Yahoo promised to pay the families' legal bills and to create a fund to "provide support to other political dissidents and their families," but the Sunnyvale, Calif.-based company wouldn't disclose other details of the agreement.
"After meeting with the families, it was clear to me what we had to do to make this right for them, for Yahoo and for the future," Yang said in a statement released Tuesday. "At Yahoo, we believe in the transformative power of the Internet. That's why we are so committed to working to support free expression and privacy around the world."
But human-rights groups criticized Yahoo's requirement that the settlement's terms be kept confidential.
"Because this agreement has been kept secret, we can't be sure that Yahoo is taking the commitment to end censorship seriously," said Amy O'Meara, director of business and human rights at Amnesty International USA.
The controversy surrounds Yahoo's decision in 2004 to turn over to Chinese police, at their request, the names of journalists who had used Yahoo services to share material advocating democratic reform. The information led to the conviction of Wang Xiaoning, who was sentenced to 10 years in prison for "incitement to subvert state power." Another journalist, Shi Tao, was imprisoned too.
The journalists' families filed suit in a federal court in San Francisco in April against Yahoo and Alibaba, a Chinese Internet company in which Yahoo owns a minority stake.
But it was not until after congressional hearings last week that the company engaged in settlement talks, said Morton Sklar, executive director of the World Organization for Human Rights USA, which represented the families.
"It took a tongue-lashing from Congress before these high-tech titans did the right thing and coughed up some concrete assistance for the family of a journalist who Yahoo had helped send to jail," Rep. Tom Lantos (D-Burlingame) said Tuesday. "What a disgrace."
Lantos, chairman of the House Foreign Affairs Committee, told Yahoo executives that "morally you are pygmies" during his committee's hearings. He said the settlement did little to ensure that Yahoo and other U.S. Internet companies would abide by international human-rights standards when they operated abroad.
Lantos said he and other lawmakers would continue to push for legislation making it a crime for Internet companies to give personal information about their users to governments that use it to suppress dissent.
"I'd rather have a written agreement that was public, that could be enforced by the court and that spelled out Yahoo's complicity," Sklar said of the deal. "But to get those elements would have taken us four or five years of continued litigation, and it was much more important to get a little bit less assurance in return for faster action."
Sklar said the families "wanted to put their hopes in the personal commitment of Jerry Yang" to help free the journalists. "Jerry Yang can go to China and say, 'Give us some relief and free these journalists. Otherwise Congress will act.' "
Although Yahoo's reputation among lawmakers has taken a beating, many of its customers, business partners and investors haven't paid much attention, analysts said.
"Does the brand take a hit? Yes, definitely," said Charlene Li, an analyst with Forrester Research. "Will it have an impact whether people will want to do business with them or use their services? No, I don't think it will."
Investors appeared to shrug off the negative attention, pushing Yahoo's shares up $1.32, or 5.3%, to $26.10.
The case highlights the difficulty of technology companies doing business in emerging markets that don't carry the same values and laws as the United States, said Barry Parr, an analyst with JupiterResearch.
Doing so might mean blocking access to certain websites or disclosing information about users in ways that aren't acceptable in the U.S., he said.
"Those are not simple problems," he said.