UBS and Climate Change—Warming Up to Global Action?

UBS and Climate Change—Warming Up to Global Action?

Marco Suter, executive vice chairman, UBS Board of Directors, carefully studied the chart on his desk. It showed the public commitment of major financial institutions to help mitigate global warming (see Exhibit 1). Evidently, UBS lagged behind its competitors. The graph was part of a report that environmental specialists and senior executives at UBS had compiled. It suggested the company adopt a more progressive policy on climate change. Suter thought about the options that the working group had generated. These ranged from stabilizing the company's current carbon emissions to complete carbon neutrality (see Exhibit 2). He felt it was possible that climate change would become an important issue for financial services companies in the future:

Think of a superstar soccer player. What distinguishes the superstar from the average player? The superstar is not running after the ball, he is anticipating where the ball will be. This is the role of corporate responsibility at UBS. We are not focused on our current legal and ethical obligations. These we meet as a matter of course. As chairman of the UBS Corporate Responsibility Committee it is my job to anticipate what stakeholders will expect from us in the future. Which of these expectations will pose risks? Which ones will open up new business opportunities?

The report also included figures on the cost of reducing carbon emissions, but Suter did not view these as central:

It is difficult to measure the benefit of corporate responsibility, and we currently do not do it. This is a question of leadership. Corporate responsibility is a part of our strategy; it is a part of what we believe in.

The UBS Corporate Responsibility Committee would meet early next week. Suter wondered which option he should support.

UBS

UBS AG, headquartered in Zurich and Basel, Switzerland, was one of the world's leading financial services companies, offering wealth and asset management as well as investment banking services internationally, and retail and corporate banking in Switzerland.¹ UBS managed 2.65 trillion^[3] Swiss francs (CHF) in invested assets, had offices in more than 50 countries, and employed 70,000 people worldwide. The company established a strong presence in the U.S. after purchasing the brokerage PaineWebber in 2000. UBS was listed on the New York, Swiss, and Tokyo stock exchanges and had a market capitalization of CHF 131.9 billion on December 31, 2005. Since 2000, the firm had significantly outperformed other global financial services companies such as Citibank, HSBC, and its hometown rival Credit Suisse (see Exhibits 3 and 4). UBS served high-net-worth individuals, corporations, and institutional clients via three business units: Global Wealth Management & Business Banking, Global Asset Management, and Investment Bank.

Global Wealth Management & Business Banking

Global Wealth Management & Business Banking (GWMBB) served private investors and corporations. The unit earned CHF 6.7 billion in income (before taxes) in 2005. It accounted for 38% of UBS's total operating income and 51% of the firm's operating profit.² Since 2000, the unit had grown organically and through a series of acquisitions. Higher fee income came from an increased number of sophisticated investment vehicles such as real estate and hedge fund products. The firm had also purchased nine deluxe money-management firms that catered to ultra-high-net-worth customers.³ By 2006, UBS was the largest wealth manager in the world, with a 3.5% share of the CHF 50 trillion GWMBB market.⁴

GWMBB was divided into three units. Advisors in the Wealth Management International & Switzerland division served wealthy Swiss and international clients excluding those from the United States. Nearly half of the division's clients invested at least CHF 10 million with UBS.⁵ While a majority were European (26% hailed from Switzerland and 41% were from the rest of Europe), the division was also the leading wealth manager in the Asia Pacific region (excluding Japan), and it held a strong position, after Goldman Sachs, in the emerging markets of Brazil, Russia, India, and China.⁶

Wealth Management US competed with Citigroup Smith Barney, Morgan Stanley, and Merrill Lynch to advise high-net-worth individuals in the U.S. From 2000 to 2005, the company's share of the U.S. private wealth management market had increased from 13.2% to 15.8%.

