Governance Concerns Raised Over Bonus for CEO of China’s JD.com Ahead of U.S. IPO

May 22, 2014 by Elzio Barreto

China’s No. 2 e-commerce company, JD.com Inc, awarded Chief Executive and founder Richard Liu a one-off, share-based bonus of $591 million as the company prepared for its U.S. IPO, giving rise to concerns about corporate governance.

The award was actually worth $891 million at the company’s IPO price of $19 per share, according to a securities filing, or nearly half the amount JD.com and some shareholders raised in the initial offering, the biggest U.S. listing by a Chinese company. It was granted “in consideration of his past and future services,” according to JD.com’s prospectus.

The company’s shares rose as much as 20 percent when they began trading on Thursday. They were up 7.9 percent at $20.51 at midday.

JD.com is the second mainland company in the past month to lavish its senior executives with major share-based bonuses ahead of a stock market flotation, raising questions about governance and shareholders’ rights at Chinese firms ahead of Alibaba Group Holding Inc.’s forthcoming IPO.

“Obviously if company funds are paid just as a matter of executive compensation and not for shareholders value, wouldn’t that automatically mean that shareholders’ rights aren’t being fairly treated?” said Michael Cheng, research director for China and Hong Kong at the Asian Corporate Governance Association (ACGA).

A shareholding structure that gives Liu absolute control over decisions in the company magnifies such concerns, he said.

The award will add to the company’s share-based compensation expenses in 2014, following a steep increase in recent years. Those expenses jumped to 261 million yuan ($41.9 million) at the end of 2013 from 71 million yuan at the end of 2011.

JD.com said in the prospectus “share-based compensation is of significant importance to our ability to attract and retain key personnel and employees.”

Chief Financial Officer Sidney Huang said in a phone interview that JD.com’s investors had put forward the idea of share awards for Liu multiple times in the past but that he had turned them down.

“We’ve achieved great success in China over the past 10 years. So the board, and our shareholders, they decided on this award” in recognition of that, Liu told Reuters.

Investors are watching JD.com as its much larger peer, Alibaba, prepares for what could be the largest ever initial public offering by a technology company.

The JD.com deal was priced at $19 per American Depositary Share (ADS), above the $16 to $18 per share marketing range for the IPO. Each ADS represents two ordinary shares.

Billionaire Liu was awarded 93.78 million restricted share units that vested immediately, equivalent to half the number of ADSs in the entire JD.com IPO.

The company itself offered about 69 million ADSs, while shareholders, including investment firm Tiger Global Management and Russian Internet investment group Digital Sky Technologies, sold another 24.68 million ADSs.

The company’s dual-class share structure, commonly used by U.S. tech titans such Facebook Inc and Google Inc , gives Liu 83.7 percent voting power because he holds class B ordinary shares that are entitled to 20 votes per share, compared with one vote per share for class A ordinary shares.

In addition, JD.com’s board will not be able to muster a quorum in the absence of Liu so long as he is a company director.

The ACGA’s Cheng said this meant “the CEO can veto anything by staying home.”

The JD.com special compensation follows a similar payment to two senior executives of China’s biggest pork producer, WH Group Ltd, who last month received a combined $600 million share-based payout for “recognition and reward” as part of the takeover of U.S.-based Smithfield Foods Inc.

($1 = 6.2337 Chinese yuan)

(Additional reporting by Denny Thomas; Editing by Stephen Coates and Steve Orlofsky)