Learning Diaries 4: Ni Nguyen

Existing literature on the governance function of firm ownership is predominantly built

around agency theory, which poses an oversimplification of the nature of relationships
between various firm owners and executives. By incorporating a wide range of approaches,
the study sheds light on the fast-evolving role of firm owners in corporate governance
through both internal and external control mechanisms. The comprehensive framework of
ownership as a form of corporate governance put forward in this paper is comprised of three
main components: ownership structure, ownership influence, and firm characteristics.

Ownership structure can be classified into two dominant forms: inside ownership (executive
ownership, board ownership, and employee ownership) and outside ownership (blockholders,
agent owners, and private equity). Equity owned by insiders is said to help align the interests
of managers and shareholders (alignment approach), while equity held by outsiders allows
these shareholders to carefully monitor the actions of managers (control approach). Scholars
of different domains demonstrate conflicting views regarding the appeal of both approaches.

Ownership structure and owner influence: Tactics to deal with non-aligned decision-
making outcomes include restructuring, activism, and buy-and-hold. Common restructuring
approaches such as spin-offs, sell-offs, and LBOs usually lead to improved firm performance.
Owners that engage in activism who tend to be large, pressure-resistant, have long time
horizon and own a considerable number of shares, could either send proposals to the board or
acquire seats on the board of directors.

There are emerging issues regarding the heterogeneity in ownership types with divergent
interests and influence on the firms. This calls for theoretical development to navigate the
increasingly diverse and dynamic structures and the strategic behaviors they encourage.

Ownership influence & outcomes: Ownership influence the firm’s performance, strategy,
and governance process. Internal ownership, outside blockholders and dedicated agent
owners all result in better firm performance either through better focus or better control.
Ownership concentration supports R&D spending and boosts innovation. Ownership is
highly interrelated with market for corporate control, board independence, executive
compensation.
The kind of change to corporate governance after restructuring remains quite unknown. Also,
the research on how owners might engage in opportunism activity such as short selling at the
cost of manager and firm’s long-term prospect.

Outcomes & ownership structures: Potential owners make investment decisions based on
information about the firm’s outcomes and attributes, which in turn change the ownership
structure.

Although there proves to be a positive relationship between institutional investor ownership

and the presence/absence of certain governance policies, it’s challenging to draw a causal
connection as endogeneity somewhat complicates the relationships.

The ownership structure of my case company, Alibaba is quite diverse, with 3.6% owned by
individual insiders and 96.4% owned by outsiders (2% for private companies, 23.9% for
public companies, 35% for institutions and 35.5% for general public) (Yahoo Finance, 2022).
However, the majority of shares owned by outsiders do not give them the right to carefully
monitor the actions of managers since the firm adopts Alibaba partnership, which gives some
shareholders more voting rights than others, allowing the company’s founders to maintain
control and power (China Business Knowledge, 2014). Operating in technological industry,
this concentrated control of insiders might be beneficial for the firm’s long-term growth as
they are more likely to provide the required R&D expenditures that short-term shareholders
are not in favor of. Although acting as a defense against short-term owners’ opportunism, this
disproportionally bigger control compared to equity stake of insiders exacerbates the agency
conflicts between managers and shareholders. There exist many weaknesses in Alibaba’s
corporate governance structure in addressing this agency problem, such as the lack of board
of independence and information disclosure, which are endogenously influenced by the
unique power control in the hand of insiders. The lack of control from outsiders might lead
the firms to several poor decisions. For examples accounting irregularities spotted in several
firms the company acquired indicate the lack of proper due diligence.

Softbank, the largest institutional investor, influences the managers through the right to elect
2 seats in the board of directors. However, the certain level of heterogeneity in ownership
causes the difference in shareholders’ interests and exposure to risks. With that being said,
‘SoftBank may exercise its shareholder rights in a way that it believes is in its best interest,
which may conflict with the interest of our other shareholders.’ (Petry, 2014). Recently,
Softbank sold almost 10% of its Alibaba shares (from 23.7% to 14.6%), in an attempt to
recover from the record quarterly loss and maintain the necessary cash to sustain its
investments (Nussey, 2022)

Last but not least, potential owners make investment decisions based on information about
the firm’s outcomes and attributes. Given the arising risks stemming from political tensions
between the US and China, and weak governance structure that lack mechanism to protect
shareholders, Alibaba’s stocks become less attractive to foreign individual investors, despite
being priced cheaper than its fair value. Several roadblocks have shown up in its international
expansions or sector expansion through inorganic growth opportunities, which potentially
slow down its growth in the future after the domestic market is saturated (Financial Times,
2022). The slowdown of growth reduces the benefits of concentrated insider control and
eventually fail to mask the weak governance structure that give individual shareholders
limited information and limited say. Therefore, recently, the company attempted to primarily
dual list its stock on Hong Kong stock market, to attract more Chinese investors when foreign
investors are pulling back.

The way ownership structure classified in this research resonates with the insider versus
outsider approach proposed by García-Castro, Aguilera and Ariño, 2013. However, my case
company analysis pointed out that the majority of equity does not always allows outsiders to
effectively ensure the managers to work in their interests.

The framework, which depicts the dynamic between ownership structure, ownership
influence and firm’s outcomes and attributes, help me to have a better grasp of how
ownership structure act as a form of corporate governance. Previously, I only know about the
difference between dispersed or concentrated ownership. This research shows me the intricate
dynamic between ownership structure and corporate governance practices, given the
emerging issues that come from the heterogeneity in ownership and the endogeneity in
corporate governance institutions. Understanding the mechanisms behind these, I could more
accurately evaluate the governance ownership structure, and adopt better corporate
governance practices in the future. Moreover, there are some questions prompted to be
discussed: “When the interests of different owners are highly contradicts, what is the
corporate governance strategies could help to achieve a balance point?” “What is the
implication of the exit of a single powerful blockholder (for example when Softback sold all
of its share) on firm’s tactical and strategic competitive activity?”
Reference list

Aguilera, R.V., Filatotchev, I., Gospel, H. and Jackson, G. (2007). An Organizational

Approach to Comparative Corporate Governance: Costs, Contingencies, and
Complementarities. SSRN Electronic Journal. doi:10.2139/ssrn.955043.

Alibaba scales back global expansion plan to rival Amazon. (2022). Financial Times. [online]
26 Jul. Available at: https://www.ft.com/content/b6903ab3-ddba-450c-8f6e-e88598e6a420
[Accessed 6 Oct. 2022].

Alizila. (2022). Alibaba Names 2 Independent Directors, Boosting Corporate Governance.

[online] Available at: https://www.alizila.com/independent-directors/ [Accessed 17 Nov.
2022].

García-Castro, R., Aguilera, R.V. and Ariño, M.A. (2013). Bundles of Firm Corporate
Governance Practices: A Fuzzy Set Analysis. Corporate Governance: An International
Review, [online] 21(4), pp.390–407. doi:10.1111/corg.12024.

Nussey, S. (2022). SoftBank to gain $34 billion from cutting Alibaba stake. Reuters. [online]
10 Aug. Available at: https://www.reuters.com/technology/softbank-book-34-bln-gain-
alibaba-shares-2022-08-10/ [Accessed 17 Nov. 2022].

Petry, S. (2014). Founder Firms and Bad Corporate Governance Design? The Case of
Alibaba. SSRN Electronic Journal. doi:10.2139/ssrn.2530063.