SAN FRANCISCO (MarketWatch) -- In the wake of damaging lawsuits charging Yahoo Inc. with complicity in the jailing and torture of Chinese dissidents, the company is seeking to make amends with a "human-rights fund" dedicated to providing victims of government censorship with legal and other assistance.

Human-rights groups that once criticized Yahoo for complying with Chinese authorities' efforts to clamp down on political discourse are now praising its new, public stance on the issue.

Nevertheless, Yahoo's YHOO effort raises questions about its future in a country where companies are expected to avoid open conflict with government policies. Those questions also could conceivably apply to Microsoft Corp. MSFT, -1.04% in the future, should it succeed in acquiring Yahoo.

Harry Wu, a former political prisoner and human-rights advocate once deported by the Chinese government, has been charged with overseeing Yahoo's initiative. Wu said a board of roughly five members should be in place to start administering the fund by the end of this month.

"So far it's unique; there are no other big companies who have set up big funds," he commented. Both Yahoo and Wu declined to detail the fund's initial size, though Wu said the company has the option to add to it if deemed necessary.

“ Falling afoul of the Chinese government has long been considered a dicey proposition for companies hoping to do business there. ”

Other groups including Reporters Without Borders, an organization that earlier this week helped disrupt the Beijing Olympics flame-lighting ceremony in Greece in protest against China, have been tapped to advise on Yahoo's fund, according to Wu.

In addition, Yahoo Chief Executive Jerry Yang indicated in a letter sent last month to U.S. Secretary of State Condoleezza Rice that bolder moves may be in store. Yang wrote that he looks forward to "seizing the opportunity presented by the Olympics to redouble our efforts in securing the release of political dissidents." The Beijing Olympics are scheduled to begin in August.

Falling afoul of the Chinese government has long been considered a dicey proposition for companies hoping to do business there.

Yahoo sold its direct presence in China in 2005, but retains a 39% stake in Alibaba Group, a Hong Kong-based holding company for a number of promising Chinese ventures including online-auction and payment services. Yang also serves on the board of directors at Alibaba.

A Yahoo spokeswoman recently said "we don't do business in China." Yet the company's assets there are widely seen as a valuable potential beachhead in a market with a rapidly growing Internet audience.

"I'm sure if Yahoo did something loud enough, Alibaba would hear about it," said Cowen & Co. analyst Jim Friedland. "But I think Yahoo's once or twice removed enough that it won't cause problems for them."

Alibaba spokesman Porter Erisman declined to comment.

Even though Yahoo enjoys a buffer from the day-to-day operation of its China assets, it's still likely hoping to see them flourish in an evolving market, said Global Crown Capital analyst Martin Pyykkonen.

Yahoo, like other U.S. Internet firms eyeing the Chinese market, is banking on positive change, Pyykkonen added. "There's a bet that all these companies are making that eventually these things get loosened up, and my sense is that it's part of the equation here. It certainly is an important market long term, for all the obvious factors."

Research firm BDA China Ltd. reported earlier this month that China recently surpassed the United States in total Internet users, citing statistics from the China Internet Network Information Center.

Adding up the pieces

Yahoo wisely has established a presence in China that relies on strong local partners, rather than having a direct role, Pyykkonen said. Such an arrangement is likely coveted by other U.S. companies such as Microsoft MSFT, -1.04% , which made an unsolicited acquisition offer for Yahoo in February initially valued at $44.6 billion.

Recent published reports, however, suggest that Alibaba intends to buy out Yahoo's stake if it is ultimately acquired by Microsoft. Whether Microsoft would even see a need to follow through on Yang's commitment to its new Chinese human-rights fund remains to be seen. A Microsoft spokesman declined to comment.

“ Whether Microsoft would even see a need to follow through on the new Chinese human-rights fund remains to be seen. ”

"China is a tough country to navigate," Cowen & Co.'s Friedland said. Google Inc. GOOG, +0.32% , for example, was compelled by the Chinese government in 2006 to begin limiting its local search results after it allowed access to topics including the massacre of Tiananmen Square protesters in 1989.

Google has a direct presence in China, where it struggles to compete against market leader Baidu.com Inc. BIDU, -2.74%

Alibaba, on the other hand, is composed of a smattering of assets including online-commerce company Alibaba.com Ltd. Because it's publicly traded, Alibaba.com ALBCF is easy to value. But other, closely held parts of the Alibaba Group, including online-shopping site Taobao.com and online-payment service Alipay.com, make the math a bit murkier, Friedland added.

Overall, the analyst estimated that Yahoo's stake in Alibaba constitutes roughly $3.42 a share in value. Yahoo shares, bolstered by Microsoft's acquisition bid, have been trading between roughly $25 and $29 a share in recent weeks.

While the smaller aspects of Alibaba may not be big money-makers, their value is based on potential, Friedland said. "They're very well positioned. They give Yahoo a pretty meaningful stake in the growth of the Internet in China."

Alongside its commercial potential, the Chinese Internet is also developing as a means for political discussion -- a phenomenon likely to receive more scrutiny as the Beijing Olympics approach, and equally as likely to draw censorship from the government.

China's bureaucrats made their mark as recently as last week, when local access reportedly was blocked to videos of violent political riots in Tibet. Those clips had been posted to YouTube, the popular video-sharing service owned by Google GOOG, +0.32% .

Wu, who serves as executive director of the Washington, D.C.-based Laogai Research Foundation, said that any U.S. Internet company doing business in China has the duty to take an active interest in political conditions there. "If they get money from China, they have to consider human rights," he commented.

The Yahoo Human Rights Fund will be used specifically to "help the people that relate to Yahoo cases or other Internet cases in China," Wu added, by paying for legal fees and other compensation.

Wu recalled that while he was serving as a representative for two Chinese dissidents, Yang approached him last year with the idea for the fund. The dissidents had been detained for posting messages to pro-democracy Web sites using their Yahoo accounts, and eventually sued the company in California for handing information over to the Chinese government.

“ 'Yahoo got to this point kicking and screaming, to be sure.' ” — Morton Sklar, attorney

That case drew the attention of the U.S. House Foreign Affairs Committee, which summoned Yang to a humiliating public hearing focused on the company's ethical shortcomings. See related story.

More recently, a second suit was filed in California earlier this month by Chinese political activists alleging that Yahoo helped the government track their activities online, leading to the arrest of Li Zhi -- who is described in court filings as a member of the "China Democracy Party." See related story.

Kirk Donahoe, an assistant director at Wu's organization, said that the fund would not be used to aid plaintiffs in the more recent lawsuit. "We do not provide support to anyone who is involved in a lawsuit against Yahoo," the spokesman pointed out.

Morton Sklar, an attorney who represented plaintiffs in the original case filed against Yahoo in California last year, said that the fund is sends a positive message to others doing business in China.

"It recognizes that the problem is widespread," Sklar noted of Yahoo's fund, adding that "Yahoo got to this point kicking and screaming, to be sure."

Friedland said he's glad to see Yahoo take a stance on the issue, rather than simply fighting back with public-relations spin. "Because they only have a minority stake in [Alibaba], they're a little more free to be critical ... up to a point."