Alibaba (NYSE:BABA) recently investigated whether Taobao and Tmall president Jiang Fan, a rising star in the e-commerce company, had used his influence to ensure the company where a female social media influencer worked, received preferential treatment from Alibaba. Thankfully, for those who own Alibaba stock, the company took quick action, demoting Jiang to vice president from senior vice president.
More importantly, Jiang was removed from the company’s 38-person partnership, which includes founder Jack Ma, current CEO Daniel Zhang, and executive vice chairman Joe Tsai. To join the partnership, you must be an executive and have worked at the company or one of its affiliates for at least five years. It’s a very exclusive group.
The 35-year-old Jiang was considered a possible successor to Zhang. However, at 48, Zhang is still a long way from being at retirement age. Even Ma, who retired earlier than most company founders, didn’t retire until he was 55.
After the entire Luckin Coffee (NASDAQ:LK) fiasco, which saw the company’s chief operating officer falsify $310 million in sales, sending its stock down by more than 80%, Chinese companies are under the microscope from global investors like never before.
As one of Asia’s largest companies by market capitalization, Alibaba has a fiduciary duty to its shareholders to do all it can to protect the company’s reputation and market value. Whether Jiang was having an affair or merely getting close to the line, large companies, whether they are Chinese or American, can’t be seen turning a blind eye to this kind of transgression.
Part human resources issue, part corporate governance concern, and part succession planning hiccup, the handling of Jiang’s situation shows Alibaba’s paying attention to best practices.
And that’s excellent news for shareholders. Here’s why.
Everyone is Replaceable
While Jiang was a rising star in the company, not to mention the youngest person in Alibaba’s 38-person partnership group, it was imperative for the company to send a message that conflicts of interest won’t be tolerated no matter who you are.
“The demotion suggests he will no longer be the crown prince. It’s a big deal for him but I don’t believe he is irreplaceable,” said Aequitas Research analyst Ming Lu recently. “ I don’t think [Alibaba’s] performance will be negatively impacted.”
The best teams operate successfully because of careful planning. It’s not enough to have great talent. You’ve got to have great talent that isn’t selfish and focuses on the common goals of the team, not the individual.
In the modern NHL, it’s not enough to be a great goal scorer. You’ve got to have what they call a 200-foot game. That means being good at both ends of the rink. Jiang might have been a rising star, but he isn’t irreplaceable.
“On succession … both JD (NASDAQ:JD) and Alibaba have challenges in that they have historically been led by very strong, very connected and very charismatic leaders,” said Paul Haswell, a partner at international law firm Pinsent Masons. “However, there is a vast talent pool for Alibaba to pick from so I doubt this will cause too great a problem for them.”
In addition to electing a majority of the company’s directors, Alibaba’s partnership governance system has a responsibility to ensure there are always qualified people to step into the breach when the unexpected happens.
By having a 38-person partnership in place, employees up and down the corporate ladder know they have a chance to get promoted to the partnership to replace Jiang.
Robust succession planning not only helps replace people who leave, for whatever reason, but it provides an incentive for everyone else to stay motivated. Because you never know when it’s your turn to step up.
The Bottom Line on Alibaba Stock
InvestorPlace’s Wayne Duggan recently suggested that the company’s $28 billion investment in its cloud business over the next three years is a big reason to own Alibaba stock. In Duggan’s case, he’s not just writing about Alibaba, he’s a shareholder, putting his money where his mouth is.
I don’t think there’s any question that the cloud is one of the company’s biggest growth drivers in the years ahead. The coronavirus has demonstrated in no uncertain terms that cloud infrastructure is vital to keeping businesses connected at a time when personal contact is all but impossible.
That said, Alibaba’s quick action shows that it takes corporate governance and employee indiscretions with the utmost seriousness.
If you own Alibaba, as Duggan does, you should be delighted it has a robust corporate governance system in place. It will go a long way to keeping the company in a proper light.
And that’s an excellent thing.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
