Last week, NYU Stern School of Business professor Aswath Damodaran said that he considered the upcoming Alibaba IPO to be fairly valued at about $66, but he also worried about the ‘corporate governance nightmare’ that long-term investors would have to accept to be a part of the Chinese eCommerce giant. But for someone who routinely champions combining business narrative with analysis, vague concerns aren’t good enough, and this week he has returned to the topic to discuss how he works governance into valuations.

Alibaba (NYSE:BABA)’s stock price: Two schools of thought on corporate governance

Damodaran acknowledges that there are two different schools of thought regarding corporate governance, what he calls the benevolent ruler school and the corporate democracy school. If a company has a dominant, capable CEO with a long history of delivering the goods then you might not want a powerful board slowing things down (especially if you’re looking at an investment over the next few months or quarters). On the other hand, even the best CEOs can start down destructive paths, and if they aren’t balanced by independent board members it could be hard to set things right again. The first school might add a value premium to a company like Alibaba while the second would attach a discount.

Alibaba Corporate governance

Discount depends on uncertainty and investment horizon

Damodaran is in the second group and as much as he admires what Alibaba Jack Ma has accomplished, he’s not particularly eager to give any CEO carte blanche with his money. To work out how much that discount is worth he sets a plausible range for revenue growth, operating margin, sales to capital, and cost of capital, with the expected values giving back his original valuation of about $66 per share.

Damodaran AlibabaSimulationPicture

Damodaran doesn’t go the extra step and offer a corporate governance-adjusted stock price, but he argues that the size of the discount (or premium) that you use grows with both uncertainty in the stock price and your investment horizon.

“With Alibaba, the decision is easier for me, at least for the moment, because the company is, at best, fairly priced at its offering price,” he writes, though he says that if the price drops he may “have to decide the discount on value at which I am okay with being in Jack Ma’s outhouse.”

Alibaba Corporate governance