Yahoo! in China (A)

It was the stuff of CEO nightmares. On November 6, 2007, Jerry Yang, CEO of Yahoo, sat in front of the U.S. House Committee on Foreign Affairs, while Representative Tom Lantos, the committee's chairman, lambasted Yang and his general counsel, Michael Callahan, declaring: "While technologically and financially you are giants, morally you are pygmies."

Nominally, the November 6 hearing was about whether Callahan had provided false in formation during previous testimony to the committee in February of 2006, and whether Yahoo should have corrected that testimony. But the tone of the hearing left no doubt that Lantos and his fellow committee members were still focused on the incident that had precipitated Yahoo's 2006 testimony: in 2004, Yahoo had provided the Chinese government with information about the Yahoo email account of a Chinese journalist and democracy advocate named Shi Tao. China then used that information as evidence at trial, prosecuting Shi for disseminating state secrets — a charge commonly used to prosecute human rights and democracy activists in China. After trial, Shi was sentenced to 10 years in prison.

In what even the committee members themselves admitted was a rare show of bipartisan agreement, Democrats and Republicans alike vociferously criticized the firm. Dana Rohrbacher, a California Republican, exclaimed:

It is repugnant, if not surprising, to learn that American businesspeople in China are assisting the Chinese Communist Party in its brutal repression of Chinese citizens and their desire for democracy. It would be funny, if it wasn't so sickening, that Internet companies which supposedly pride themselves on facilitating the free exchange of ideas are helping to throw in jail the very people who they claim to be their most loyal clients.

In his statement, Chairman Lantos excoriated Yang and Callahan, pointing out that Yahoo had no institutional process to avoid complicity with human rights abuses, and that it had, three years later, still not done anything to help Shi Tao's family. One of the more poignant moments occurred when, in response to Lantos's chastising, Jerry Yang, bowing his head in deference, turned around to apologize to Shi Tao's mother, who sat in the first row.

As he listened to the committee's criticism, Jerry Yang had a lot on his mind. He was the co­founder of Yahoo and saw the company as his life's work. He had always held a senior role at the firm, but had only taken on the CEO position in January of that year, after Terry Semel, who had been CEO since 2001, stepped down. By 2007, it was clear that Yahoo's strategy of leveraging acquisitions and international growth was facing increasing competitive pressure. After recovering successfully from the dot-com fallout of 2000-2001, Yahoo saw its stock price peak in 2005; it declined slowly thereafter and, by the time of the hearing, was off 20% from late 2005. Almost a year after taking over as CEO, Yang knew that shareholders were anxious.

It wasn't just the lashing he was getting from Congress that worried him. Shi Tao's mother, along with the wife of another journalist, Wang Xiaoning (whose identity Yahoo had also disclosed and who had been similarly sentenced to 10 years), had filed a civil suit against Yahoo.

Aside from the business concerns, and even though he hadn't been CEO when the original incident occurred, Yang's personal history and connection to the firm made the allegations of human rights abuse particularly disturbing.

An Internet Trailblazer

Jerry Yang's life was a quintessential example of the immigrant-to-American-Dream story. His parents fled mainland China for Taiwan, where Yang, the older of two boys, was born in 1968. His father died two years later and his mother, an English professor in Taipei, brought her two sons to California in 1978, at least in part so that they would not be drafted into the Taiwanese army. Though he spoke only a word or two of English when he arrived, Yang quickly excelled in his public schools and, by his senior year in high school, he was not only the class valedictorian but also student body president.^[1]

Yang went to Stanford for college and completed both a B.S. and a master's degree in electrical engineering before continuing on to the PhD program. Along with his friend and fellow PhD student David Filo, he was fascinated by the early days of the World Wide Web. Suddenly, the Internet permitted people to see the contents of computers around the world. The two detected a need for some sort of organizing system or guide to help users find the information they wanted on the Web, and, in late 1993, they went to work designing software that would organize various Web sites into categories.

The result was initially called Jerry's Guide to the World Wide Web, but they renamed it Yahoo! It began to grow rapidly almost immediately and, in 1994, the pair moved the site off-campus because of infrastructure demands. Venture capital investment followed soon thereafter. Though starting a business had not been their main intention, Yang and Filo realized that they had done just that. Since they also knew that they weren't businessmen, they hired an experienced entrepreneur, Tim Koogle, as CEO.

