By David Wolf
A reporter was asking me the other day whether the complicity of American Internet companies in helping China censor its Internet was right, and whether those companies are deserving of condemnation? My answers? No, of course it's not right. But no, they do not deserve condemnation.

(Full disclosure – I work with or for none of these companies, so my interests are not drawn either way)

I think it's dead wrong that these companies should find themselves in the position of having to make a choice between their ideals and their share prices.?

But condemning them? Condemnation gets headlines for congressmen and columnists as they wrap themselves in the American flag and Jeffersonian doctrine. But it doesn't solve the fundamental problem: what should Internet executives do when faced with the Faustian choice twixt their high-minded goals and their fiduciary responsibilities??

The Problem

First, it is fair to say that Yahoo, MSN, Cisco, Google and their ilk need China a lot more than China needs them, at least in the eyes of a generation of policymakers who know even less about the Internet than the distinguished solons on Capitol Hill. Their roles are easily supplanted by home-grown heroes like Sina, Sohu, Baidu, and Huawei. American companies recognize this, and accept it, and in so doing place their existence in China at the whim of officials for whom an arbitrary decision serves as due process. Not only do they need to operate in China according to the letter of the law, they feel the need to operate in a manner that avoids giving any of these bureaucrats the slightest irritation.

Second, each of them believes – with varying justification – that failure to operate in China will deprive them of significant revenues or otherwise damage their overall prospects as a business.

Third, each of them believes that they are faced with a simple choice – either play ball according to Chinese rules, or take their balls and go home.

Fourth – based purely on apocryphal knowledge and no systematic research – I give these executives the benefit of the doubt: I would wager that none of them feels especially comfortable with the choices they have made.

Fifth, because they feel uncomfortable with the situation they find themselves in, they do all they can to put it behind them – including not saying anything about it to their employees, their users, and their other stakeholders.

Denial is More than just a River in Egypt

There are two challenges here. The first is replacing the urge to bury the whole issue with proactive openness and transparency.

In nearly every major capital intensive business setting up shop in a foreign country, extensive time and effort is taken to anticipate, disclose, and mitigate every potential risk. This also happens in an IPO process (as mandated by securities regulators and exchange authorities).

Where this has not been happening is in the Internet industry, and in particular vis-a-vis China. And now that clearly has to change.

Anticipating, disclosing, and mitigating the risks of being in the Internet business in China is arguably part of a company's fiduciary duty, but equally important it forces a company to deal with the problems before they come up in a very open, public way. It also provides shareholders and other constituencies the opportunity to weigh in on those risks and the issues they present, and gives the company a chance to engage in a discussion that may lead to unanticipated ways to mitigate the problems they face.

Not to mention, of course, it ensures that when stuff like this happens, the companies involved are actually ready for it.

Wow. Preparation. What a concept.

Engagement is More than just Being There

Several U.S. Internet companies make the argument that it is better for Chinese users if American Internet companies are actively operating in the market. Simply by being in the game, they suggest, they have a positive effect on the evolution of a freer China.

Most companies in China can make this claim with some justification purely on the basis of person-to-person interactions between Chinese and foreigners, and through the transfer of modern business practices.

But for Internet companies, experience is now proving that being here is not enough. Companies need to make engagement and "doing good by doing well" a stated, clear, and measurable part of their operational plans.

This does not mean defying the government, or even banding all of the foreign companies together to pressure the government. These are tactics that won't work, and despite occasional claims to the contrary, have rarely (if ever) worked in the past.

But with a bit of sensitivity, creativity, and a willingness to put some time, money, and attention to the effort, there is a good deal that American Internet companies could do – and I would suggest, will do – (short of violating the law and upsetting officials) that will help improve the local operating environment, take the compliance pressure off of the companies, and widen the availability of information to Chinese citizens.

Regulation as a Last Resort, Not a First Step

The gut reaction of the election-minded congressman is to pass legislation that requires American Internet companies to take all kinds of steps. Republican Chris Smith of New Jersey wants to propose a bill that will not only require Internet companies to move their e-mail servers offshore, it will also give foreign nationals the right to sue U.S. companies who violate their privacy.

With respect to Rep. Smith (and other solons proposing similar legislation), this is a misguided idea for all kinds of reasons (unless you're a personal injury attorney, in which case you will look at this as a windfall courtesy of Uncle Sam), not least of which being that it is unlikely to change much for your average Internet user in China.

Congress sees this problem as a nail and legislation as a hammer. That's a bad thing, but it will serve as a wake-up call to companies that they need to take the lead on this issue, or they will find their China businesses legislated into a corner.

About the author:
Silicon Hutong is an ongoing series of thoughts and commentaries by David Wolf, President and CEO of Wolf Group Asia'a management advisory firm providing strategic communications counsel to technology, media, entertainment, and telecommunications companies in Greater China and the Asia-Pacific region. David's opinions are his own and do not reflect those of either WGA or it's clients. Past articles can be found at www.chinatechnews.com, the Silicon Hutong Blog can be found here and David himself can be contacted at [email protected].