Yahoo's Lashing Highlights RisksOf China Market
By COREY BOLES in Washington, and DON CLARK and PUI-WING TAM in San FranciscoNovember 7, 2007; Page A1
An unusually dramatic congressional hearing on Yahoo Inc.'s role in the imprisonment of at least two dissidents in China exposed the company to withering criticism and underscored the risks for Western companies seeking to expand there.
"While technologically and financially you are giants, morally you are pygmies," Rep. Tom Lantos (D., Calif.), who called the hearing on Capitol Hill, told Yahoo's co-founder and Chief Executive Jerry Yang and General Counsel Michael Callahan. "This testimony has been an appallingly disappointing performance."
Gao Qin Sheng, center, mother of Chinese journalist Shi Tao, who was sentenced by China to 10 years in prison with the help of information provided by Yahoo, bursts into tears after committee chairman Rep. Tom Lantos requested Yahoo CEO Jerry Yang, left, publicly apologize to Mr. Shi's family. Chinese dissident Harry Wu, right, looks on during the hearing.
Mr. Yang apologized to the mother of journalist Shi Tao, who was jailed after Yahoo China, then a unit of the company, handed information about him to Chinese authorities in 2004. She was at the hearing, sitting directly behind Messrs. Callahan and Yang. Addressing the families of the dissidents, Mr. Yang said: "I want to say we are committed to doing what we can to secure their freedom. And I want to personally apologize for what they are going through."
The hearing was called by Rep. Lantos, chairman of the House Foreign Affairs Committee, to hear testimony about the circumstances under which Yahoo cooperated with the Chinese authorities, and to hear from Mr. Callahan about apparent inconsistencies in his testimony.
The highly publicized hearing highlighted a risk that comes with the rewards of moving into the huge Chinese market: Yahoo, Google Inc. and other U.S. Internet companies face a potentially high cost in negative publicity with their gains.
The debate over China is just one of the pressures facing Mr. Yang, who succeeded Terry Semel as CEO in June. Mr. Semel had also been dogged by questions about Yahoo's actions in China. Like executives at Google and other Internet companies, Mr. Semel expressed his anger at China's repressive policies while arguing that the company had to follow the laws of countries where it does business.
It's unknown what the consequences would have been for Yahoo if it failed to comply with the Chinese demands. The company said that if its employees violated Chinese law, they could face prosecution in the country. The licenses required for a foreign business to operate in China are entirely at the government regulator's discretion.
Ahead of the Olympic Games next summer in Beijing, China is facing increased scrutiny on a host of problems -- from human rights to the environment -- that could well broaden to affect Western companies doing business there.
Some analysts pointed to the hearing as a reason that Yahoo's shares dropped 5% on a day when the stock market was generally up. The decline came despite the potential benefit to the company from the hugely successful stock listing in Hong Kong yesterday of Chinese Internet company Alibaba.com Ltd. Yahoo owns 39% of its parent company, Alibaba Group, a stake it bought in 2005. (Please see related article.)
PREPARED TESTIMONY
Click on the name to read the full prepared testimony.
• Yahoo CEO Jerry Yang:"Like many who came to America with the hope of a better life and opportunity, my mother brought me here from Taiwan as a child. [hellip] [I had] a keen appreciation at an early age of the freedoms and opportunities offered in America. I believed then, as I believe now, that this country is a beacon of freedom to the rest of the world. [hellip] We continue to believe in engagement in markets like China. Why? Today, despite broad limitations on sensitive political subjects, Chinese citizens know more than ever before about local public health issues, environmental causes, politics, corruption, consumer choice, job opportunities, and even some foreign affairs."
• Yahoo General Counsel Callahan:"I recognize that some may disagree, but our view is that engagement in China is the better course, and that is why Yahoo opened local operations in China. A byproduct of opening local operations, however, is that local operations are subject to local law. I cannot ask our local employees to resist lawful demands and put their own freedom at risk, even if, in my personal view, the local laws are overbroad."