Yahoo grew over the next five years to become the most visible name on the Internet. By 1999, it had nearly $600 million in revenue and, unlike many companies that took off during the dot-com boom, $61 million in profit. By 2000, it had operations in 15 countries, including China, and had five Limes more visitors than AOL (the leading Internet service provider [ISP] at the time) had subscribers. The firm was valued at $70 billion, and Filo and Yang each held 10% of the company's shares.

Yang and Filo, after ceding the CEO position to Koogle, were known as the company's "Chief Yahoos." While Filo focused on driving the company's technological innovation, Yang served as a dynamic leader in various capacities. As John Hennessy, Yang's former faculty advisor and then- Provost of Stanford put it in 2000, "Jerry has managed to sculpt out a new kind of role for a founder that is as important as Koogle's or anybody else's at Yahoo: He's everything from technical visionary

to chief strategist to corporate spokesman and cheerleader to Washington lobbyist to the company's conscience."^[2]

This kind of dynamic —a hands off, head on role —suited Yang well. Hennesey explained that "Jerry doesn't think of himself as a businessman trying to exploit this new Internet community. He still thinks of himself as being a citizen of the Internet and makes sure the management team runs the company according to the Golden Rule, so to speak."

After peaking well above $100 per share in January 2000, Yahoo suffered, like most Internet- related stocks, during the end of the dot-com boom. Tim Koogle resigned as CEO in March 2001 and Terry Semel, an executive at Warner Bros., was brought onboard as the new CEO. In late September 2001, Yahoo shares traded just above $4.

By the time Semel became CEO, Yahoo's sites were already using search technology created by Google. The following summer, Semel tried to buy Google (two years before the Google IPO) for $3 billion. When Google's young founders refused—much to Semel's consternation—Semel started on a path to build Yahoo's own capabilities to compete with Google. Over the ensuing 18 months, Yahoo bought Inktomi —for its search technology — and Overture (formerly GoTo) —for its system of auctioning keywords to paid advertisers.

In addition, Semel continued to push for international growth, noting that Yahoo had fallen behind Google and Ebay in share of revenue generated overseas. "Buy, build, and partner" was how Semel described his strategy for Yahoo.^[3] It seemed to be working: the company's stock price climbed steadily from 2002 to 2004, wowing industry analysts and making Semel, who had negotiated for millions of options, a very rich man.

But there was little room for complacency. In the United States, Yahoo's status as a market leader remained intact, but its imago among investors had been battered by the fallout from the dot-com boom. Google had rapidly gained market share since its launch in 1999; increasingly, it seemed to set a new standard for search engine technology and related platforms. Meanwhile, talk of a Google IPO was titillating the financial and tech worlds. The situation was "all eyes on Google" as a Neivsiveek cover story in late March 2004 proclaimed.^[4]

In its U.S. operations, Yahoo was on the defensive against Google's incursion, attempting to modify its search engine to integrate more seamlessly with its other online platforms. But even if the firm succeeded at defending share at home, it was clear that Yahoo's international strategy would be crucial to the company's long-term performance (see Exhibit 1).

The Chinese Market

By 2004, China was in the midst of an Internet explosion that paralleled its rapid economic growth. (The Chinese economy had grown at a staggering annual rate of ~10% over the two

preceding decades.⁵) Broadband subscriptions tripled in 2003 to 10 million; they were expected to double in 2004 and reach 100 million by 2007.⁶ (In fact, they reached 122 million by 20077) The total number of active Internet users in China rose from fewer than one million in 1997 to more than 70 million in 2003.⁸ By 2010, some analysts predicted, China would surpass the United States as the largest Internet market in the world (see Exhibit 2).

Though Yahoo had entered the Chinese market early, in 1999, its Chinese business had yet to really take off. Semel was determined to take a new approach. Chinese sites like Sina, Sohu, and Netease had dominated the portal market, and Yahoo decided not to take them on. Instead it would forge ahead with other services, partnering with domestic Chinese players where it made sense.

