Alibaba IPO: Lessons the City can learn from New York float

Americans are less fussy when it comes to shareholder rights and Alibaba is taking advantage to ensure Jack Ma remains in the driving seat

The flotation in New York of Chinese e-commerce giant Alibaba could not have happened in London because our rules on investor protection and corporate governance would not allow it

One share, one vote is a cardinal principle of British listings that ensures all shareholders are treated equally and groups of insiders cannot exercise disproportionate control.

They are less fussy about shareholder rights in America, and Alibaba is taking advantage of this to ensure the existing owner management team remains in the driving seat.

Thus the company is effectively run by 27 people known as the Lakeside Partners, with six of these not even Alibaba employees. The group, including founder Jack Ma, collectively owns about 10 per cent of the company but has the authority to control the majority of board appointments.

This has been flagged as an issue in the UK not by an investor protection group, regulator or stock exchange but by Oliver Parry, corporate governance adviser to the Institute of Directors.

He is right to highlight it — even if doing so draws attention to the silence from the legions of analyst and others, most of whom no doubt work for firms that hope to profit from the flotation and therefore consider it politic not to stick their necks out.

Parry also says this is becoming something of a trend among technology companies because Facebook, Amazon and Google have all taken a similar approach in their different ways to limit the power of shareholders.

These are giant companies and it matters when they justify this approach because they don’t want their business to be overexposed to the mood swings and short-termism so prevalent among professional investors.

The knee-jerk reaction is to assume the Americans are wrong and the British approach is right, but maybe we should think again. None of the companies has made any secret of its restricted governance structure. Investors knew what the deal was before they bought shares, and were free not to buy if they did not approve. So why shouldn’t the existing owners of the company have the right to tailor its governance structure to safeguard what they think is important?

The UK approach is more purist. It relies instead on encouraging shareholders to engage closely with management to support long-term value creation. When this works, there should be no need for extra protections.

But it does not really work. The Financial Reporting Council last year launched a shareholder code to encourage more constructive engagement. Lots of fund managers signed up but companies report that in reality there has been precious little change in the amount or quality of engagement.

Should we perhaps therefore accept that professional shareholders are never going to behave like owners and will never take the interest in the business the textbooks say they should. If we accept that reality, perhaps we should be more accommodating toward protective share structures, provided they are transparent and fully disclosed.

The loss would be of shareholder rights, which most don’t care to exercise anyway. The gain would be that it would protect businesses so they could think long term — witness the performance of Associated British Foods or Associated Newspapers, two of the handful in the UK that do still have such protections.

It would also help protect our promising businesses from being bought by foreign buyers just as they begin to show what they can do. In this way, we might have more success in growing the next generation of world-leading enterprises.

We need to have this debate. Instinctively, we think shareholder democracy must be the ideal we should aim for.

But it clearly is not working, and the pressures it exerts on managements arguably do more harm than good and restrict our ability to develop world-class businesses. There is surely a case for more flexibility in governance arrangements — for rules that reflect reality rather than a never-attained ideal.