• Rep. Tom Lantos:"If you think our witnesses today are uncomfortable sitting in this climate-controlled room and accounting for their company's spineless and irresponsible actions, imagine how life is for Shi Tao, spending ten long years in a Chinese dungeon for exchanging information publicly -- exactly what Yahoo claims to support in places like China."
Alibaba.com shares opened at HK$30 (US$3.86) yesterday, more than double its initial public offering price of HK$13.50, and reached an intraday high of HK$39.95.
Scott Kessler, an analyst at Standard & Poor's, said he thought the decline in Yahoo's shares was more the result of investors selling on the news of Alibaba's successful stock-market debut after a run-up in prior days. With the hearing past, he thinks investors may now believe that Yahoo has weathered the China issue. "There's a reputational hit from this that the company can now absorb," Mr. Kessler said.
The Alibaba deal put Alibaba itself on the front lines in dealing with Chinese government officials, not Yahoo. Mr. Yang noted that his company doesn't control the day-to-day operations of Alibaba or Yahoo China.
Still, Mr. Yang's grilling highlights the bind that Internet companies face when they venture overseas, privacy experts say. In China, privacy takes a back seat to laws governing criticism of the government, and while Yahoo and rivals like Google tried to comply with China's local laws, that ultimately backfired on them domestically.
"They're caught in a vise," said Denny O'Brien, international outreach coordinator for the Electronic Frontier Foundation, a nonprofit civil-liberties group in San Francisco.
For the past year, says Mr. O'Brien, Yahoo and other Internet companies have been working with the EFF and other nonprofits on a code of Internet privacy principles, trying to resolve some of the issues that had unfolded in China. The effort has been proceeding slowly and isn't yet complete.
While the U.S. government had been silent on the topic for some time, Mr. Yang's testimony today signals the reinvolvement of U.S. officials into global Internet privacy issues, Mr. O'Brien said.
Yahoo first entered the Chinese market in 1999, when it was aggressively expanding overseas in other countries such as Japan. But local Chinese portals stole a march on the U.S. company and it had middling success in the giant market.
In 2004, Yahoo acquired 3721 Network Software Co., which makes software for Chinese-language Internet searches. In 2005, it paid about $1 billion and transferred its ownership in Yahoo China as part of the deal to obtain its stake in Alibaba Group, which owns Alibaba.com and other properties. Mr. Yang is one of four members of Alibaba Group's board of directors.
Yahoo, based in Sunnyvale, Calif., ran into trouble in China the same year as the Alibaba deal, for its role in helping Chinese officials identify Mr. Shi. He allegedly used his Yahoo email account to relay the contents of a secret government order to an overseas Web site. Mr. Shi is now serving a 10-year prison sentence.
Also at the hearing was the wife of jailed Internet writer Wang Xiaoning. According to a committee spokeswoman, Mr. Wang was arrested in 2002 for using a Yahoo account to advocate open elections in China. The company is alleged by lawmakers and human-rights groups to have cooperated with Beijing over his arrest as well.
In the case of Mr. Shi, Mr. Callahan had initially told Congress that Yahoo didn't know the reasons for a Chinese government order seeking information from the company. Then in October 2006, when Mr. Callahan discovered the extent to which company officials did learn of the political aspect to the government order, he failed to let Congress know his earlier testimony was incorrect.
Lawmakers expressed incredulity that Mr. Callahan hadn't been aware of the details of Beijing's request. That order referred explicitly to "state secrets" violations, which several members of the panel pointed out was code in China for political investigations.
"Yahoo claims that this is just one big misunderstanding," said Rep. Lantos. "Let me be clear -- this was no misunderstanding. This was inexcusably negligent behavior at best, and deliberately deceptive behavior at worst."
Mr. Callahan apologized to the committee for not returning to inform lawmakers of his earlier error. Earlier, in meetings with committee staffers, he also apologized for misinforming the panel, according to several people at those meetings.