In December 2003, Yahoo bought a Chinese Web software company called 3721 from a brash young Chinese entrepreneur, Zhou Hongyi, for $120 million. At the time, 90% of Chinese Internet users used 3721, which allowed them to search using Chinese characters.

A month later, Yahoo announced a partnership with Sina, China's largest portal, to launch an online auction site that would compete with EachNet, in which Ebay had bought a two-thirds stake the year before.

Semel kept 3721 founder Zhou on board. Even though Zhou raised eyebrows in March 2004 by announcing at a public forum in Beijing, "My job in China is to kick Google's ass!" (When asked later whether he regretted his statement, he replied "What was I supposed to say? 'We don't compete'?") Semel made Zhou president of Yahoo China in April 2004.⁹

The Anniversary

In the spring of 1989, a group of students, labor leaders and others conducted a series of pro­democracy protests across China against the autocratic Chinese government. These protests culminated on June 4, when the government's attempts to suppress the protests resulted in an assault at Tiananmen Square in Beijing, which left hundreds (maybe thousands — reports varied) of students and other activists dead. Haunting images of tanks rolling into the square to attack protesters flashed around the globe, bringing widespread international condemnation on the Chinese government.

In early April of 2004, as the fifteenth anniversary of the Tiananmen Square protests and violence approached, the government was eager to minimize discussion of or memorials to the event. In mid- April, the government issued Document 11, "A notice concerning the work for maintaining stability," which ordered media organizations within China to abstain from coverage of the anniversary of "The June Fourth Incident."

At the Lime, Shi Tao was a 37-year-old journalist working for The Contemporary Business News in Hunan province. Within days of the government order's issue, his editor held a meeting in the newsroom during which he shared the contents of the government directive. On April 20, Shi^]

prepared a summary of the document and, using his personal Yahoo email account, sent it to the U.S. office of the Democracy Forum, a pro-democracy NGO.

Two days later, the Chinese police presented a formal request to Yahoo's office in Beijing for the identity of the user associated with the Yahoo email address that Shi had used. The request indicated that the user in question was part of an investigation of disclosure of state secrets, one of the charges most often levied against political activists in China (see Exhibit 3).

When Yahoo China's office received the request for user information for Shi Tao's account, no official company policy was in place that outlined any kind of special procedure for responding to such requests. As in America, Yahoo's Chinese users —including Shi Tao —had agreed when signing up for their email accounts to terms of service. The terms of service for Yahoo's Chinese accounts provided for Yahoo's compliance with government investigations.

The manager in the office could see from the request that the user information was being requested as part of a political investigation. The manager also believed that failure to comply with the request could put Yahoo China's employees at risk of prosecution. It might also imperil Yahoo China's license to do business.

Raising the issue with lawyers and executives at Yahoo headquarters in the United States was possible, but the manager worried that if the Americans told Yahoo China to refuse the request, employees might still be at risk. It seemed possible that the best thing to do was to provide the data in question and hope that the matter would quickly pass unnoticed.

The manager in Yahoo China's Beijing office therefore furnished Shi Tao's user information to the Chinese government as requested. In November 2004, Shi Tao was taken into custody; he was formally arraigned on charges in December. In March 2005, he received a two-hour secret trial and on April 27, 2005, the Changsha Intermediate People's Court convicted and sentenced Shi Tao to 10 years in prison. The written verdict cited the information Yahoo provided as part of the material evidence against Mr. Shi (see Exhibit 4).

China, the Internet, and Free Expression

At the end of the 1990s, politicians and international observers heralded the arrival of the Internet as a new weapon in the battle for democracy and human rights around the world. Grateful Dead lyricist cum cyberspace guru, John Perry Barlow, presented A Declaration of the Independence of Cyberspace at the World Economic Forum at Davos in 1996, declaring:

Govern men Ls of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.

We have no elected government, nor are we likely to have one, so I address you with no greater authority than that with which liberty itself always speaks. I declare the global social space we are building to be naturally independent of the tyrannies you seek to impose on us. You have no moral right to rule us nor do you possess any methods of enforcement we have true reason to fear.

