45.  It is essential that a body receiving more than three billion pounds of public money each year is governed and regulated so as to command the confidence of the public and the wider industry.[23]

46.  In chapter three we foreshadowed our intention to make recommendations for a clearer division of management, governance and regulatory responsibilities and to promote accuracy in BBC reporting (and in its output more generally). Following Lord Hutton's inquiry and report, the BBC has responded constructively to the management issues which arose, notably by commissioning and implementing the Neil Report.[24] But important governance and regulatory issues remain.

47.  Despite the Government's proposed arrangements for BBC governance and regulation being among the most controversial parts of the Green Paper, the Secretary of State told us they have White Paper status and therefore are not open for consultation: "The Green Paper was quite deliberately framed in a way that was a bit like a pistachio ripple: there were some white proposals which had White Paper status, particularly on the regulatory framework and governance" (Q 1797). Because of this we can only conclude that the Government and the BBC are committed to the course set out in the Green Paper. This illustrates the fundamental flaw in the process of defining a Royal Charter which we discussed in the last chapter. It is precisely the parts of the Green Paper to which the Government has given White Paper status that command little support from commentators—including the independent panel, chaired by Lord Burns, which the Government appointed. We received considerable evidence criticising the Government's proposals in this area. For example Sir Christopher Bland, Chairman of the BBC from April 1996 to September 2001, told us "I do not think the proposals, as laid out in the Green Paper, do work or will work. They are an uneasy compromise between having a separate regulatory body and a German-style two-tier form of governance" (Q 1008). We therefore regret that the Government have indicated that they will be inflexible about their governance and regulatory proposals and that as a result Parliament has been and will be excluded from playing any part in shaping and approving them. We note that the even if these proposals do have "White Paper status" this does not preclude the Government from changing them. There is absolutely no reason why White Paper proposals cannot be changed and indeed they frequently are.

48.  The Government have stated that "Governance is the central issue for this Charter Review" and that the BBC must be held to its public purposes through a "powerful governing body".[25] However, the solution they put forward, the BBC Trust, is not simply a governing body. It has regulatory functions too. We believe these functions need to be considered separately.

49.  Governance involves the arrangements which ensure that the interests of both society at large and the members/owners of an organisation are taken into account. With reference to the BBC it can be said to involve six main tasks: supervision of management; representation of licence fee payers' interests; accountability for the use of public money; interpretation of and safeguarding the delivery of Public Service Broadcasting (PSB); guardianship of the BBC's editorial independence and ensuring high levels of quality and accuracy in BBC coverage of the world. Regulation involves specifying and ensuring adherence to rules that secure the public interest. The Government is attempting to address defects in the governance and the regulation of the BBC by changes exclusively to its governance and we believe this cannot and will not work.[26]

Why is reform necessary?

50.  At the moment the BBC is governed by a Board of Governors who are appointed by the Queen in Council and work within the terms of the Royal Charter to deliver the objectives set out in the BBC's Agreement with the Secretary of State. The BBC is managed by an Executive Board appointed by the Board of Governors. The legal personality of the BBC rests with the Board of Governors.

51.  These arrangements have served well enough in the past. Under this system the BBC developed into an internationally respected institution. In chapter two we referred to evidence testifying to widespread respect for the BBC and we recognise that this respect has been earned by a BBC operating under a Board of Governors. Lord Burns explained that his independent panel had not concluded that there had been many great problems in the past, or that the system was fundamentally broken, but believed change was necessary because the world outside the BBC had changed not least in corporate governance and the shape of the media industry (Q 240). We agree. The changing broadcasting market has put the BBC in an increasingly complex and challenging market position that requires careful independent regulation and distinct governance. In addition, the last decades have seen the emergence of more rigorous systems of corporate governance in both the public and private sectors. We consider the case for change in both these areas below.

THE NEED FOR CLARITY IN CONTENT REGULATION

52.  There is no single body responsible for regulating all the BBC's activities. Whereas Ofcom is responsible for all areas of content (and competition) regulation in respect of the UK's other broadcasters, it shares responsibility for some aspects of regulation of BBC content with the BBC's Governors. Recently, for example, both the BBC and Ofcom adjudicated on the complaints each had received in connection with the BBC's broadcast of "Jerry Springer: the Opera".