Yahoo has denied that Mr. Callahan apologized in private for misinforming the committee, and at Tuesday's hearing, Mr. Callahan also said he didn't believe he had been untruthful when testifying in 2006.
His remarks didn't mollify lawmakers. Committee members of both parties took turns at the hearing lambasting the executives for what happened.
Rep. Brad Sherman (D., Calif.) said he believed Rep. Lantos had shown significant self-control in not pursuing a perjury investigation into Mr. Callahan's February 2006 testimony.
"How could a dozen lawyers prepare another lawyer to testify before Congress, without anyone thinking to look at the document that had caused the hearing to be called? This is astonishing," said Rep. Chris Smith (R., N.J.).
Mr. Lantos asked why no one at Yahoo had been disciplined for what happened. Mr. Yang said that while the company had lessons to learn from the incident, he didn't believe there was any need to discipline any one employee. "At the end of the day, I feel that everybody was doing the best they can given a difficult situation," Mr. Yang said.
Messrs. Yang and Callahan were pressured by lawmakers to endorse a bill, authored by Rep. Smith, which would criminalize cooperation by U.S. technology companies with foreign governments that could use information to crack down on democracy activists. The Yahoo executives refused to specifically do so, but said they would look at the legislation further. That bill was unanimously approved by the committee two weeks ago and now faces a debate on the floor of the House.
The lawmakers urged Yahoo to help with the humanitarian needs of families of jailed dissidents in China. Rep. Smith said one way the company could do this would be to settle a court case brought against it by relatives of the imprisoned dissidents as soon as possible. Mr. Callahan said that the company was open to that. After the hearing, the Yahoo executives met with Mr. Shi's mother, Mr. Wang's wife and their translator. It isn't known what was said in that meeting.
Write to Corey Boles at corey.boles@dowjones.com, Don Clark at don.clark@wsj.com and Pui-Wing Tam at pui-wing.tam@wsj.com
By COREY BOLES in Washington, and DON CLARK and PUI-WING TAM in San FranciscoNovember 7, 2007; Page A1
An unusually dramatic congressional hearing on Yahoo Inc.'s role in the imprisonment of at least two dissidents in China exposed the company to withering criticism and underscored the risks for Western companies seeking to expand there.
"While technologically and financially you are giants, morally you are pygmies," Rep. Tom Lantos (D., Calif.), who called the hearing on Capitol Hill, told Yahoo's co-founder and Chief Executive Jerry Yang and General Counsel Michael Callahan. "This testimony has been an appallingly disappointing performance."
Gao Qin Sheng, center, mother of Chinese journalist Shi Tao, who was sentenced by China to 10 years in prison with the help of information provided by Yahoo, bursts into tears after committee chairman Rep. Tom Lantos requested Yahoo CEO Jerry Yang, left, publicly apologize to Mr. Shi's family. Chinese dissident Harry Wu, right, looks on during the hearing.
Mr. Yang apologized to the mother of journalist Shi Tao, who was jailed after Yahoo China, then a unit of the company, handed information about him to Chinese authorities in 2004. She was at the hearing, sitting directly behind Messrs. Callahan and Yang. Addressing the families of the dissidents, Mr. Yang said: "I want to say we are committed to doing what we can to secure their freedom. And I want to personally apologize for what they are going through."
The hearing was called by Rep. Lantos, chairman of the House Foreign Affairs Committee, to hear testimony about the circumstances under which Yahoo cooperated with the Chinese authorities, and to hear from Mr. Callahan about apparent inconsistencies in his testimony.
The highly publicized hearing highlighted a risk that comes with the rewards of moving into the huge Chinese market: Yahoo, Google Inc. and other U.S. Internet companies face a potentially high cost in negative publicity with their gains.