The Business Banking Switzerland division provided traditional banking services in Switzerland. It managed CHF 153 billion in invested assets and CHF 141 billion in loans, 83% of which were mortgages. UBS was the top bank in Switzerland, serving 2.6 million individuals and approximately 137,000 corporations. It had about a 25% share of both the individual savings and mortgage markets.⁷

Investment Bank

Headquartered in London and New York and employing over 18,000 people in 34 countries, the UBS Investment Bank earned a profit of CHF 5.2 billion (before taxes) on an operating income of CHF 17.5 billion in 2005. The investment bank's mergers-and-acquisitions (M&A) business grew particularly quickly, doubling its worldwide share between 2002 and 2005. UBS participated in 295 deals worth $314.8 billion for a market share of 13.9% in 2005.⁸ These deals included some of the largest in the industry. For example, UBS was the financial advisor to Gillette when Proctor & Gamble purchased the company for $57 billion in 2005.

Global Asset Management⁹

In 2005, the Global Asset Management business earned a profit of CHF 1.06 billion (before taxes), managing CHF 765 billion of invested assets. The largest manager of mutual funds in Switzerland and the second largest in Europe, the unit offered clients traditional investment vehicles (e.g., equities and fixed income), alternative and quantitative investments (e.g., hedge funds), and real estate investment options. Its institutional clients included public pension plans, municipalities, and central banks. Global Asset Management competed with businesses such as Fidelity Investments and Merrill Lynch Investment Managers as well as local and regional companies.

Corporate Responsibility at UBS

UBS had taken corporate responsibility (CR) seriously for some time.¹⁰ For example, the company was among the first to sign the Bank Declaration of the United Nations' Environment Program, committing to conduct its business in an environmentally responsible manner. CR efforts had further gained in prominence in recent years, Chairman Marcel Ospel explained:

The numerous recent corporate scandals have sent shock waves through the global economy and pushed "responsibility" up the agenda. As tends to happen in these situations, a large number of organizations have taken the issue on board, and it is clear that clients, the media, and financial analysts in particular are now paying greater attention to this aspect of corporate management.

For the UBS leadership, "responsible behavior" was an important part of the company's culture, identity, and business practice. Defying Milton Friedman's notion that there was one and only one social responsibility of business—"to use its resources and engage in activities designed to increase its profits"¹¹—UBS pursued a broader mission. Ospel explained: "For us, behaving responsibly sometimes means moving beyond solely profit-oriented considerations and legal requirements." UBS management was in good company. A 2005 McKinsey study of more than 4,000 executives in over 100 countries had found that more than 80% of respondents believed that corporations should balance their obligation to shareholders with explicit contributions to "the broader public good."¹²

Principal Activities

UBS's CR activities focused on four areas: the internal work environment, client relationships, the communities in which UBS conducted its business, and the natural environment.

Client relationships UBS strove to develop expertise in incorporating environmental and social aspects into its research and advisory activities. In 2004, it established an equity research desk to monitor the rankings of socially responsible investments (SRIs) and produce original research. By 2005, UBS managed SRIs valued at CHF 46.89 billion, about 2% of all invested assets. In its approach to SRIs, the company distinguished among three classes of products. Funds using positive criteria selected companies with a superior social track record (1.7% of SRIs). A second type of fund excluded problematic industries such as weapons or tobacco (15.7%). This approach was particularly popular in the U.S. In its most significant class of SRIs (82.1%), UBS actively engaged management, trying to influence the corporate behavior of the companies in which it invested. The Global Asset Management unit in the U.K. was particularly active in this regard. On average, the UBS SRIs tended to slightly outperform broad market indices. In 2004, for example, the performance of these investments exceeded the MSCI World Index by 1.3%.^[4]

Communities UBS management believed that the company's success depended not only on the skills and resources of its employees and the relationships with its clients but also on the health and prosperity of the communities in which the bank operated. To support these communities, UBS made annual cash donations on the order of CHF 50 million, mostly for educational and environmental projects.

Environment UBS carefully tracked the impact of its business operations on the natural environment. Under its global environmental management system, which was certified by an independent auditor using the ISO 14001 standard, the company sought to manage the impact of its business operations on the natural environment. UBS produced an annual environmental report that documented these impacts (see Exhibit 5). Environmental reviews were also a standard part of the bank's risk management systems.

