What’s really behind Pinduoduo leadership switcheroo?

In case you missed it, the founder of Pinduoduo, Colin Huang, recently stepped down as CEO. The move was announced a week after Huang eclipsed Jack Ma as China’s second-richest person. That feat was underwritten by a sudden, rapid increase in Huang’s personal wealth, adding $25 billion in six months on the back of Pinduoduo’s surging stock price. 

Analysts described Huang’s sudden departure, and immediate appointment of CTO Lei Chen as his replacement, as “unexpected.” That’s a polite way of saying, “We don’t know what the bloody hell is going on.” 

The circumstances look odd

Huang’s sudden resignation comes as Pinduoduo gains traction in China’s e-commerce—on the basis of self-reported GMV numbers, Pinduoduo may have as much as 10% of China’s e-commerce market. He stepped down amid the convergence of four events: the pandemic’s catalytic effect on e-commerce in China, Pinduoduo’s strong reported GMV growth, a sharp jump in the company’s share price, and Huang’s concomitant increase in personal wealth.

I’ll put it as plainly and objectively as I can—stepping aside in these circumstances looks odd, and dents confidence in Pinduoduo’s staying power.

Here are the two charts that matter.

The market has rewarded Pinduoduo for its advances into incumbents’ market share. At the time of writing, Pinduoduo’s share price has increased 120% this year. Huang, who held 43.3% of Pinduoduo’s shares before his resignation announcement, saw his wealth explode by $25 billion.  

So, why leave when everything’s going so damn well? Without a cogent explanation, analysts may question Pinduoduo’s resilience. Cynics may even have flashbacks of other significant shareholders in high-flying Chinese companies using sky-high share prices to cash out on the down-low.

Inconsistencies in words and actions

In a release circulated to media outlets, Huang said he would step back from day-to-day management to work on the company’s long-term strategy and corporate structure. That’s a pretty limp explanation, and it sows confusion—it’s the CEO’s job to think about strategy and corporate structure. 

McKinsey, a consultancy, articulates the six main elements of a CEO’s job as: 

Setting the strategy, aligning the organization, leading the top team, working with the board, being the face of the company to external stakeholders, and managing one’s own time and energy.

The very activities Huang relinquished the CEO role to perform are the two first elements on a CEO’s list of responsibilities. Either Huang’s understanding of a CEO’s responsibilities is deficient, or the explanation around his departure contains material omissions.

The inconsistencies don’t stop there.

Media outlets have breathlessly recounted how Huang has given away some of his shareholding. That’s true, to an extent. From the chart below, you can see Huang donated a small chunk to a charitable foundation and returned another chunk to an (unnamed) angel investor. 

The biggest “giveaway,” around 8% of the company’s shareholding, goes to the Pinduoduo Partnership. As flagged in Huang’s internal memo to staff, this may be part of a move to incentivize up-and-coming managers. Nice in theory, but currently the only members of the Pinduoduo Partnership are ex-CEO Huang and current CEO Chen. Huang is also the authorized representative and director of Qubit GP Limited, a corporate entity that owns the shareholding. That’s cozy, convenient, and potentially lucrative. 

Putting that together, Huang’s effective company shareholding hasn’t decreased from 43.3% to 29.4% as intimated. He still has effective control of around 37% of the company’s shareholding and retains 80.7% of Pinduoduo’s voting shares. 

Make no mistake, Huang is still the boss. However, for some reason he’s not comfortable wearing the CEO’s hat, nor is he comfortable with Pinduoduo’s leadership extending beyond him and co-founder Lei. 

Lingering gaps in corporate governance

Critically, Huang’s handpass of the CEO role to Chen means that Pinduoduo’s senior management team looks emptier than a movie theater during a Covid-induced lockdown. There’s no CFO (which I view as problematic), no COO, and no CTO. 

Pinduoduo has never had the former two roles. That’s fine for a start-up, but incredibly difficult to justify when Pinduoduo’s $100 billion-plus market capitalization is higher than 98% of listed stocks in the US. Can you imagine the headlines if Shopify, another $100-billion-plus e-commerce company, had similar corporate governance gaps? It’s time for some adults in the room to give investors additional confidence in the company’s corporate governance. 

At this point, Pinduoduo fanboys might point out the company appointed a VP of finance as part of the company’s leadership shakeup. The company’s previous VP of finance, Tian Xu, resigned for personal reasons in April 2019. He lasted 10 months in the job. The new VP of finance will have his work cut out for him. Pinduoduo faces questions from investors on issues including:

• Allegations of aggressive revenue recognition, as flagged by Lightstream Research and Blue Orca Capital.
• The “Critical Audit Matter” that Pinduoduo’s auditors, Ernst & Young Hua Ming LLP, identify in its annual report regarding the company’s practice of classifying subsidies as marketing expenses, rather than costs of revenues. 
• The scale of “free traffic” Pinduoduo supplies to merchants. 
• Declining cash and equivalents, which plunged 75% year on year to RMB 5.53 billion ($780.5 million) in Q1 2020 from RMB 22.50 billion ($3.35 billion) in Q1 2019. However, Pinduoduo does have cash reserves it could apply in the future.

These issues aren’t trivial, and it may only be a matter of time before investors start asking smarter questions. I’d say the company needs to appoint a CFO to answer those questions satisfactorily. 

Pinduoduo declined to comment on this story.

Changes bring fresh doubts

Huang’s decision to relinquish the CEO role but retain significant shareholding and control over Pinduoduo should raise more scrutiny. His publicly announced rationale for leaving the top job at this point in time doesn’t pass the sniff test. 

My working hypothesis is, relieved of the CEO title, Huang gives himself a layer of protection if something goes wrong. He may even be able to sell some of his shareholding without raising too many eyebrows. 

That hypothesis may make some uneasy, but there’s a lot about Pinduoduo that could give investors pause. Pinduoduo’s share prices have more than doubled this year. The company seems to be pulling out all the stops to sustain its growth trajectory, including allegedly subsidizing as much as 60% of the purchase price of some items during June’s 618 e-commerce extravaganza. At this critical juncture, sudden CEO departures and corporate governance gaps raise questions about what’s driving decisions at Pinduoduo, and dent confidence in the company’s staying power. I’ll be looking for reassurances at the company’s next earnings call.  

Clarification: This article has been edited to clarify the questions raised by investors referred to in the second to last section.