The debate over China is just one of the pressures facing Mr. Yang, who succeeded Terry Semel as CEO in June. Mr. Semel had also been dogged by questions about Yahoo's actions in China. Like executives at Google and other Internet companies, Mr. Semel expressed his anger at China's repressive policies while arguing that the company had to follow the laws of countries where it does business.
It's unknown what the consequences would have been for Yahoo if it failed to comply with the Chinese demands. The company said that if its employees violated Chinese law, they could face prosecution in the country. The licenses required for a foreign business to operate in China are entirely at the government regulator's discretion.
Ahead of the Olympic Games next summer in Beijing, China is facing increased scrutiny on a host of problems -- from human rights to the environment -- that could well broaden to affect Western companies doing business there.
Some analysts pointed to the hearing as a reason that Yahoo's shares dropped 5% on a day when the stock market was generally up. The decline came despite the potential benefit to the company from the hugely successful stock listing in Hong Kong yesterday of Chinese Internet company Alibaba.com Ltd. Yahoo owns 39% of its parent company, Alibaba Group, a stake it bought in 2005. (Please see related article.)
PREPARED TESTIMONY
Click on the name to read the full prepared testimony.
• Yahoo CEO Jerry Yang:"Like many who came to America with the hope of a better life and opportunity, my mother brought me here from Taiwan as a child. [hellip] [I had] a keen appreciation at an early age of the freedoms and opportunities offered in America. I believed then, as I believe now, that this country is a beacon of freedom to the rest of the world. [hellip] We continue to believe in engagement in markets like China. Why? Today, despite broad limitations on sensitive political subjects, Chinese citizens know more than ever before about local public health issues, environmental causes, politics, corruption, consumer choice, job opportunities, and even some foreign affairs."
• Yahoo General Counsel Callahan:"I recognize that some may disagree, but our view is that engagement in China is the better course, and that is why Yahoo opened local operations in China. A byproduct of opening local operations, however, is that local operations are subject to local law. I cannot ask our local employees to resist lawful demands and put their own freedom at risk, even if, in my personal view, the local laws are overbroad."
• Rep. Tom Lantos:"If you think our witnesses today are uncomfortable sitting in this climate-controlled room and accounting for their company's spineless and irresponsible actions, imagine how life is for Shi Tao, spending ten long years in a Chinese dungeon for exchanging information publicly -- exactly what Yahoo claims to support in places like China."
Alibaba.com shares opened at HK$30 (US$3.86) yesterday, more than double its initial public offering price of HK$13.50, and reached an intraday high of HK$39.95.
Scott Kessler, an analyst at Standard & Poor's, said he thought the decline in Yahoo's shares was more the result of investors selling on the news of Alibaba's successful stock-market debut after a run-up in prior days. With the hearing past, he thinks investors may now believe that Yahoo has weathered the China issue. "There's a reputational hit from this that the company can now absorb," Mr. Kessler said.
The Alibaba deal put Alibaba itself on the front lines in dealing with Chinese government officials, not Yahoo. Mr. Yang noted that his company doesn't control the day-to-day operations of Alibaba or Yahoo China.
Still, Mr. Yang's grilling highlights the bind that Internet companies face when they venture overseas, privacy experts say. In China, privacy takes a back seat to laws governing criticism of the government, and while Yahoo and rivals like Google tried to comply with China's local laws, that ultimately backfired on them domestically.
"They're caught in a vise," said Denny O'Brien, international outreach coordinator for the Electronic Frontier Foundation, a nonprofit civil-liberties group in San Francisco.
For the past year, says Mr. O'Brien, Yahoo and other Internet companies have been working with the EFF and other nonprofits on a code of Internet privacy principles, trying to resolve some of the issues that had unfolded in China. The effort has been proceeding slowly and isn't yet complete.
While the U.S. government had been silent on the topic for some time, Mr. Yang's testimony today signals the reinvolvement of U.S. officials into global Internet privacy issues, Mr. O'Brien said.
