What Google in China shows: It’s never about shareholders

Investors (and Jack Welch) complain that Sergey Brin was acting from personal belief when he made the move. Of course he did. So does every CEO.

By Paul Smalera, contributor

Google watchers and investors are scrambling to make sense of the company’s historic pullout from the Chinese market on Monday. The company’s stake in technology, services and staff there likely ran into the hundreds of millions, if not billions of dollars. But within the space of just a few weeks, Google helicoptered itself out of the country; forsaking decades of future growth prospects in a rapidly maturing and massive economy, and a half-decade spent building up its operational and business presence.

Investors, usually not much for principled stands that don’t involve the capital gains tax, aren’t exactly thrilled with Google’s abdication from China, nor its losses on sunk costs. “I would have loved to have been in that boardroom to hear that discussion: how they decided to walk away from the largest single growth market in the world,” one money manager told Investor’s Business Daily.

But investors looking for the business case here simply aren’t going to get it. Google left China based on the principles of co-founder Sergey Brin, plain and simple. Brin was uncomfortable continuing to do business with a regime that reminded him a little too much of his native Soviet Union, which he left at age six. And he has often said a corollary to Google’s famous “don’t be evil” motto is to also “be good.” For better or worse, it was Brin’s personal experience, and the translation of those experiences into business principles, that informed Google’s decision to walk away.
That’s not to say Brin didn’t have a strong argument, grounded in sound business practices, if not financials, for pushing the decision through. Just as automotive and luxury goods executives helplessly watch while Chinese firms produce copies of their cars and purses, Google has seen its investments in search, online video and social media copied by Chinese firms that enjoy government favor.

And while Baidu and Google are both regularly criticized for delivering seamy results, it’s typically Google that is made an example of in state-run media. “Without Google access to pornographic and subversive content, China’s cyber space will continue to grow in a cleaner and more peaceful environment,” is how the state-run newspaper China Daily marked Google’s exit.

Why it’s personal for Google

Ultimately though, Brin overruled CEO Eric Schmidt and other top executives on the pullout. In a candid conversation with the Wall Street Journal, Brin explained that he had become increasingly aware of the double standard the company had countenanced in order to do business in China. In “one out of five meetings,” said Brin, there was a different set of rules for operating in China as opposed to everywhere else.

Brin specifically mentioned the state’s surveillance of political dissidents as one of the “earmarks of totalitarianism,” he was disturbed by. Indeed, the hack of Google’s Chinese operations seemed to be targeted at breaking into the Gmail accounts of several well-known Chinese activists. For Brin, who came from the country that gave the world the KGB, the threat of domestic espionage may have been particularly galling.

That’s an equation the business world isn’t used to balancing. Former General Electric CEO Jack Welch tut-tutted Google for making its “big decision” on CNBC, saying that if the government allows American business to operate there, the company should take full advantage and swallow its pride on adhering to local laws.

Even as Welch discussed his own setbacks there while selling turbines and medical equipment, he admitted they weren’t comparable to those of a company dealing in search, media and communications, like Google. With our high-tech economy and China’s massive consumer base, more companies may find themselves making similar calculations. Indeed, after finding that China required extensive information, including color headshots, from individuals registering China’s .cn domain names, GoDaddy said it would no longer service the suffix.

Welch may have had Six Sigma by which to measure performance, but it was through force of personality that he turned GE into a brutally efficient profit machine, without fatally demoralizing the workforce he was always looking to shrink.

What makes a leader

Investors in Google have gotten a lesson today that, public or not, the $177 billion company retains the DNA of its two nerdy cofounders. In major decisions about Google’s future, they are more likely than not to guide it based on their view of the world rather than their view of a balance sheet. Shareholders who signed up to profit from the brilliance of guys like Brin and Page — or Jack Welch or Steve Jobs — should be used to the fact that the iconoclasm that made them leaders also makes them resistant to the idea of managing for the medians.

Given Google’s recent troubles with privacy issues related to its rollout of Buzz, and the announcement it was working with the National Security Agency on the China breech, investors might actually take comfort in the fact that the company hasn’t abandoned its desire to cultivate trust with its users; after all, they save petabytes of sensitive documents, emails and data in Google’s massive databases. Without them, the company doesn’t exist. Google’s China move could even be seen as a counterpoint to Eric Schmidt’s repellant statement on CNBC in December that, “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.” What if that something is organizing or protesting for political or religious freedom in China?

Google’s withdrawal is an acknowledgment it can’t provide Chinese citizens with the same data security it provides the rest of the world. It might not have an obligation to solve China’s human rights problems, but for someone like Brin, whose parents left a Communist country in order to provide him with freedoms they didn’t enjoy, and whose own academic and career freedoms were unavailable to his father for reasons of religious persecution, it probably feels good to know his company will no longer be complicit in them either.

Still, it may be difficult for investors to understand why Google took the dramatic and likely irreversible step that it did.

To answer its critics, Google should publish the contents of its now-voided self-censorship agreement with the Chinese government, including the terms it was required to block, like “democracy.” Though the document may embarrass Google, it would also give angry investors a means to put their concerns about market share and revenue growth into broader perspective.

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