Govern men Ls derive their just powers from the consent of the governed. You have neither solicited nor received ours. We did not invite you. You do not know us, nor do you know our world. Cyberspace does not he within your borders. Do not think that you can build it, as

though it were a public construction project. You cannot. It is an act of nature and it grows

itself through our collective actions... .^[6]

By 2004, American consumers were increasingly aware of human rights issues related to business activity overseas. No longer a matter of interest only to activists, stories about working conditions in global supply chains or the environmental effects of natural resource extraction had become mainstream, appearing on television news channels and the front pages of newspapers. Human rights concerns were always a strand of any policy discussion about trade with China.

In a speech in 2000 enjoining the U.S. Congress to grant Most Favored Nation trading status to China in advance of China's accession to the WTO, President Bill Clinton argued that the best way to positively influence China's persistent human rights violations was to embrace China in the community of nations. To those concerned about Chinese censorship and control of the Internet, Clinton predicted that the Internet was an uncontrollable space that would eventually become a critical contributor to the democratization of China.

Nonetheless, as the Internet spread in China, the Chinese government created a series of carefully developed legal and technological tools to regulate it. All Internet-related businesses in China were required to comply with these domestic Internet/ telecommunications regulations. This often meant actively contributing to (and at least refraining from disrupting) the censorship and control system that the Chinese government had developed to promote state security and social stability.

With the help of American telecommunications giant Cisco Systems, the Chinese government estabhshed a surveillance infrastructure to monitor Internet activity. As China scholar Joshua Kurlantzick noted in The New Republic in April 2004, "Nowhere has a regime's ability to corral the Internet been more apparent than in China, the world's largest authoritarian state."^[7] Citing the findings of Harvard researchers Jonathan Zittrain and Benjamin Edelman, Kurlantzick explained that China had achieved near perfect control by mandating that all Internet traffic pass through government-controlled servers that could constantly monitor and control it through a complex system of firewalls.

In order to gain permission to operate in China, search engines managed by both Chinese and foreign companies had to agree to censor search results, typically excluding foreign media sources as well as political materials, especially those pertaining to democracy or human rights.

Public opinion polls of Chinese citizens indicated general support for government intervention and regulation of the Internet, although enthusiasm for censorship varied widely depending on the material being censored — vast majorities had supported censorship for pornography since the earliest surveys about the Internet, while support for political censorship was less strong. Interestingly, polls seemed to show that enthusiasm for censorship was growing, rather than waning, in China between 2003 and 2007 (see Exhibit 2).

In 2002, two years before the Shi Tao incident, Yahoo signed a "Public Pledge on Self-discipline for the Chinese Internet Industry" that a Chinese government-sponsored NGO, The Internet Society of China, put out. The pledge required Internet-related businesses to agree to various forms of censorship in the name of state security and social stability. At the time, Kenneth Roth, the director of Human Rights Watch, wrote a letter to Yahoo's then-CEO, Terry Semel, expressing a prescient

concern: "Were Yahoo to implement its provisions, it could become complied in violations of the right to free expression" (see Exhibit 5).

Discovery of and Reaction to Yahoo's Decision

Because Yahoo China operated under a license given to Yahoo's Hong Kong subsidiary, the initial reaction to the Shi Tao verdict and to Yahoo's role in aiding the Chinese government's investigation came from democracy activists in Hong Kong. They were concerned that a Hong Kong entity had provided information to the Chinese security apparatus. An investigation by Hong Kong's Privacy Commissioner concluded that, in fact, the information Yahoo released had been held on servers within mainland China, so no Hong Kong laws had been broken.^[8] (Google and Microsoft chose a different infrastructure model for their services when they entered the Chinese market, storing user data on servers outside of China.)

But this conclusion hardly put the matter to rest. Objections to Yahoo's role in the case continued and criticism mounted around the world, particularly in the United States. Many saw China's imprisonment of Shi Tao as a clear human rights violation because it violated the right to free expression and, at the same time, a right against unjustified imprisonment. Furthermore, Chinese prisons had a reputation for treating political prisoners poorly, and many people were concerned that Shi could be subjected to further rights violations while he served his sentence. In many corners, Yahoo's complicity with the Chinese government in carrying out these violations was portrayed as an independent wrong.

