Yahoo shareholders showed their dissatisfaction with the internet company’s performance on Tuesday, giving only a lukewarm endorsement for the re-election of the board of directors.

Only a year ago, Terry Semel, chief executive, had received a 99 per cent vote in favour of his re-election. on Tuesday, the company announced its board as whole had been re-elected with only 66 per cent support.

Yahoo’s share price declined by 35 per cent during 2006, even though its chief executive’s compensation package of $71.7m was the highest of all chief executives’ in the S&P 500, according to an Associated Press survey.

Shareholder advisory groups had urged investors to withhold their votes for three directors serving on Yahoo’s compensation committee.

Yahoo has been overtaken by Google as the leading internet company. It was slower to capitalise on search advertising. It bought Overture, a rival to Google, for $1.6bn in 2003, but then realised Google had the better technology and set about building its own search advertising platform – code-named Panama – which is set to be rolled out this year. Mr Semel urged shareholders to give it time and said its success should be judged at the end of the year.

He sought to counter reports of low morale among staff and difficulties filling top positions, with eight top executives having left the company in the past year. Yahoo was on Fortune magazine’s list as one of the best places to work, he said, and the developers of Panama were “very happy campers.”

Jerry Yang, Yahoo co-founder, said internal perceptions of what could be accomplished by the company were different from external ones and his team couldn’t wait to prove they were right.

Mr Semel said: “We think, without any question in our mind, we are going to narrow that gap (with Google) and will be able to say more publicly very shortly.”

He defended Yahoo’s acquisition strategy – it stood by as Google bought the YouTube online video service and announced a deal for the DoubleClick online advertising company – stressing how it had picked up relatively inexpensive Web 2.0 companies such as the photo-sharing site Flickr, which was expanding globally.

Shareholders criticised Yahoo for co-operating with the Chinese authorities and allowing censorship. One read out a letter from a mother whose son had been jailed for 10 years after Yahoo passed on his information. Mr Yang said it was working with others on a set of global principles for freedom of expression.

“We, the employees and the executive team at Yahoo, are dismayed and distressed by the impact of people in prison in China and around the world. We have been and will continue to be actively engaged for the long-term,” he said.

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