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5% Shareholding Rule: Case Study


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A 5% shareholder rule will work against the independence of the board of directors who should own the shares of Alibaba.

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Agency theory

This law is applied to explain and resolve conflict in the relationship between the agents and their principals. It is essential to base on this principle to help the company meet its fundamental goals without conflict of interest.

5% shareholding rule

This rule defines any entity where a beneficiary owns 5% or more of shares and has the voting right. Such beneficiaries are allowed to be a part of the board of directors. It means those with these shares can make the critical decision for the company and elect the leaders they want (Martins, 2020).

The Role of the Theorem

Director’s independence is one of the most critical issues that should never be taken for granted. They play a vital role in the crucial decision in companies like Chinese company Alibaba. When elections base on personal interests, it results in poor corporate governance. Adopting appropriate recommendations will improve the governance system of the firm. The shareholder will vote in their interest to safe guard stock prices; this move resulted in bad corporate governance. (Cai et al., 2016).

Shareholders thereby play an important role in the functioning of a company. They have various rights which include the appointment of the company’s director, auditor and having a say when the company goes insolvent.

Risk-taking and Management

Risk taking is any consciously or non-consciously controlled behavior with a perceived uncertainty about its outcome, and/or about its possible benefits or costs for the physical, economic or psycho-social well-being of oneself or others.

For every business to be successful, a considerable degree of risk taken by stakeholders. For Alibaba to remain at the top of the market, they need a leader who will take innovative solutions and diversify products. A shareholder who in leadership might fail to take up risky projects and market. American companies are taking on diverse tasks that might be fruitful in the end (Cole, 2021).

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Shareholder director will fear shares prices will drop significantly if the company fails to meet the expectations. For instance, investing in the latest technology will help them introduce the right products in the market that will be earn the company great fortune.

Impact on Consumer Selection

Many different factors can influence the outcomes of purchasing decisions. Some of these factors are specific to the buying situation: what exactly you are buying and for what occasion. Other factors are specific to each person: an individual’s background, preferences, personality, motivations, and economic status.

Market analysis is an essential aspect of companies like Alibaba, as they must supply the right products at the right time. Independent leaders will help the company choose the right partners and business associates. People with shares in Alibaba will not take up new challenges, especially the risky ones. Despite the marketing strategies in place, the 5% shareholder leader will fail to challenge this.

Possible Conflict in the Company

Shareholder conflict of interest arises as a Tier-III conflict when the interests of shareholders are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions.

Alibaba has many shareholders who inject capital into the company to help it develop various aspects. Choosing a shareholder to take up the leadership will bring conflict among the other associate who might feel their interest are not met. In this situation, it is hard to make vital decisions that will spur the company to greatness. There will be an increase in company politics that will waste much time. Slowing decision making will give the competitors an upper hand who will make a swift decision. There will be a lack of trust by a shareholder who wont believe in the current.

Communicating openly and effectively with senior leaders is one of your most important tasks as a professional communicator. The success of your company and brand depends on senior management’s decision making, and it’s your job to inform senior leaders about what’s really going on.

The company must take a better communication strategy to involve both top and lower management in the implementation and decision making. Concertation ownership helps in the production of active and effective evaluation mechanisms, making the managers and directors make decisions based on the shareholders’ interests. Through the changes policy reviews, it will assist in understanding the internal working system and the role the board of directors plays in the governance.

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Risk of Poor Leadership

Poor leadership can seriously affect employee morale and even cause the company’s bottom line to plunge. Bad leadership leads to poor employee retention and demotivates the remaining employees, causing them to be much less productive than they would otherwise be.

International companies need the right leaders to help them remain at the top of the game, therefore, Choosing leaders basing personal interest will impact the negatively its growth. The right leaders will choose the right strategy for the company and invest in the right approach. Consequently, applying the 5% shareholder rule interferes with the company’s process as the right approach will not be taken to select the right person to drives the company’s growth.


Conclusively, the theory of 5% shareholder rule will have a negative impact on the success of Alibaba. All the stakeholders involved should allow a neutral party to drive the company’s interest forward. The application of this rule will give their competitors a slight advantage over them.


  1. Cai, Y., Xu, J., & Yang, J. (2016). Affiliated Corporate Donations and Director Independence. SSRN Electronic Journal. Web.

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