53.  The Communications Act 2003 splits regulation of broadcasting content into three tiers.

• tier 1 regulations relate to avoidance of harm and offence, impartiality, subliminal messages and fairness and privacy;
• tier 2 regulations apply to designated public service broadcasters and consist of quotas for certain programmes (e.g. news) and types of production (e.g. out of London production);
• tier 3 regulations comprise the public service remit of designated public service broadcasters (e.g. the monitoring of statements of programme policy for each channel).

THE NEED TO REPRESENT THE LICENCE FEE PAYER

56.  42 per cent of respondents to the Government's initial consultation addressed the issue of accountability. Of these around two-thirds said they wanted increased accountability to the public. There was a strong sense that public involvement might extend further than at present, delivering advice and feedback on broader strategic and policy issues.[27] The Government believe that "it has proved difficult for the existing Board of Governors to represent both the public interest and the BBC executive at the same time".[28]

57.  We believe that any reform of the BBC should secure:

• a governance body which sees itself as responsible to the licence fee payer, not to the Government, and which strives to connect with the licence fee payer on a regular basis;
• a clear and understandable independent regulatory system;
• a simple complaints procedure which must have the confidence of the licence fee payer and the wider industry.

The BBC's own proposals for reform

58.  The BBC recognises that its system of governance must change significantly if it is to retain public confidence over the next Charter period.[29] In Building Public Value the BBC proposes to "ensure clear and indisputable independence of the Board of Governors from the management of the BBC … introduce a new framework of transparent scrutiny of the BBC's activities by the Board of Governors... [and] make the BBC more responsive and accountable to the British public".[30] To realise these objectives the BBC has already established a distinct Governance Unit to advise the Governors; it has overhauled its complaints system and proposes to introduce a public value test for new services. To connect better with the licence fee payer it has created a Governors' website and began holding "Annual General Meetings". It also intends to use new technology to engage with licence fee payers and to give a stronger role to its advisory bodies.

59.  Some of the BBC's new ideas for engaging with the licence fee payer are promising but its proposals to reform governance and regulation have not gone far enough. The Government agree. Lord McIntosh of Haringey, the then Minister for Broadcasting, told us that the BBC's proposals represented behavioural change when structural change was needed (Q 104).

60.  There are two schools of thought about the necessary structural changes. The first (based on current arrangements) advocates responsibility for regulatory duties continuing to rest with the BBC. The Government are proponents of this school. The second gives the regulatory powers, currently vested in the BBC Governors, to a body independent of the BBC. The Lord Burns Panel proposed such a model. We will consider the pros and cons of Lord Burns's model first, before considering the Government's model and finally proposing our own model.

The Lord Burns Panel's proposals for reform

61.  The Lord Burns Panel proposed a new independent body called the Public Service Broadcasting Commission (the Commission). The Commission would be "small" and have a Chairman and non-executive commissioners appointed by the Government. Ofcom's regulatory role in respect of the BBC's commercial activities would be strengthened. The Commission would also assume the Government's powers to approve new BBC services. An important, and controversial, feature of the Commission is that it would have powers to judge how much of the licence fee should be awarded to sustain public service broadcasting outside the BBC (see chapter five).

62.  Under this model the BBC would be run by a unitary BBC board modelled on best corporate governance practice. The board would have a majority of non-executive directors including a non-executive chair. It would remit some governance functions to dedicated nomination, remuneration, audit and complaints sub-committees. The unitary BBC board's non-executive Chairman would be appointed by the Government and (together with another non-executive director and an independent appointee e.g. from the Civil Service Commission) would recommend other non-executive appointees to Government. The legal personality of the BBC would reside with the unitary BBC board.

63.  Ofcom would have increased competition powers to regulate the BBC's commercial activities and the interface between its commercial and PSB activities. Ofcom would also carry out market impact assessments of BBC services at the request of the Commission.

64.  These proposals have two clear strengths. First, there is much to be said for the creation of a unitary BBC Board to take on the governance and supervision of the management of the BBC. And secondly, there is a clear separation between regulator and regulatee—the BBC would no longer be seen as judge and jury in its own cause.