In recognition of the company's efforts, UBS was included in the Dow Jones Sustainability Group Index (DJSGI) and the FTSE4Good Index. Both indices attempted to identify companies that met globally recognized corporate responsibility standards. Whether the indices succeeded was a matter of dispute.¹³ Flarvard University Professor Michael Porter and Mark Kramer, managing director of FSG Social Impact Advisors, for example, argued that the groups that created these indices lacked the resources to audit companies and that they relied on easy-to-observe but questionable indicators to measure social performance.¹⁴ While UBS management understood these issues, competition among firms for inclusion in the indices was nevertheless seen as positive. Markus Jaggi of UBS Communications explained:

DJSGI and FTSE4Good provide good examples of how companies can track their performance against peers in the area of corporate responsibility. The indices also act as a discipline and an incentive for companies, since those that fail to meet the criteria of the indices lose their place, and other companies can always strive to enter the indices by improving their performance in the areas under assessment.

CR Effects

UBS, a sophisticated marketer that received a prestigious Ogilvy Award for the research underlying its 2005 "You and Us" campaign, carefully measured the economic effects of its brand. In surveys, the company tracked the relation between the popularity of its brand and consumers' knowledge of UBS sponsoring activities. UBS marketers also studied the likelihood that respondents would become UBS customers after learning of the bank's sponsorships. In contrast, as of 2005, the company did not measure the economic effects of CR. "We don't know to what extent CR activities influence the value of our brand," said Oliver Loch, UBS global head of brand research. Fie added, "We also don't know how our customers feel about CR. Do they really want us to support the communities in which we operate?"

Organization

Unlike many other companies, which assigned CR activities to the general counsel's office or communications, UBS had created a special Corporate Responsibility Committee. In its activities, the committee relied on the input of business groups and corporate functions (risk, communications, ¹³

legal, HR) (see Exhibit 6). The committee's task was to judge how UBS could best meet the ever- evolving expectations of its stakeholders. Suter outlined the task:

If the CR Committee comes to the conclusion that there is a gap between what our stakeholders expect and what we practice—and that this gap represents either a risk or an opportunity to the firm—the committee suggests appropriate measures to management, which is then responsible for implementing solutions.

The CR Committee comprised many of the company's most senior managers. In addition to Suter, there were two other members of the board of directors, and four members of the group executive board, including Peter Wuffli, the group CEO. The involvement of top managers reflected a deeply held belief. "Corporate responsibility is a function of management at all levels. One cannot simply delegate one's responsibilities to an expert body," explained Mark Branson, chief communication officer. Suter agreed:

Our commitment to corporate responsibility must be a matter of conviction, not something that is driven primarily by reputation-related considerations. We must do what we believe to be right, what ties in with our corporate culture and, ultimately, what is right for the UBS name.

Climate Change^[5]

While the earth's climate had not changed much since the Industrial Revolution—the average surface temperature rose by only 1.1 °F during this period—industrial activity had substantially increased levels of carbon dioxide in the atmosphere, from 280 parts per million (ppm) before the Industrial Revolution to 380 ppm in 2005 (see Exhibit 7).^c The most important sources of CO, and other greenhouse gases were electricity generation (24.5%), deforestation (18.2%), agriculture (13.5%), and transport (13.5%). These gases had formed a layer that trapped a part of the sun's heat, hence warming the planet. Svante Arrhenius, a nineteenth-century scientist and winner of the Nobel Prize, was first to speculate about the link between CO, concentrations and increases in temperature.^[6] Because he was from Sweden, a warmer climate seemed just fine to him. But by 2005, many scientists were deeply concerned about the prospect of global warming. At current trends, CO, concentrations would reach 800 ppm by the end of the twenty-first century, and the Intergovernmental Panel on Climate Change (IPCC) expected the average global temperature to increase by 2.5°F to 10°F during this period.^[7]

