. Some worry that his role is still too loosely defined for the period after 2020. He won’t have an official title but he will likely stay on as a lifetime member of both the partnership group and the committee that nominates partners. That will give him a strong say on board-level issues. Nor is there much mention of how Alibaba is going to interact with Ant Financial, the $150 billion fintech giant that has grown out of Alibaba’s e-commerce payment function. Ant is controlled by Ma personally and it is a co-investor with Alibaba on some of its projects.

According to Alibaba’s latest annual report, four of the company’s five VIEs, or variable interest entities, are also still nominally owned by Jack Ma and Simon Xie, another co-founder. VIEs are holding firms domiciled offshore that control businesses in China normally barred from foreign ownership. Internet firms listed in the US are typical candidates, although the VIEs occupy a legal grey area in China.

Alibaba is now trying to address this ‘key man risk’ as well, its annual report revealed, and it is going to shift the control of the VIEs from Ma to two layers of holding companies, which will sign specific contracts with Alibaba’s operating businesses.

The Economist has a more laymen-friendly interpretation of the revamp. “The idea is that if anyone gets run over by a bus [or mired in a sex scandal, WiC might add], then the scheme will not be disrupted,” the magazine reports. “If all goes to plan it will be completed by 2019. Other tech firms may feel pressure to follow, ” it added.

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