Learning Diaries 1: Ni Nguyen

The research, written by Aquilera et al. 2008, argued that it’s more beneficial to analyse
corporate governance in a more open angle instead of focusing on a ‘closed system’ approach
such as ‘agency theory’ and the links between different corporate governance practices and
firm performance. The main issue with the latter remains in the fact that it usually ignores the
distinct contexts in which firms are embedded, which are deemed to shape the dynamic
between the firm’s stakeholders, and thus affect the corporate governance practices. The lack
of attention to this critical component makes the empirical findings on the topics mixed and
inclusive, failing to identify any consistently significant effects. Therefore, there calls the
need for a framework that looks at corporate governance from a more open perspective and
includes the effects of the boarder environmental context. Based on the stakeholder theory
that defines efficiency as goal attainment regarding multiple objectives of different
stakeholders rather than solely the narrowly defined financial performance, the research
proposes to assess corporate governance with a conceptual framework with three
components: costs, contingencies, and complementarities. By evaluating the corporate
governance practices by these three categories, we could explore how some combinations of
practices are more effective for some firms but less for other firms; or work in some
environments but ineffective or costly in other. More specifically, costs should include the
systematic costs of compliance to governance rules and regulations (the audit costs or
directors’ insurance); the indirect opportunity costs such as foregone business opportunities
and diminished entrepreneurial spirits; proprietary costs of disclosing strategic information;
and reputational costs of fraud, misconduct or corporate irresponsibility. Contingencies
analyses how the firm’s specific characteristics such as size, age, phases of growth, resources
and capabilities, etc affect the effectiveness of corporate governance practices.
Complementarities explore the how governance elements consistently complement each other
and make certain practices are more effective in specific combinations than implemented
alone.
By attaining the holistic perspective of this comprehensive framework, I would like to
evaluate the corporate governance of my case company, Alibaba, with respect to their costs,
contingencies, and complementarities. Alibaba is a big, US-public, China-based company
which specializes in e-commerce, retail, Internet, and technology. Its headquarters are in
China, a business environment with heavy regulations from the government, concentrated
ownership structure, and increasing geopolitical risks. Alibaba’s corporate governance
policies claims to focus on the independent and experienced directors, and information
disclosure (Laubscher, n.d.). Regarding the cost of these practices, the high systematic costs
of compliance with requirements of board independence is not a big issue for big firm like
Alibaba, especially when comparing to the strong benefits of enhanced confidence among
investors and the firm’s performance. However, operating in a technological industry, the
proprietary costs of information disclosure and board independence are high if strategically
sensitive information is shared with company outsiders. Regarding contingencies, the large
size of the firm, and the maturity in its growth cycles, the board independence and
information disclosure is particularly important in terms of monitoring the firm’s corporate
governance practices and ensuring the benefits of external investors. In terms of
complementarities, board independence and information disclosure enhance effectiveness of
each other by facilitating the communication between investors and the board. Theoretically
speaking, these seem work efficiently together as corporate governance practices. However,
the reality provides very different angles. The Chinese heavy regulations and concentrated
ownership structure makes the corporate governance structure of Alibaba more special than
the normal definition of board independence and information disclosure, with the inherently
implicit insider control involved. Alibaba’s board of director is independent in terms of
choosing directors based on their talents and abilities, regardless genders, or being Jack Ma’s
descendants, showing no sign of nepotisms or corruptions. However, with some Chinese
government regulations, the board is heavily influenced by a partnership committee and a
variable intertest entity which are controlled by the founder due to his still possession over
the critical business licenses to operate in sensitive sectors (Kamar and Fried, 2020). With the
high concentration of control, not ownership (Jack Ma’s holding only 5% of the shares,
(Kamar and Fried, 2020)), the information disclosure practice also poses some challenges as
it can easily manipulate which information to be disclosed. As a matter of fact, some critical
information such as executive pay structure, or accounting and financial reporting is either
not published or conducted by independent committee (GMI, 2014). This semi-information
disclosure and incomprehensive board independence might reduce the risks of proprietary
and promote company’s growth of innovation, in the other hand, pose critical risks for
foreign shareholders due to their lack of control or knowledge over how the firm is managed.
The voting structure of shareholders also significantly reduces their right in strategic
participation or takeover defenses. This makes minor shareholders vulnerable and totally
relies on the major shareholders in doing the right course. This structure of corporate
governance, although praised in terms of enhancing firm’s performance and ensuring the pool
of qualified successor (Drake, 2018), still presents the problem of concentrated control by
decreasing the degree of board independence and information disclosure, which fueled by
governments’ regulation and Chinese unique business environment.
Aquilera’s research frees my previous perspective of corporate governance from the narrow
agency theory and offer a more holistic view over the corporate governance dynamic with
external environment. This allows me to better understand the effects of various corporate
governance practices and their interdependence for specific firm and specific industries or
business environment. I consider this as very useful perspective to adopt in terms of
enhancing corporate governance practices in real business situation as well as further research
on the topic. From the analysis of my case company, however, show other challenges in
specifying the definition and the ensuing impact of each corporate governance practice. Some
structure shows the board independence in their definition, in fact, is not as independent for
foreigners. Moreover, there are some questions prompted to be discussed: “How global firm,
which operates in many countries and business environments make use of the framework? To
what extent should they universalize company’s corporate governance codes and to what
extent should they adapt to local business environment?”

Reference list
Drake, D. (2018). Alibaba’s Jack Ma: Lessons in Corporate Governance. [online] Wharton
Global Youth Program. Available at:
https://globalyouth.wharton.upenn.edu/articles/business/alibabas-jack-ma-lessons-corporate-
governance/ [Accessed 28 Oct. 2022].
GMI, Inc. (2014). CEOs on Board 6.5 % Audit Committee Independence 2.6 % Executives
on Audit Committee 3.9 % Comp Committee Independence 2.6 % Executives on Comp
Committee 2.6 % Gender Diversity 1.3 % Risk Management Expertise 2.6 %. [online]
Available at: https://www.msci.com/documents/10199/c4ffe535-12da-480f-acd7-
871d1cc6ea93.
Kamar, E. and Fried, J. (2020). Alibaba: A Case Study of Synthetic Control. [online] The
Harvard Law School Forum on Corporate Governance. Available at:
https://corpgov.law.harvard.edu/2020/08/11/alibaba-a-case-study-of-synthetic-control/.
Laubscher, H. (n.d.). What Jack Ma Taught Us About Good Corporate Governance This
Week. [online] Forbes. Available at:
https://www.forbes.com/sites/hendriklaubscher/2018/09/10/what-jack-ma-taught-us-about-
good-corporate-governance-this-week/?sh=71353679fa2b [Accessed 28 Oct. 2022].