Predicting long-run changes in climate, however, was exceedingly difficult. The earth's climate system was complex, with many poorly understood feedback loops. For example, melting ice decreased the planet's albedo, leading to quicker warming.^d In a similar vicious cycle, warmer oceans absorbed less CO,. In 2005, scientists agreed that global warming had the potential to seriously affect the earth's ecosystem. Some of the direst consequences included a shutdown of the Gulf Stream and a rise in sea levels. The Gulf Stream carried warm, salty water from the tropics to the north Atlantic, leading to a milder climate in northern Europe.^e As the stream approached the Arctic, it cooled down and began to sink because its salty water was heavier than the surrounding waters, thus keeping up the stream's circulation. Melting Arctic ice, scientists feared, could dilute the

Gulf Stream, reduce its salt content, and lead to its slowing or perhaps even a shutdown. This was more than a theoretical possibility. The Gulf Stream had come to a standstill about 8,000 years ago when a sudden flood of fresh water from a North American lake poured into the north Atlantic. If the Gulf Stream shut down, the consequences could be grave. "You could have icebergs around Britain," said David Griggs, director of climate research at Britain's Met Office.¹⁸ Other scientists, however, predicted far less frosty consequences.

Rising sea levels were a second major concern. Melting Arctic ice would not have a big impact on sea levels because it was already swimming at sea. In contrast, ice in Greenland and Antarctica was sitting on land. If all of Greenland's ice melted, sea levels would rise by 23 feet. Recent data presented a complex picture. Sea levels were falling in the northern Pacific, the northwest Indian Ocean, and Antarctica. They were rising in the tropics and subtropics. Changes in water temperature as well as wind and land movements—the Northern Hemisphere was still bouncing back from the weight of long-melted glaciers—all contributed to fluctuating sea levels. Whether melting glaciers also played a role was an open question. Emma Duncan of The Economist explained:

Nobody knows what is happening to the mass balance of Antarctica. Greenland's does seem to be shrinking very slightly—by around 0.4 mm a year, in sea-level equivalent. That would be only 4 cm a century, if the rate stayed constant. But there is no reason to think that the rate will stay constant—nor, if it did accelerate, that anything could be done to stop it.¹⁹

Some scientists also maintained that warmer ocean temperatures contributed to the increase in the number of hurricanes. The Pew Center on Global Climate Change, for example, linked Katrina's development from a tropical storm to a Category 5 hurricane to the abnormally warm surface temperature of the Gulf of Mexico in the summer of 2005.²⁰

Given the complexity of predicting climate change, it was no surprise that scientists, policy­makers, and the general public varied in their opinions about the degree of warming, the intensity of its effects, and consequently the efforts that should be undertaken to mitigate them (see Exhibit 8). Economists struggled to predict the economic impact of climate change. One study, by Professor William Nordhaus, the father of climate-change economics, predicted that a 4.5°F increase in temperature would reduce global output by 3%.

Carbon Markets

Until the late 1990s, most companies and consumers were shielded from the cost of global warming. While taxes on energy consumption and transport were common, these charges did not reflect concerns about greenhouse gases. Even the increased risk of major storms, which could be expected to result in increased insurance rates, were hardly felt because governments kept prices artificially low. Commenting on insurance rates in Florida, Robert Muir-Wood of Risk Management Solutions quipped: "Communism survives in three parts of the world ... North Korea, Cuba and the American insurance market."²¹

Efforts to slow climate change gained momentum in the late 1990s when developed-country governments established the Kyoto Protocol, committing to decrease their greenhouse-gas emissions on average by 5% below 1990 levels before 2012. To achieve these goals in an efficient manner, governments set up a number of trading mechanisms, including the Kyoto-wide Clean Development Mechanism (CDM) and the European Emissions-Trading Scheme (ETS). As a result, UBS had various options to lessen its impact on climate change: reducing its own emissions and purchasing offsets in carbon markets.

Internal Reductions

A first possibility was to adjust activities in the company. UBS's carbon footprint showed that energy consumption (31% of the bank's electricity was produced from fossil resources) and business travel (UBS personnel took more than 300,000 flights annually) were by far the most important sources of emissions. Replacing flights with videoconferencing was one way to reduce the company's carbon footprint. In 2005, UBS held over 20,000 videoconferences, a 47% increase over the prior year. The company also strove to effectively manage its energy use. For example, when UBS renovated one of its buildings in Zurich, improved cooling, heating, and lighting systems resulted in 41% energy consumption savings. In London, UBS purchased climate change levy-free electricity, guaranteed to be generated from an energy source with lower emissions than fossil fuels.