65.  The unitary board is a clearly understood governance model with a proven UK track record. Sir Derek Higgs, author of the review of the role and effectiveness of non-executive directors,[31] told us "The overwhelming feeling in this country in the corporate sector was that a unitary board had clear advantages over a supervisory board structure; part of that is familiarity, culture and history" (Q 1265). Although Sir Derek did not personally support this structure for the BBC (Q 1263) we agree with Lord Burns—it provides a clear, workable model for the BBC. We share Sir Christopher Bland's view that "in spite of the zeitgeist of the times, a unitary Board of Governors actually makes the most logical sense" (Q 1015).

66.  Separating the regulator of the BBC from the BBC is widely supported. ITV told us that "independent and objective regulation of the BBC is essential to provide maximum accountability to licence fee payers and responsiveness to the legitimate concerns of the BBC's commercial competitors" (p 114). The Satellite and Cable Broadcasters Group told us that "The appropriate way for the BBC to be operated and regulated is, like every other British broadcaster, under licence—either from Ofcom or from a newly established Public Service Broadcasting Commission" (p 235).

67.  However, we are concerned about three aspects of Lord Burns's model. First, that the Commission would have powers to allocate some of the licence fee to other public service broadcasters. This would break the link between the licence fee payer and the BBC (see chapter five). Sir Christopher Bland told us the Commission model "only makes sense if you want contestable public service broadcasting funds" (Q 1025). Second, this model involves creation of a new regulator with all the resource requirements that such a body would entail. Another regulator would further complicate matters for complainants. Third, this model leaves the weak link between Ofcom's responsibilities on the one hand for periodical review of public service television and for regulation of the sector to secure public service goals and on the other Ofcom having fewer regulatory powers in respect of the BBC than it has in respect of other PSBs.

The Government's proposals for reform

68.  The Government believe, as Lord McIntosh of Haringey told us, that they have taken "the best bits" of the proposals from the BBC and Lord Burns's Panel (Q 104). A BBC Trust would replace the Board of Governors and a formally constituted BBC Executive Board would take responsibility for the management and delivery of all the BBC's activities. The Executive Board would contain a significant minority of non-executives and would be accountable to the Trust for its performance.

69.  The Green Paper sets out the proposed functions of the BBC Trust and Executive Board.[32] The Trust's responsibilities would be broadly the same as those of the current Governors but would differ in the following ways

• The Trust would issue service licences;
• The Trust would approve the BBC Executive Board's nominations for its non-executive members and may appoint a non-executive, rather than the Director-General, to chair the operating/executive board;
• The Trust would determine the remuneration only of the Chairman of the Executive Board (but may also define the parameters within which remuneration for others is set);
• The Trust would assume power to approve new services currently held by DCMS (though the Government will retain important loci of control by retaining responsibility for what the Green Paper calls "final sign off") but will be required to involve Ofcom on "market impact issues";
• The Trust would have a stronger role in holding management to account (defining performance criteria and measures of delivery rather than "monitoring performance");
• The Trust would have a stronger role in promoting transparency, and thus accountability, to licence fee payers e.g. through commissioning value for money (VFM) studies and consulting with licence fee payers.

70.  The Government have adopted Lord Burns's recommendation that Ofcom should undertake market impact assessments of proposed new BBC services (see paras 219-224).

71.  The Government's proposed structure resembles a German two-tier board. Sir Derek Higgs told us that he saw the proposals as "akin to a supervisory board/management board situation" (Q 1272). However, Sir Christopher Bland described it as an uneasy compromise between a separate regulatory body and a German-style two-tier form of governance which did not clearly separate responsibilities (Q 1008). His view was that "If you are going to have a two-tier structure then something closer to a supervisory board in a German corporation makes more sense" (Q 1023).

RESPONSIBILITY FOR GOVERNANCE AND REGULATION

72.  The Government state that their model adopts Lord Burns's recommendation of clear separation between governance and regulation.[33] However, Lord Burns told us that the Government's model does "not go far enough as far as the separation is concerned" and that he would have preferred "a greater degree of separation so that they were clearly seen as distinctive animals" (Q 228). Other witnesses agree. Channel 4 told us "Although these proposals seek to create a structure within which there is a clear separation of functions… it is not yet clear that they will avoid the possibility of 'confusion or capture'" (p 64). BSkyB stated "By proposing a new BBC Trust to be responsible for 'oversight' (a term which encompasses both governance and regulation) and a new Executive Board to be responsible for 'delivery', the Green Paper seeks to clarify the distinction between the governance and management of the BBC, rather than clarify the distinction between the governance and regulation of the BBC… it does not address shortcomings in the current regulation of the BBC" (p 149).