In September 2005, Reporters without Borders publicized the Shi Tao case and wrote an open letter to former President Clinton, asking him to press the issue with the Chinese government on an upcoming visit, and to encourage Internet companies to implement human rights obligations. Furthermore, other NGOs like Human Rights Watch, as well as popular news outlets, seized upon the Shi Tao story, which gave a human face to China's perceived repression and to the dilemmas that faced U.S. corporations that did business there.

Yahoo CEO Terry Semel and other Yahoo executives had to decide how to respond to the increasing criticism. While they objected to the Chinese government's actions, including the imprisonment of Shi Tao and other political activists, they felt that the best course was to place the blame squarely on the Chinese government. After all, it was the government that had imprisoned Mr. Shi—Yahoo had complied with the request but had not intended for one of its users to be imprisoned. Official company statements expressed regret for what happened to Shi Tao, but they also emphasized that Yahoo had done nothing more than obey the lawful authority of the Chinese government.

Congressional Hearings

Yahoo wasn't alone in facing scrutiny. After launching its business in China in 2005, Google also controversially complied with Chinese government requests to censor its search engine results. Microsoft, also a new entrant into the Chinese market, removed a blog that belonged to an employee of The New York Times’s Beijing Bureau after it received complaints from the Chinese government in late 2005.

In February 2006, two subcommittees of the U.S. House Committee on International Relations held a joint hearing entitled "The Internet in China: A Tool for Freedom or Suppression?" The subcommittees invited representatives of Yahoo, Microsoft, Google, and Cisco to testify. Knowing that Shi Tao's case would be a topic of questioning, Yahoo issued a press release in advance of the hearing (see Exhibit 6). In a prepared statement, Yahoo's general counsel, Michael Callahan, reiterated Yahoo's support for free expression and expounded upon the Internet's power to contribute to that right, citing statistics about Internet usage in China. He also noted that "These issues are larger than any one company or any one industry," and he welcomed government engagement.^[9]

Addressing the Shi Tao case directly, Callahan declared: "When Yahoo China in Beijing was required to provide information about the user, who we later learned was Shi Tao, we had no information about the nature of the investigation. Indeed, we were unaware of the particular facts surrounding the case until the news story emerged." He also reiterated that "Yahoo China was legally obligated to comply with the requirements of Chinese law enforcement."

Notably, Callahan took the opportunity of the hearing to explain that Yahoo had, in 2005, ceded operational control over Yahoo China to a Chinese partner, Alibaba. Yahoo retained a significant investment stake and one of four board seats, but withdrew from day-to-day decision-making. He also outlined four steps that Yahoo would take in the future to contribute to the protection of free expression, including contributing to the development of industry guidelines.

The general tone of Callahan's statement and the pre-hearing press release were consistent with a messaging strategy that emphasized the liberalizing power of the Internet, Yahoo's support for free expression, and Yahoo's compliance with the law.

Elliot Schrage, Google's vice president for corporate communications and public affairs, took a different approach. He acknowledged repeatedly that participation in the Chinese market posed serious challenges to the company's values:

Self-censorship, like that which we are now required to perform in China, is something that conflicts deeply with our core principles. We recognize the conflict and the inconsistency. We respect the opinions of those, including several Members of this Committee, who disagree with the decision that we have taken...we reached our decision by balancing three commitments: First, our commitment to user interests, our commitment to access to in formation, and our commitment to responding to local conditions.... It is not appropriate to say that we are proud of our decision. It is just too early to say that. Our hope is that the decision will prove to be the right one. If, over Lime, we are not able to achieve our objectives to continue to balance those interests in China, we will not hesitate to reconsider doing business in that market.^[10]

Schrage detailed Google's hesitations about engaging directly in China and explained that because of privacy and data security concerns, Google had decided not to offer services such as blog hosting in China.

Mounting Competition in the Chinese Market

Since the spring of 2004, competition in the Chinese Internet space continued to grow and became increasingly dominated by domestic Chinese players.

The market was highly dynamic. The number of Internet users continued to rise at a fast clip between 2004 and 2006, largely fueled by users under 30 years old, and the rapidly growing user pool enabled the diversification of Internet content and service offerings. Other factors, such as the fast development of broadband infrastructure (which facilitated the expansion of the popular online gaming market), as well as progress in the development of electronic credit and payment technologies (which were necessary to expand e-commerce and thus enhanced the value proposition of search services), also affected the market's development. Whereas the early years of the 2000s were dominated by portals —in 2004, the top four Web sites in traffic were portals^[11]—by the second half of the decade, search engines took over as a major source for user demand-driven content.