Offsets

UBS could also purchase offsets to neutralize its own emissions. These offsets represented investments in third-party projects that reduced greenhouse-gas emissions. Several markets existed.

Certified emissions reduction units (CERs) These certificates came from carbon-reducing projects in developing countries. Often project-management companies such as Cameo and AgCert identified polluters and studied ways to cut emissions. Niche investment banks such as Climate Change Capital and Natsource acted as brokers and sold these projects to companies seeking to offset their carbon emissions. To facilitate trades, exchange markets were set up (European Climate Exchange, Nord Fool), and the World Bank organized a carbon fair in Cologne for bilateral exchanges. Carbon-reducing projects in poor countries were particularly attractive because the marginal cost of abating a ton of CO, was only $5 to $10. In 2005, the market price for CERs hovered around $20 (see Exhibit 9). The markup represented the substantial demand for CERs. Frices also reflected the decision of the Chinese government to levy a 65% tax on carbon-reducing projects in the country. In 2005, roughly two-thirds of carbon deals involved projects in China. While the country had been skeptical of carbon markets early on, arguing trading allowed richer nations to pay their way out of obligations to reduce emissions, China eventually warmed up to the idea of carbon trading. Jiang Weixin, a senior official of the National Development and Reform Commission, welcomed the opportunity to attract foreign investment:

Developed countries get opportunities to emit greenhouses gases at a relatively low

economic cost and achieve their emission reduction targets, while developing countries obtain

benefits such as funding and technology transfer.²²

Emission reduction units (ERUs) The company could also offset its emissions by purchasing ERUs. These certificates represented carbon-reduction projects in industrialized countries that had signed the Kyoto Frotocol.

Verified emission reductions (VERs) These voluntary certificates represented carbon- reduction projects that were traded in over-the-counter markets. The projects were verified by independent consultants, but they had not yet undergone the procedures for verification, certification, and issuance of CERs or ERUs. Because it was uncertain whether VERs would eventually qualify as CERs or ERUs, buyers tended to pay a discounted price for these certificates.²³

Froponents of market-based approaches argued that they allowed countries to cut emissions at reduced cost. The EU Commission estimated that ETS saved European companies €3 billion, one- third of the cost of Kyoto compliance.²⁴ On the other hand, critics of carbon markets saw these

institutions as an easy way out for polluters. Larry Lohmann of the U.K.-based nongovernmental organization (NGO) The Corner House explained:

[Offset] projects are merely supplementing fossil fuel use; they are not replacing it. The institutions most eager to set up offset projects—from the World Bank to Tokyo Power—are precisely those most committed to burning up more and more fossil fuel. Covering the land with windmills and biofuel plantations will be of little use unless fossil fuel extraction is stopped.²⁵

While they did not share these views, some UBS managers thought the bank should take them into account when deciding how to reduce its carbon emissions. Liselotte Arni, head of Group Environmental Policy, argued for this approach:

It is important that internal and external audiences understand the value of the program. While we obviously focus on cost-effectiveness, for example by buying offsets when break­even or in-house investments cannot be reached in a reasonable time frame, we also have to accommodate critical voices. People argue, "Banks are rich; they can afford to buy their way out of reducing emissions." So we need to optimize across climate change and the UBS reputation.

Competitors' Actions

In reviewing the UBS climate-change proposal, Suter thought about the policies that other banks had adopted (see Exhibit 10 for summary information).

Citigroup Citigroup served clients in more than 100 countries and managed over $1 trillion in assets.²⁶ The company's measures to protect the environment were part of its corporate citizenship agenda. Starting in 2002, Citigroup compiled data on energy use in its 13,000 buildings. Based on these analyses, the firm was refurbishing some of its U.S. facilities. Citigroup planned to purchase 10% of its electric power in the U.S. as green power through 2007. In 2004, Citigroup began disclosing the carbon emissions from power plants that it financed. Two years later, the company announced it would lower its greenhouse-gas emissions to 10% below their 2005 level by 2011.

