David Prosser: Why James Murdoch must step down as chairman of BSkyB

Outlook: Sky, now a prominent FTSE 100 company, deserves a chairman who is able to devote the sort of time to its affairs that befits an operation of such scale
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The Independent Online

Should James Murdoch step down as chairman of BSkyB, a move for which there is a growing clamour? Of course he should: even putting aside the controversies of the past two weeks, Mr Murdoch should never have become chairman in the first place. That he did so in 2007 was a breach of not one but two principles of the UK's Combined Code on corporate governance, the City's rulebook on such matters.

The code makes it clear that it is not good practice for a company's chief executive (the post Mr Murdoch previously held at Sky) to become its chairman, since this encourages a cosy game of musical chairs in which senior executives are not properly held to account. The code also makes it clear that a company's chairman should not have a connection to a major shareholder. Mr Murdoch could hardly be more in breach.

Sky and Mr Murdoch were able to overcome these difficulties, because the code operates on a "comply or explain" principle – whereby if a company chooses not to abide by its provisions, it must give an account of its actions. Sky's explanation wasn't particularly convincing – it said the board had decided Mr Murdoch was the best man for the job – but it was enough. Although some shareholders did vote against Mr Murdoch's elevation, the rebellion, in the end, was relatively small.

Three-and-a-half years on, it is worth noting that one of the prominent figures doing the explaining for Sky back then was its senior independent director, Nicholas Ferguson, the man now being tipped to replace Mr Murdoch should he stand down. We shall have to see if Mr Ferguson presses his independence more forcibly this time around.

He must. For never mind the theory of corporate governance, think about more practical matters. Sky, now a prominent FTSE 100 company, deserves to have a chairman who is able to devote the sort of time to its affairs that befits an operation of such scale. Can Mr Murdoch really make that commitment, given the rather pressing demands of his day job just now, as the man in charge of News Corp's European operations?

Then there are the conflicts of interest to worry about. One of them, it is true, has gone. MrMurdoch had to absent himself from all board discussions of News Corp's bid to buy the company in full, but that matter is resolved, for now at least. Unfortunately, it has been replaced by the worry that Ofcom might declare News Corp not fit and proper to hold such a large stake in Sky. That one is going to be tricky for the current chairman too.

Taking a leaf outof BAE's book?

If News Corp previously underestimated the toxicity of this scandal, as many of its critics believe, the response it announced yesterday suggests it is beginning to get the picture. For the appointment of an independent peer to oversee ethics at News International is a play taken from the book of BAE, which did something very similar in an attempt to put the affair of its arms contracts with Saudi Arabia behind it.

At BAE, it was Lord Woolf who was charged with improving transparency and raising ethical standards at a company that, until political pressure was brought to bear on the Serious Fraud Office, had been facing claims that it had bribed senior Saudi officials to win arms deals.

At News International, it is Lord Grabiner who yesterday agreed to head an independent management and standards committee reporting back to the News Corp board. The equivalence of the remedies put in place at the two companies is an indication of just how serious this has become.

Still, News Corp will be aware that BAE played its cards very smartly. Lord Woolf's inquiries at the defence company have improved its standing – not least because of a number of valuable recommendations he made – but he was not asked to look into the original controversy of the Saudi deals, which meant, rather usefully, that there was no chance of another round of embarrassing revelations. We do not yet have the terms of reference for the committee that Lord Grabiner will chair, but it will be interesting to see whether News Corp has learned this lesson from BAE too.

When are train builders British?

Is there about to be another outcry over public sector procurement? Reports yesterday suggested that Invensys, the British engineering company, may have to shed several hundred jobs because it lost out, earlier this year, to a foreign company when tendering for work on the London Underground.

The identity of that foreign company may surprise you. It hails from Canada and its name is Bombardier. Only a fortnight ago, of course, the boot was on the other foot, with Bombardier warning of big job losses at its UK operation after it lost out to Germany's Siemens on a contract to build rolling stock for Thameslink.

The row over that contract rather missed the point that Siemens intends to do much of the work in Britain (although not all of it, to be fair), just as Bombardier would have done. This was essentially a spat between two foreign companies over who should get to employ more British workers.

With Bombardier having won this time, will those who said it should have been favoured during the tendering process, because of it large British business, complain about the treatment of Invensys and its employees? Don't bet on it.

The underlying principles in these arguments remain the same, however. Under European law, Britain cannot favour bidders perceived to be British and nor should it – value to the taxpayer is the paramount issue. As it turns out, the "Britishness" of the bidder may well vary depending on the result of the tendering process.