Alibaba CEO Resigns: It's All About E-Commerce Trust

Trust is at the center of E-Commerce. In a physical store, the customer can see the product and walk out with goods in hand; online, it's all a matter of trust until the merchandise finally arrives. So when the CEO and COO of—China's giant business-to-business E-Commerce player—resigned on Monday (Feb. 21) in a fraud scandal, it certainly didn't feel like a move that would increase the level of trust anyone would have in doing business online. But that may be exactly wrong.

After all, Alibaba CEO David Wei and COO Elvis Lee quit after an investigation said they weren't involved in the fraud that cost Alibaba customers $1.7 million. That's right, $1.7 million, not billion. And Alibaba is in China, not Japan; top Chinese execs don't routinely leave as "the honorable thing to do" when they're not personally guilty. Assuming they really are clean, why make that extraordinary gesture? Could it be that they want to demonstrate to customers that Alibaba has skin in the game—all the way to the top?

The rough details of the fraud are pretty clear: Starting in late 2009, about 100 sales employees "'willfully or negligently' helped organize Chinese criminal rings establish 'Gold Supplier' storefronts so they could pose as legitimate businesses in order to defraud buyers," according to an Alibaba statement on the fraud investigation.

The statement continued: " requires would-be vendors to provide business registration documents to set up storefronts on the site. But fraudsters subverted the Web site's verification process by submitting fake papers, sometimes with the help of 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."

Alibaba founder Jack Ma called the mess a systemic breakdown of the company's "culture of integrity."

But wait a minute: The average fraud was less than $1,200. About 1 percent of suppliers and less than 2 percent of Alibaba's salesforce was involved in the fraud. That's the scandal that caused CEO Wei and COO Lee to walk the plank?

To U.S. E-Commerce players, that sounds crazy. CEOs don't resign over a fraud unless they're caught at it. A sex scandal, sure. Terrible financial performance, probably. But a mere $1.7 million in fraud? C'mon, who cares?Maybe that's exactly the point. Alibaba has been very successful as a trusted middleman—it handles almost 70 percent of China's business-to-business E-Commerce, and its business is growing at 32 percent a year, according to Analysys International, a research firm in Beijing. Alibaba is also a $318 million company, which means there's lots of room to grow.

But a little fraud can go a long way in tainting a fast-rising company's reputation. And Alibaba's sister company, the consumer E-Commerce portal Taobao, is a billion-dollar business that's growing even faster. Saying to customers "Fraud? Who cares?" is a very effective way to send them somewhere—anywhere—else.

Burying scandals or security failures or even just operational problems is a common enough practice. Sometimes it's a calculation: Is the damage from admitting the problem worse than the fallout from hiding it and later getting caught? Sometimes it's just a matter of culture: Deny everything and hope for the best.

You can get away with that if you don't depend on customer trust. In a brick-and-mortar store, for example, you can get by without much trust at all. Customers can see what they're buying. They can walk out the door with it in hand. They can safely assume that if something goes wrong, that big pile of bricks will still be there the next day, and there will be an actual human being behind a physical customer-service desk to listen to a complaint.

True, plenty of customers trust retailers with personal information for CRM programs. Plenty more don't. And no customer actually has to trust the retailer.

Now contrast that with E-Commerce: No products in hand; no big pile of bricks; no actual human beings in sight. It all depends on trust. And customers are much more likely to trust a big business when they believe the guys at the top will either defend that trust or walk the plank.

Are things really that much more fraud-resistant at Alibaba today? Probably not. The company is still investigating the mess. Rooting out connections to criminal gangs could take years.

But are Alibaba's customers a little more comfortable knowing that a CEO's sense of self-preservation is on their side? You can bet they are.