Q. From reading this case study, Should Google compromise their ethical code and resume censorship, if it were necessary to stay in China? Explain in details.

Balancing Ethics and Shareholder Returns: The Case of Google in China: Case Study

In the spring of 2010, the executives and top management of Google, Inc., were worried. The May 13 Annual Meeting of shareholders was rapidly approaching, and shareholders were upset. On January 1, Googles stock price had opened the year at $626.95 per share, and by May 7, it had fallen significantly, closing that day at $493.14. This represents a -21% return over slightly more than a 4-month period. In aggregate dollar terms, Google had lost more than $42 billion of market capitalization. This loss could not be blamed on poor equity market conditions, since the NASDAQ index (Googles shares were traded on the NASDAQ) had declined by only 1% during the same period of time.

What had happened? Google and its conflict with the government of the Peoples Republic of China had been a major news story in the early months of 2010. That spring, the company decided to redirect its mainland China search requests through its Hong Kong server. This was done in an attempt to circumvent Chinese government demands that the firm censor search activity. The timing of this decision came on the heels of Googles public announcement that the security of their user accounts had been compromised by hacking activity originating within mainland China. The Company never named the Chinese government as the perpetrator of this activity, but the government responded angrily nonetheless. There was speculation that Google would close down its Chinese operations altogether. Management felt the steps they took were necessary to remain true to their ethical code. While Googles actions are sometimes controversial, the firm is widely cited as a principles-driven company. Ted Leonsis, former AOL Vice-Chairman and principal owner of the Washington Capitals NHL hockey team, labels Google as a double bottom line company, which he defines as an organization that measures its success by both its fiscal results and its positive impact on humanity. Googles actions in China were motivated by several factors. First, they had an obvious need to protect their own network from the threats posed by hackers. Upon gaining access, hackers can not only destroy the security of a computer network, but its very functionality also. This is a risk Google could not afford to take, especially when the nature of their business is considered.

Second, management felt they had an obligation to preserve the privacy and the integrity of their users. In the decision to close down their search site in mainland China and move it to a server in Hong Kong, David Drummond, Senior Vice President of Google, said the firm was motivated by ...evidence to suggest that the Google mail accounts of dozens of human rights activists connected with China were being routinely accessed by third parties, most likely via phishing scams or malware placed on their computers. Googles #1 value in their code of ethics is Focus on the user and all else will follow. This focus includes protecting user information and privacy. The Code goes on to state that ...we take great care to serve you, rather than our own internal goal or bottom line. The full text of Googles code of ethics, entitled Our Philosophy, is included as an appendix to this case.

A third explanation for Googles China actions revolves around managements distaste for censorship. No one felt this more strongly than Sergey Brin, Google co-founder, who was born in the former Soviet Union. Brin recognized the value that the free flow of information could have in opening up the political climate in a country like China, and he noted that Google had not censored their search service in any other market. As one observer concluded, After all, Googles unofficial motto is Dont be evil. Google, like other firms, was also under pressure to maximize the value of their shareholders investment. Not only the shareholders, but much of the public assumed shareholder wealth maximization was a key driver of business decisions. Most financial economists believe that the primary aim of corporate management is (or, at least, should be) to maximize shareholder value (or, more precisely, the value of the firm). The principle of shareholder wealth maximization is now fundamental in many business-school textbooks.

On Wall Street, Google is classified as a growth stock, and its growth potential is a major value driver. Googles presence in mainland China enhanced the growth opportunities of the firm, since the Chinese Internet market was the fastest-growing in the world, and would soon be the largest also. As of May, 2010, after Googles move to Hong Kong and the Chinese governments response, management realized that Googles future in mainland China was in jeopardy. The 21% decline in the market value of their stock since January was a reflection of Googles uncertain future in China, as stockholders were upset by the loss of Googles growth potential. Management was also frustrated by the apparent conflict between the ethical foundations of their decisions and the goal of maximizing shareholder wealth. One thing was certain, the annual meeting of shareholders was approaching quickly, and management needed justifications for their actions that stockholders would accept before confronting them face-to-face.

1. Googles China Operations Googles Chinese beginnings can be traced back to the year 2000, when the firm developed a Chinese language interface for use on their website, Google.com. They experienced trouble almost from the beginning, and the site was temporarily unavailable to Chinese users as early as 2002. The company suspected interference from domestic competition, but nothing was proven. In January 2006, Google rolled out Google.cn, its China-based search page. As a condition of opening Chinese operations, the Chinese government made it clear that Google would be expected to censor content generated by its web searches. This censorship included not only pornography and other culturally objectionable material, but political content also. (For example, Google censored information relating to the Dalai Lama, Tibet, Tiananmen Square, and other political issues sensitive to the Chinese government.) The government expected this censorship to be done by the firm, indicating that Foreign companies operating in China must abide by Chinese laws. The level of censorship actually practiced by Google may have been higher given the fact that specific content to be censored was left undefined by the government. Googles practice of self-censorship was the subject of widespread criticism. U.S. Representative Tom Lantos, a California Democrat, said that the firm should be ashamed. Google, however, gave the issue a different spin. They believed their presence in China would promote the free flow of information, indicating our continued engagement with China is the best and perhaps only way for Google to help bring the tremendous benefits of universal access to users there. In assessing their censorship in China, management was pulled in opposite directions by two conflicting and contradictory objectives from Our Philosophy. On one hand, they sought to focus on the user and all else will follow by remaining in China and using their presence to promote the free flow of information. On the other hand, make money without doing evil would lead Google to avoid censorship, even if the cost was the abandonment of the Chinese market. More trouble followed in 2009. Three months later, Googles Chinese search site, and other Google online services were inaccessible to users in China. The following day, a government official accused Google of spreading obscene content over the Internet. Service was restored within a short time. Despite their problems, Googles business in China grew steadily. At the end of 2009, Google had a Chinese market share of about 35% (measured by revenues generated), behind Chinese rival Baidu with 58% of the search market. Google had offices in Beijing, Shanghai, and Guangzhou, and employed several hundred persons. Large increases in Chinese employment were planned. While the firm did not break out their Chinese revenues separately, Wall Street analysts estimated that they did about $200 million in annual sales in China in 2008, and JP Morgan estimated that the firm would generate $600 million in revenues during the year 2010, due to both the rapid growth of the number of Chinese Internet users and Googles increasing market share. Googles main competition in the Chinese market was Baidu, Inc.

