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Another Internet company has been accused of cozying up to the Chinese government. The other week, it was Google, which has decided to filter its Google.cn search results, according to categories set by the Chinese government. This time, it seems that Yahoo! may have cooperated with the Chinese government in its arrest of a political dissident (and this may not have been the first time).

Chinese pressure on Internet companies is raising serious concerns. And not just among organisations such as Reporters Without Borders (which claimed that Yahoo! helped identify the dissident through his email address and username), but the US Government. Yahoo!, Google, Microsoft, and Cisco have all been requested to appear as witnesses at a Congressional hearing this week, titled “The Internet in China: A Tool for Freedom or Suppression?” (Why these four? While both Google and Yahoo! have filtered their search engine results for Chinese users, Microsoft has reportedly shut down a blog in China, and Cisco has provided hardware used for filtering.)

All of this raises some very interesting, and difficult, issues. Given that it’s unlikely the Chinese government will change its position on whether Chinese citizens should be able to read about Tianamen or Taiwan, I think it comes down to a couple of questions.

Is it worse for Chinese citizens not to have access to fundamental tools for using the Internet (search engines and free email accounts), or to have censored access?

I think that the threshold issue is whether the Internet without Google and Yahoo! is somehow less valuable than the Internet with Google and Yahoo! In other words, why should anyone care whether these companies do business in China at all?

With respect to their search engine capabilities, my personal opinion is that the Internet is much more valuable when you have a way to find what you are looking for. As someone once said to me, it doesn’t matter if you have something if you can’t find it. (The comment was made about a messy office, but I think that the same holds true here.) It was harder to find useful content on the Internet before good search engines were around.

As for Yahoo!’s email capabilities, having free email is, for the most part, also better than not having it. Many people cannot afford an email account through a subscription service, or need multiple email addresses used for multiple purposes. Chinese users are unlikely to be any different. The argument may not be as clear as with search engines, however. It is important to note that Google has decided not to offer Gmail to the Chinese market because it does not want to be put in the position of releasing information about its users. So perhaps, from the point of view of some Chinese users, it is better not to have an email account at all, however inconvenient that might be.

Are censored results worse than no results at all? Filtering search engine results is certainly not ideal. But in this situation, I think that access to something is better than access to nothing. Ultimately, I think that people’s position on this issue depends on how likely they think China is to give into external pressures, and change its policies. For the time being, my personal view is that it’s better to offer these services to Chinese users.

What path should Internet companies take in China, when they are under an obligation to their shareholders to maximise profits, but doing so may cause them to lose the support of some existing customers?

In other words, what are the implications for corporate governance?

This one is a bit harder, and I am not sure where I stand. From the perspective of a business that will continue to exist in the longer term only if it continues to profit, Google and the rest have an obligation to make the most of any potential markets. This doesn’t mean that they have to make profits all of the time — certainly, when Internet companies start, they often spend quite a bit of money before they make any. But to continue in business once they have become publicly-held companies traded on the stock exchange is a different matter. Right or wrong, between shareholders and customers the first obligation of a company’s management is to its shareholders — because the shareholders own the company. So if we prefer to have Yahoo!, Google, Microsoft, and Cisco exist than not, we probably have to accept that we won’t like all of their policies.

But at the same time, these companies do need their customers, and customers can influence company policy. The difficulty lies in the fact that what customers value is not necessarily the same thing as what shareholders value. In this situation, these interests contrast more than usual. Here, many users value not only good, innovative products, but the freedoms associated with Western societies, including the freedom of speech. The fact that it’s a government’s policies that are objectionable makes the contrast that much more stark.

So Google and the rest are faced with a difficult problem, namely, how can they justify not entering one of the largest markets in the world? From the perspective of profits, they cannot. So it then they have to figure out how to try and satisfy not just two but three interest groups: shareholders, customers, and the Chinese government. I don’t envy them the task.