James Murdoch’s Future at Stake as BSkyB Board Meets

The phone hacking scandal riling the British political and media worlds has posed a significant challenge to British Sky Broadcasting, the lucrative satellite television network that has long been the centerpiece of Rupert Murdoch’s European ambitions.
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On Thursday, BSkyB’s board will meet for the first time since the outcry over phone hacking by one of Mr. Murdoch’s tabloid newspapers forced his News Corporation to drop its bid to buy the 61 percent of outstanding shares in the network that it does not already own. The future of BSkyB’s broadcasting license and the fate of its current chairman, Mr. Murdoch’s son James, are on the line, analysts said.

“The biggest issue is whether James Murdoch is to remain chairman,” said Steve Liechti, an analyst at Investec Securities in London. “Given the issues going on with News Corp. and James Murdoch’s position within that business, it may be seen that it is not appropriate.”

The meeting comes as Ofcom, the British broadcasting regulator, proceeds with inquiries into whether BSkyB remains “fit and proper” to hold a broadcasting license because of the scandal unfolding at the News Corporation. BSkyB’s share price has dropped 14 percent since the latest phase of the affair erupted this month.

Several former employees of News International, the News Corporation’s British newspaper empire, have been arrested in the investigations into telephone voice mail hacking and corruption at The News of the World, which Mr. Murdoch shuttered this month.

James Murdoch, who is head of the News Corporation’s European operations, which include News International and BSkyB, approved a £725,000 settlement (about $1.1 million) to a hacking victim in 2008. In Parliament last week, he denied he was ever told that underlying evidence in the case implicated a second reporter at the tabloid, in addition to one convicted in 2007, although two former senior executives of News International have questioned his testimony.

Executives at BlackRock, BSkyB’s largest shareholder after the News Corporation with a 7.7 percent stake, and other large shareholders declined to comment about the matter, citing company policies not to speak to the news media about their holdings.

But some smaller shareholders and corporate governance experts have expressed concerns about the board structure at BSkyB and have raised questions about whether Mr. Murdoch should stay as chairman.

A BSkyB spokesman would not say whether the scandal or Mr. Murdoch’s position would be discussed at Thursday’s board meeting. “The company is very committed to good governance,” the spokesman said. A spokeswoman for the News Corporation offered no comment.

Theo Blackwell, a councilor for London’s Camden district, whose public pension fund invests in BSkyB, said he has requested a review of the investment.

Paul Myners, Britain’s former government minister for financial services, said BSkyB’s 14-member board urgently needs a change because “a significant number” — four members — have been directors for more than nine years. Four others are on the News Corporation payroll.

Mr. Myners said Mr. Murdoch probably should remain on the board but not as chairman. “Most corporate problems can be traced back to poor corporate governance and this company falls short in that respect,” he said.

Pensions Investment Research Consultants, which offers independent advice to institutional investors, has advised BSkyB shareholders to urge that James Murdoch be replaced.

“His relationship to the controlling shareholder clearly compromises his independence,” said Alan MacDougall, the firm’s managing director. “Questionable governance practices have been tolerated at BSkyB for a long time, and unfortunately many shareholders have not effectively challenged them. That must change.

“In light of current events, it is time for the board to review whether BSkyB and its shareholders would benefit from a new, independent chair,” Mr. MacDougall said.

At least three shareholders in BSkyB voted against James Murdoch’s appointment in 2008: Aviva, Legal & General and Co-operative Asset Management, money managers whose BSkyB investments are mainly part of an index-linked fund.

“There were concerns about him being named and the way he was parachuted in,” said one of these investors, speaking on condition of anonymity because he prefers not to discuss the issues with the news media. “These concerns remain.”

Co-operative, which owns a 0.003 percent stake in BSkyB and a 0.1 percent stake in the News Corporation, said in an e-mailed statement that “radical reform” was needed at both companies but especially at the News Corporation, “and indeed in the newspaper industry in the U.K., to stamp out the kind of illegal and grossly invasive practices that are alleged.”

Julian Franks, a finance professor at London Business School, said: “The board’s independent directors have to ask themselves” what happens if James Murdoch resigns and none of Rupert Murdoch’s other children can get into the job?

“Murdoch might think, ‘What’s the point in me being in that business,’ ” and could sell his BSkyB investment, which would hurt the share price, Mr. Franks said.

In a letter to lawmakers last week, Ed Richards, Ofcom chief executive, said its judgment on whether BSkyB was fit and proper to hold a broadcasting license did not depend on criminal convictions in the case.

A spokesman for Ofcom, Ed Taylor, said the concept of “fit and proper” had no fixed definition and it was the regulator’s responsibility to interpret it. There was no timeline for ending its inquiries.