Yahoo first entered the Chinese market in 1999, when it was aggressively expanding overseas in other countries such as Japan. But local Chinese portals stole a march on the U.S. company and it had middling success in the giant market.
In 2004, Yahoo acquired 3721 Network Software Co., which makes software for Chinese-language Internet searches. In 2005, it paid about $1 billion and transferred its ownership in Yahoo China as part of the deal to obtain its stake in Alibaba Group, which owns Alibaba.com and other properties. Mr. Yang is one of four members of Alibaba Group's board of directors.
Yahoo, based in Sunnyvale, Calif., ran into trouble in China the same year as the Alibaba deal, for its role in helping Chinese officials identify Mr. Shi. He allegedly used his Yahoo email account to relay the contents of a secret government order to an overseas Web site. Mr. Shi is now serving a 10-year prison sentence.
Also at the hearing was the wife of jailed Internet writer Wang Xiaoning. According to a committee spokeswoman, Mr. Wang was arrested in 2002 for using a Yahoo account to advocate open elections in China. The company is alleged by lawmakers and human-rights groups to have cooperated with Beijing over his arrest as well.
In the case of Mr. Shi, Mr. Callahan had initially told Congress that Yahoo didn't know the reasons for a Chinese government order seeking information from the company. Then in October 2006, when Mr. Callahan discovered the extent to which company officials did learn of the political aspect to the government order, he failed to let Congress know his earlier testimony was incorrect.
Lawmakers expressed incredulity that Mr. Callahan hadn't been aware of the details of Beijing's request. That order referred explicitly to "state secrets" violations, which several members of the panel pointed out was code in China for political investigations.
"Yahoo claims that this is just one big misunderstanding," said Rep. Lantos. "Let me be clear -- this was no misunderstanding. This was inexcusably negligent behavior at best, and deliberately deceptive behavior at worst."
Mr. Callahan apologized to the committee for not returning to inform lawmakers of his earlier error. Earlier, in meetings with committee staffers, he also apologized for misinforming the panel, according to several people at those meetings.
Yahoo has denied that Mr. Callahan apologized in private for misinforming the committee, and at Tuesday's hearing, Mr. Callahan also said he didn't believe he had been untruthful when testifying in 2006.
His remarks didn't mollify lawmakers. Committee members of both parties took turns at the hearing lambasting the executives for what happened.
Rep. Brad Sherman (D., Calif.) said he believed Rep. Lantos had shown significant self-control in not pursuing a perjury investigation into Mr. Callahan's February 2006 testimony.
"How could a dozen lawyers prepare another lawyer to testify before Congress, without anyone thinking to look at the document that had caused the hearing to be called? This is astonishing," said Rep. Chris Smith (R., N.J.).
Mr. Lantos asked why no one at Yahoo had been disciplined for what happened. Mr. Yang said that while the company had lessons to learn from the incident, he didn't believe there was any need to discipline any one employee. "At the end of the day, I feel that everybody was doing the best they can given a difficult situation," Mr. Yang said.
Messrs. Yang and Callahan were pressured by lawmakers to endorse a bill, authored by Rep. Smith, which would criminalize cooperation by U.S. technology companies with foreign governments that could use information to crack down on democracy activists. The Yahoo executives refused to specifically do so, but said they would look at the legislation further. That bill was unanimously approved by the committee two weeks ago and now faces a debate on the floor of the House.
The lawmakers urged Yahoo to help with the humanitarian needs of families of jailed dissidents in China. Rep. Smith said one way the company could do this would be to settle a court case brought against it by relatives of the imprisoned dissidents as soon as possible. Mr. Callahan said that the company was open to that. After the hearing, the Yahoo executives met with Mr. Shi's mother, Mr. Wang's wife and their translator. It isn't known what was said in that meeting.
Write to Corey Boles at corey.boles@dowjones.com, Don Clark at don.clark@wsj.com and Pui-Wing Tam at pui-wing.tam@wsj.com
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