Alibaba’s demands have echoes in Hong Kong’s history; when Li Ka-Shing announced B share plans for his two corporate redoubts, Cheung Kong and Hutchison, other tycoons followed, sending Hang Seng down 5% in the next few days

October 1, 2013 3:48 pm

Alibaba’s demands have echoes in Hong Kong’s history

By Paul Davies

Hong Kong forced to think again about ownership and control

Brian Powers was a hotshot investment banker in his mid-30s when he arrived in 1986 as chief strategist at Jardine Matheson, Hong Kong’s original conglomerate trading house. It took less than a year for the US-born financier – a former American football player – to provoke a mini-crisis in the city’s stunted, under-developed stock market by trying to divorce ownership from corporate control.Another revolutionary outsider is now forcing Hong Kong to think again about ownership and control. Jack Ma, co-founder of Alibaba, wanted to stuff his board with supporters after going public, but his scheme was rejected by the city’s guardians of governance. The Chinese e-commerce leviathan is now heading to New York instead. Hong Kong’s financial community is now debating whether the city was right to hold firm to the principles adopted almost 30 years ago in a world that has changed so much?

Jardine’s had seen three tough years when Mr Powers was promoted to the top job in early 1987. It had lost a battle for a big property development in Hong Kong and looked vulnerable to takeover. His first mission was to cement the Keswick family’s control over the publicly listed empire while raising cash to fund expansion.

Mr Powers pulled out the kind of brazen financial sleight of hand that had got him hired from the New York boutique advisory firm headed by James Wolfensohn. At Mr Powers’ instigation, Jardine’s created a second class of B shares that held the same voting power as the existing A shares, but was available to the family at one-tenth the price.

Li Ka-shing, now Asia’s richest man, was quick to spot the wheeze. Within days he announced B share plans for his two corporate redoubts, Cheung Kong and Hutchison. Very quickly, local bankers’ in-trays were flooded with similar schemes from other budding tycoons. Investors balked, sending the Hang Seng down about 5 per cent in the next few days.

For Ray Astin, then the one-man market regulator, this was one more problem. He was battling to remake the image of Hong Kong, an incestuous market rife with all kinds of abuse. Mr Astin had upset many with his push to make insider trading a criminal offence and his demand that large shareholders disclose their holdings – principles now taken for granted.

If foreign investors saw the mass creation of B shares as another way in which they could be fleeced by the city’s tight financial community, Mr Astin believed, his attempts to turn Hong Kong into a leading financial centre would flounder. The watchdog eventually banned dual-share structures under the listing rules, but only after months of wrangling.

Almost 30 years later, it is unquestionable that such flagrant financial alchemy would have harmed investors and was rightly nipped in the bud.

So what, says Alibaba, whose rejection by Hong Kong has sparked controversy, hand wringing and for the head of the stock exchange, Charles Li, a night gripped by garrulous hallucinations.

Mr Ma, the impish visionary behind Alibaba, was not asking for dual shares, nor was he trying to enrich himself at the expense of existing investors. He was, however, asking the world’s technology investors to hand over their money to the company while leaving him and his top team in control of its fate.

But is Alibaba right to say the world will pass Hong Kong by if it does not adapt its listing rules? Will the entrepreneurs of the future insist that their bright burning minds are protected from minority shareholder demands while they create brilliant new technologies and entertainments?

It is a debate worth having. But the problem with Alibaba is that the company was not asking for the short-term protections afforded to entrepreneurs, such as those at Google, which are broadly backed by investors.

Instead, Mr Ma wants to create a grand legacy, an institution that will bear the name he gave it for more than a century. In a highly disruptive industry, he believes creative destruction for Alibaba should only occur within its walls and under the watchful central command of his top executive partnership. David Webb, the Hong Kong governance activist, is not the only one to note glaring parallels with the state of China itself in Mr Ma’s creation.

But perhaps the best description is from an eloquent local banker asked for a view on the point of Alibaba’s novel corporate-control scheme. “It’s very difficult to articulate why it should have this kind of set-up unless you are a multi-billionaire. It’s got Ozymandias written all over it.”