Credit Suisse Credit Suisse Group (CSG), UBS's main competitor in Switzerland, emitted 450,000 tons of greenhouse gases in 2005. Most of these stemmed from its business travel and the use of electricity. In an initial step towards reducing its impact on climate change, in April 2005, CSG's Sustainability Committee approved a plan that called for all of the company's buildings in Switzerland to be greenhouse-gas neutral by 2006. CSG also ordered 243,000 tons of carbon credits for 2006-2008 so that its operations in Switzerland and its business flights out of Switzerland would be carbon neutral. The firm expected to spend CHF 2.2 million on certificates.²⁷

HSBC HSBC Holdings, the world's largest bank by assets, led the banking industry in its commitment to mitigate climate change. In December 2004, HSBC committed to neutralize 100% of its carbon emissions by purchasing green electricity and offset certificates. It accomplished this goal ahead of schedule in September 2005. HSBC's offset credits came from a wind farm in New Zealand, an organic waste composter in Australia, an agriculture methane reducer in Germany, and a biomass co-generator in India. The average price of each metric ton of offset was $4.43. In mid-2005, HSBC pledged to reduce its carbon emissions by another 5% by 2007, and it set up a Carbon Management Task Force to oversee the project.²⁸ HSBC's efforts were widely recognized. The Financial Times

named HSBC as the top bank in its first Sustainable Banking Awards for "its leadership in merging social, environmental and business objectives."²⁹

Morgan Stanley Investment bank Morgan Stanley began trading carbon credits in 2004. It hoped to acquire deals valued at over $3 billion in the next five years. "We strongly support the use of market-based solutions to meet environmental policies and objectives," said Simon Greenshields, managing director and global head of power at the company.³⁰

Competing Issues

Climate change was not the only issue on Suter's desk. All types of environmental impacts as well as the alleged tax evasion among the wealthy and human rights were other concerns. Suter explained:

NGOs use the globalization process to export rich-country standards to the rest of the world. There is a trend to make financial institutions responsible for their "sphere of influence." Some groups think we are accountable for all the activities that we support financially. Take the Global Compact, a United Nations initiative, as an example. The compact asks companies to make sure they are not "complicit in human rights abuses." What does complicity mean? And where does our responsibility end?

Which issues and groups UBS should address was a complicated question. Christian Leitz, NGO facilitator at UBS, explained: "The issues that NGOs bring up can certainly not be ignored. These groups are increasingly concerned about the activities of financial services providers; their expertise in financial-industry issues has grown markedly in recent years. It is therefore important both to monitor NGO activities and to engage in constructive dialogue."

Many analysts pointed to the important role of the media in bringing particular problems to the attention of the public. But this simply begged the question why the media reported on some issues and not on others. Professor David Baron of Stanford University argued that the media's stance depended on the societal significance of a topic and on intrinsic audience interest in the matter.³¹ Rating an issue on these two dimensions, Baron believed, could help predict the response of the media (see Exhibit 11). Determining societal significance, however, was no easy matter. For example, experts often disagreed with the risk perceptions of the general public (see Exhibit 12). Suter wondered whether UBS should follow common perceptions or expert judgments in these instances.

Taking Action?

In the upcoming meeting of the Corporate Responsibility Committee, Suter wanted to reach three decisions. Which of the four options, if any, should UBS adopt? For any given option, what was the right mix of mitigating measures? And finally, how should the new policy be communicated? Suter was well aware that views sharply differed among UBS managers. Some business units feared that even stabilizing carbon emissions might be too ambitious in view of the bank's growth prospects. There were also important geographical differences. U.S.-based businesses had shown decidedly less enthusiasm than other units. Finally, some managers had expressed concerns about the cost of the proposed programs. Was it realistic to assume that carbon certificates would only double in price in the next seven years, as the working group had assumed?

Suter glanced at the chart on his desk one more time. Was it time to take action?

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“UBS and Climate Change: Warming Up to Global Action?” 

1) What are the benefits for UBS of reducing its carbon emissions? What are the risks? 

2) Which option should Suter support?

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?