In a stunning management shakeup at one of China’s largest Internet companies, Alibaba.com CEO David Wei and COO Elvis Lee today resigned to take responsibility for not setting a strong tone of corporate values at the top in connection with an increase in fraud being committed by organized groups that attacked the e-commerce website.
Jonathan Lu, the CEO of Taobao, Alibaba.com’s sister company, was named as Wei’s replacement. Lu, an 11-year veteran of Alibaba Group, which owns Taobao and Alibaba.com, will continue to serve as Taobao’s chief executive. No replacement was named for Lee.
According to company officials, Wei and Lee resigned in the wake of an internal investigation that found Alibaba.com’s senior management did not get to the root cause of a “noticeable increase” last year in the number of fraud cases being reported against suppliers selling products via the Hangzhou, China-based company’s international trading website. Alibaba.com is an online marketplace that allows businesses to market their merchandise or source products over the Internet.
The investigation, launched by the company’s board of directors in mid-January and led by independent director Savio Kwan, focused on a group of Alibaba.com sales employees who “willfully or negligently” helped organized Chinese criminal rings establish Alibaba.com “Gold Supplier” storefronts so they could pose as legitimate businesses in order to defraud buyers, said a source close to the matter.
Alibaba.com requires would-be vendors to provide business registration documents to set up storefronts on the site. But fraudsters subverted the website’s verification process by submitting fake papers, sometimes with the help of Alibaba.com sales staff, the investigation found. Once established on the site, the phony suppliers, usually offering small lots of consumer electronics at very low prices, went on to take orders from several thousand overseas consumers and small businesses who paid up front but never received any merchandise. It’s unclear how much money was taken, but the company said that the average claim by aggrieved buyers is less than US$1,200.
Alibaba.com did not disclose the status of nearly100 employees out of the company’s 5000-strong sales force who are suspected of abetting fraud, saying only that many have been terminated and the investigation is ongoing.
Alibaba.com is listed on the Hong Kong Stock Exchange. In a filing with the exchange today disclosing the management changes, Alibaba.com Chairman Jack Ma said that Wei and Lee, while not involved in the fraudulent activities, “did the honorable thing by accepting full responsibility” for what the company described as a “systemic breakdown of [Alibaba.com’s] culture of integrity.”
Company officials stressed that the scope of the fraudulent activity appeared to be within the risk range for e-commerce websites in general, but it was important for the company to crack down hard on these activities.About 1,219suppliers that signed up in 2009 and 1,107in 2010 (1.1 percent and 0.8 percent respectively of total paid sellers during the relevant period) had fraud complaints lodged against them, according to the company.Alibaba’s investigation determined the vast majority of these storefronts were set up to intentionally defraud global buyers.The company said that all of these confirmed fraudulent storefronts have been de-listed from the site, and that the company is in the process of identifying high-risk suppliers througha proprietary fraud-detection system.
Despite this, directors determined that although Wei and other top executives took steps to contain the fraud, they failed to act decisively to prevent erosion of the company’s ethical standards. The investigationfound therewasa culture emphasizing “the pursuit of short-term financial gain” that influencedAlibaba.com’s sales staff, who receive commissions for signing up paying customers. “Sales people were incentivized to bring in as many paid suppliers as possible without regard to quality. There was a breakdown in the company’s internal check-and-balance systems that allowed fraudulent storefronts to be listed easily on the site,” said a source close to the investigation.
“The founders of the company are incredibly angry about this,” added the source.”The founders felt this was not about mis-management, but about failing to recognize the long-held belief at Alibaba that the values of integrity and customer service are the essence of the company’s success.”
In the Hong Kong Stock Exchange filing, Ma stated that “One of our most important values is integrity. That means integrity of our employees and integrity of the online marketplace as a trusted and safe place for our small business customers.We must send a strong message that it is unacceptable to compromise the company’s culture and values.”
As part of the management shakeup, Alibaba Group Chief People Officer Kangming Deng, who headed human resources at Alibaba.com until mid-2010, was demoted for failing to make employee education on Alibaba values a priority, the company said.
The company said the management changes and other fallout from the fraud investigation will have no impact on its financial filings, but the company will monitor any financial impact to its future business prospects.
Fraud is not uncommon on open e-commerce marketplaces like eBay and Alibaba.com, companies that sell no products directly but act as matchmaking services between millions of buyers and sellers around the world. Despite screening processes, the sheer number of members and transactions can make policing such sites difficult.
Alibaba.com’s new management team vowed to redouble efforts to prevent fraud. By using data mining and statistical analysis to monitor trading patterns, Alibaba.com hopes to be able to more effectively identify suppliers believed to have a high risk of committing fraud and remove them from the marketplace. The company also will revise its internal policies and structures to ensure that employee interests are aligned toward building long-term customer value.
According to company officials, directors asked Lu to serve as Alibaba.com CEO in part because he has the respect of the Alibaba.com sales organization. Lu is a former Alibaba.com sales manager for Guangdong Province and was general manager of Alibaba.com’s South China Region for nearly five years.Lu also served as the founding president of Alipay, Alibaba Group’s electronic-payments subsidiary, from 2004 through the end of 2007.
Lu became CEO of Taobao, China’s largest retail e-commerce website, in January 2008. His background is expected to allow him to take a leadership role in building an e-commerce ecosystem that would make it more efficient for manufacturers on the Alibaba.com platform to supply products to Taobao merchants or sell directly to Taobao consumers.
The company said there are no plans to search for a permanent CEO.”The Board will evaluate if this is an appropriate arrangement on an ongoing basis,” said one executive.
The company also said that all fees paid to Alibaba.com to set up fraudulent storefronts will be forfeited and paid into a special fund that was established by the company in early 2010 to help provide good-will payments to fraud victims. Officials said the company will continue to help victims pursue legal action against fraudulent operators.