Most foreign companies took a buy-over-build approach, attempting to acquire or partner with domestic Chinese companies. But that strategy yielded mediocre results. In 2003, Ebay bought a 67% stake in EachNet, the largest Chinese auction site, but lost significant market share to another domestic competitor thereafter. In 2004, Anrazon.com bought Joyo, the leading e-commerce site, and also lost share. Yahoo bought 3721, but its share of users in the search market fell from 9% in 2004 to 5% in 2005. (Yahoo's users were more affluent, so its share of advertising revenues was higher, but that too declined from 2004 to 2006.)^[12]

In 2005, as Callahan reported in the congressional hearing, Yahoo gave to Alibaba the Yahoo China business and $1 billion in capital investment in exchange for a 40% stake and 35% of voting rights in Alibaba, the leading B2B commerce company in China. Semel heralded the partnership in a press release: "Together, Yahoo and Alibaba have created one of the largest Internet companies in the fastest-growing Internet market. Through this strategic partnership, we will combine the best of commerce, search, communications, and online advertising capabilities in new ways for Chinese consumers and businesses, under the management of a strong local team."

Yahoo's leaders hoped that they could effectively leverage the company's search technology and brand name to build market share in the search segment, while Alibaba would be able to use its access to Yahoo's other technologies to build upon its strength in B2B and B2C commerce. From Yahoo's perspective, the deal offered a permanent local partner for its Chinese business and a way to stay invested in a broad array of segments in the Chinese market. But it also meant that Yahoo's presence in China would be more passive. Through the deal, Yahoo got one of the four seats on Alibaba's board, to which Jerry Yang was appointed.

Meanwhile, in the first half of 2005, Google made a small —$5 million—investment in a fast­growing Chinese search site called Baidu. Baidu went public in August 2005 and Google pocketed a $60 million gain the following June. But just as Semel had underestinrated Google's insurgent potential in the U.S. market years before, Baidu saw a meteoric rise in the Chinese market. Second quarter 2006 results showed that Baidu had a 50% share of advertising revenue, compared with 16% each for Yahoo and Google. (As before, Yahoo's relatively more affluent users accounted for its

advertising revenue—by 2005, it was already a distant third in user share —with only 5% compared to Google's 33% and Baidu's 57%.)^[13]

Baidu's rise was facilitated by its cooperative relationship with the government. It never resisted censorship, permitting government censors to oversee its site operations. Although the government continued to shut down access to Google periodically—even after Google conceded to censorship requirements — the Chinese state actively supported Baidu's explosive growth.^[14]

By January 2007, Baidu's rise and Google's continued strength forced Alibaba to rethink its efforts to compete for the general search market. It announced that, in the face of continued losses from its Yahoo China unit, it would reorganize itself and create a targeted search product for a business audience. "If Yahoo is going to win, it has to do so in a new way," Alibaba's CEO Jack Ma said.^[15]

Continued Criticism

After the February 2006 hearing, Yahoo (and, to some extent, other companies) remained dogged by critics. In May 2006, at a forum sponsored by The Wall Street Journal, Terry Semel said that while he was "pissed off" and felt bad about Yahoo's compliance with Chinese authorities, "you have to follow the laws of the country you're in." One questioner asked if Yahoo would have cooperated with Nazi Germany the same way it had with China. Semel answered, "... I don't know how I would have felt then. I don't feel good about what's happening in China today."^[16]

In July 2006, Amnesty International called for a letter campaign against Yahoo, noting that Yahoo's actions in China conflicted with the values to which it had publicly committed.