2. Events of December, 2009 and January, 2010 On January 12, 2010 : Google announced that email accounts of Chinese human rights activists had been breached during December, 2009. However, the hackers were only able to access from and to information, and the message content remained secure. In addition, Google announced that dozens of Google accounts in China, Europe, and the United States had been regularly accessed through phishing and malware on the users computers, rather than through a security breach at Google. Google did not immediately accuse the Chinese government of originating this activity. Later, it became known that the breach began with an instant message sent to a Google employee in China which, by clicking on a link, installed a modified version of a Trojan called Hydraq. The attack was labeled sophisticated due to the fact that the hackers knew who to attack, not due to the sophistication of the malware itself. Local media reported that Google suspected the attacks were aided by its employees, and, after the attacks, some Google employees were put on leave, some transferred to other offices in China, and others were denied access to internal networks. A week later, on January 18, a journalists advocacy group announced that the Google accounts of at least two foreign journalists in Beijing had been compromised. In this attack, hackers changed Google email program settings so that all messages would be forwarded to unfamiliar addresses. Googles response to these attacks was swift. On January 12, they indicated that they would no longer practice self-censorship of the web searches conducted on Google.cn and threatened to leave the country entirely if the situation could not be resolved. Despite this announcement, the firm reinstituted their self-censorship of search results shortly thereafter. The Chinese government, in turn, made it clear that they were unhappy with Googles public stance. Foreign firms in China should respect Chinas laws and regulations, and assume the corresponding social responsibilities, and of course Google is no exception said Chinese Foreign Ministry spokesman Ma Zhaoxu. Both parties found the actions of the other unacceptable, and negotiations began in an attempt to resolve the impasse. During their investigation of the attacks, Google learned that as many as 34 other firms, as well as the government of India, may have also been targeted. A mix of technology firms and defense contractors were attacked, including Adobe, Yahoo, Northrop Grumman, GoDaddy, and Dow Chemical.

3. The Move to Hong Kong: Negotiations between Google and the Chinese government continued throughout the months of January-March 2010. Both sides made their positions clear. Google would not continue to practice self-censorship of web searches originating from their Chinese site, and the government refused to do the censorship itself, also indicating that uncensored searches would never be allowed. The Chinese government further questioned Googles motivations. In a statement on Xinhua, Chinas official state news agency, spokespersons said Regrettably, Googles recent behaviors show that the company not just aims at expanding business in China, but is playing an active role in exporting culture, value and ideasIt is unfair for Google to impose its own value and yardsticks on Internet regulation to China, which has its own time-honored tradition, culture and value. They added that And whether leaving or not, Google should not continue to politicalize itself, as linking its withdrawal to political issues will lose Googles credibility among Chinese netizens. (sic) The impasse was broken with Googles March 21 announcement that they were closing down their mainland Chinese website and moving search operations to their Hong Kong server. Googles Hong Kong service, Google.com.hk, operates without a censorship requirement. While Hong Kong is a part of China, it operates as a Special Administrative Region and enjoys relative freedom in everything from finance to its judicial and legal systems. In making this move, Google was able to continue to serve the Chinese market without continuing the practice of self-censorship. Mainland Chinese users were still unable to access politically-sensitive material, because a government firewall continued to censor all Internet content generated from non-mainland servers. The Chinese governments response to the Google move was swift. In an official statement issued by the China State Council Information Office and published by the government-run Xinhua news agency, they said: Foreign companies operating in China must abide by Chinese laws. Google has violated the written promise it made on entering the Chinese market. It is totally wrong in halting filtering of its search provider and also in making aspersions and accusations toward China about hacking attacks. We firmly oppose politicizing commercial issues and express our dissatisfaction and anger at Google Inc.s unreasonable accusations and practices. The non-official response from Chinese Internet users was less restrained. Comments posted on the Global Times website included Get the hell out and another wrote Ha ha, Im going to buy firecrackers and celebrate! While Google feels redirecting Chinese users to their Hong Kong site is entirely legal, it seems unlikely the Chinese government will see this as anything other than an attempt to bypass their laws and direction. Their actions cannot hurt their reputation in the West, but it remains to be seen if improved reputation equates to any particular business benefit. In the end, it seems Google did not take this action primarily to generate goodwill, but because they believed it was the right thing to do for their culture, vision, and business.