Paradoxically, Yahoo has stated that it believes in the core values of 'excellence, innovation, customer fixation, team work, community, and fun.' Yet, the company has signed the Public Pledge on Self-Discipline for the Internet Industry, effectively agreeing to implement China's draconian system of censorship and control.^[17]

Moreover, that same month, in a 32-page report about corporate complicity in undermining freedom of expression in China, Amnesty singled out Yahoo as the worst offender. "While each of Yahoo, Microsoft, and Google may be considered to be complied in the Chinese government's denial of freedom of in formation, Yahoo's actions have, in particular, assisted the suppression of dissent with severe consequences for those affected," Amnesty claimed. In the same report, Amnesty offered reserved praise for Yahoo's chief competitor:

Of the three companies, Google has come closest to acknowledging publicly that its practices are at odds with its principles, and to making a commitment to increase transparency

by informing users in China when a Web search has been filtered. Although there are many

other transparency options that the company should consider, these are welcome first steps.^[18]

In January 2007, Semel left as CEO amid complaints from shareholders about his compensation (he had netted over $450 million from options and had yet to exercise millions more) and Yahoo's growth, which was lagging compared to Google. Jerry Yang took over as CEO after Semel's departure.

The following spring and summer, the Shi Tao case had still not faded from discussion. NGOs had uncovered information that linked Yahoo with several other recent convictions in cases similar to Shi Tao's. In April, a lawsuit was filed against Yahoo in California under the Alien Tort Claims Act and the Torture Victims Protection Act sought general, compensatory, and punitive damages from Yahoo on behalf of the Chinese plaintiffs (see Exhibit 7). Shi Tao joined the case later in the spring and was part of a revised complaint filed that summer.

The Alien Tort Claims Act of 1789 (ATCA), originally established with eighteenth-century piracy and maritime claims in mind and relatively forgotten by the mid-twentieth century, had been resuscitated in recent years as a way of filing civil suits in the United States for human rights abuses. The law granted U.S. federal jurisdiction to foreigners who brought civil claims for acts in violation of the law of nations or a treaty of the United States. Human rights abuses constituted violations of the law of nations (and sometimes of bilateral treaties as well) and as such, it was argued, were torts (i.e., wrongs) under the Act.

While use in human rights cases was still an underdeveloped and relatively untested application of the law, a June 2004 U.S. Supreme Court ruling on the Alvarez-Marchain case had caught the attention of corporate executives and human rights activists alike.^[19] In a footnote to the opinion, the Court mentioned the possible applicability of the ATS to corporations, a mention that was greeted with enthusiasm by human rights activists and trepidation by the leaders of multinational corporations. Many observers believed that the Court's opinion spurred Unocal to settle a suit later that year that had been brought against the company under ATCA for complicity in human rights abuses in Burma.^[20]

In a National Public Radio report about the lawsuit in April 2007, Yahoo's spokesman defended the company, saying that for all anyone at Yahoo knew, the Chinese authorities were investigating a murder.

But then another, potentially more troubling problem arose. In the summer of 2007, the Dui Hua Foundation, a San Francisco-based human rights advocacy and research organization, discovered and translated the original request that Chinese police had presented at Yahoo's Beijing office in reference to Shi Tao's account.

Like the spokesman commenting on the lawsuit, Michael Callahan had clearly stated in his congressional testimony that Yahoo China did not know the context or reason for the police request. The document itself (see Exhibit 3) explained that the in formation sought was part of an

investigation into leaking state secrets. This revelation proved conclusively that Callahan had, either intentionally or unintentionally, given false testimony.

The Second Hearing—Yahoo in the Hot Seat

On August 3, 2007, Rep. Tom Lantos, as chairman of the House Foreign Affairs Committee, announced a second hearing "to investigate the disparity between documents and hearing testimony by Yahoo!"^[21] This wouldn't be a meeting of subcommittees, but a meeting of the full congressional committee — a major event likely to attract significant publicity. Representative Lantos was the only Holocaust survivor ever elected to Congress and was known as a fierce advocate for human rights.

Jerry Yang had been dreading the second hearing since the announcement. As he left the hearing room on November 6, he felt justified in his apprehension. But now he had to decide what to do, not only about the Shi Tao case in particular, but about Yahoo's strategy in China, and how to handle potential future encounters with the Chinese government and human rights activists.

1) Should Yahoo! have provided information on Shi Tao to the Chinese government? Why or why not?
2) What, if anything, could Yahoo! have done differently to prevent the Shi Tao situation? Once the incident had occurred, what, if anything, should they have done differently to address it? What should Yang do now in the wake of the November 2007 hearing?