73.  We have sympathy with these concerns. We also note that the skills and experience needed by Trustees to carry out their governance role will be very different from those needed to carry out their regulatory role. This further weighs against giving both responsibilities to one body.

74.  We believe an effective separation between governance and regulation can only be realised if the two roles are carried out by clearly distinct bodies. Neither the licence fee payer nor the BBC's competitors will have full confidence in a regulatory body unless it is quite separate from the BBC itself. We set out the details of our preferred model in paras 91 to 112.

THE HANDLING OF COMPLAINTS

75.  The BBC has recently overhauled and improved its complaints system. The Green Paper does not propose change to the system (though responsibility moves from the Governors to the Trust). Therefore the Government's model neither provides for a single body to which complaints should initially be made, nor for assuredly independent adjudication of appeals. The Government's model preserves the current confusing position whereby complainants to the BBC may also complain to Ofcom—except where the complaint concerns impartiality or inaccuracy when jurisdiction rests with the BBC.

76.  Whilst it is important that people should first address complaints to the organisation which is the subject of complaint (not least so that it can understand how its outputs are received) the split between the BBC's and Ofcom's responsibilities is unhelpful and confusing to complainants. Moreover, Ofcom's complaints procedure sets a time limit for submission of a complaint of six weeks (radio) or three months (television) after transmission. There is therefore a danger that viewers and listeners may run out of time if they first complain only to the BBC and subsequently refer their complaint to Ofcom. We note that there does not appear to be a warning to this effect on the BBC website.

77.  We believe that the BBC should have the opportunity to respond to all complaints in the first instance. However, it is essential, in the interest of clearness and transparency, that there should be a single body, independent of the BBC, to which complainants about BBC content and services can appeal and receive a final and independent adjudication. We set out the details of our preferred model in paras 100 to 110.

TWO CHAIRMEN

78.  The Government state that the Executive Board will be chaired by the Director-General, or, at the discretion of the Trust, a non-executive.[34] We are concerned about the confusions and uncertainties that might arise should anybody other than the Director-General chair the Board charged with managing the BBC. Sir Robert Phillis, the Chief Executive of the Guardian Media Group, told us that "the Chief Executive, must have a clear accountability to one person and not two. I think the notion of the chair of the Executive Board, the operating board, being the Director-General is the correct one" (Q 1273).

79.  Michael Grade told us that the Government's proposal was "a recipe for conflict" (Q 1737). Sir Christopher Bland agreed and said that "two chairmen will raise difficulties… Who is in charge and what happens when those two boards disagree?" (Q 1020). Greg Dyke described the likely relationship between the Chairman of the Trust and a non-executive Chairman of the Board as "warfare" (Q 378).

80.  We do not think that the Government's proposals are sensible and note that our evidence shows that current and past senior BBC management figures share this view. We recommend first that there should be one Chairman of the BBC, i.e. the Chairman of the BBC Board, and second that the management committee (called the Executive Board in the Green Paper) should be chaired by the Director-General.

THE ROLE OF NON-EXECUTIVES

81.  The Government proposes a significant minority of non-executive members on the BBC Executive Board. We note that the Trustees (i.e. those sitting on the BBC Trust proposed by the Government) are also non-executive. We are concerned about the proposed role of non-executives on the BBC Executive Board. Their role will be very demanding and highly unusual. The Executive Board meets much more regularly than a standard company board and is responsible for much day-to-day management. In practice, if the BBC Executive Board has non-executive members, is likely that there will be a formal Executive Board, including non-executive members, and an informal Executive Board which deals with the day-to-day management of the BBC but which non-executives do not attend. This will introduce a further level of complication and potential tension in the organisation.

82.  The German supervisory board structure does not include non-executives on the management board. In the traditional UK unitary board structure non-executives never sit on the management board. The Public Voice coalition, a voluntary sector body campaigning for citizens' communications interests, told us "The presence of non-executives will create a new dynamic which may undermine the unity of the Board as broadcasters in deciding how the purposes are to be delivered; and could potentially lead to decisions being taken 'outside the boardroom'" (p 166). The Government state that the non-executives are there as critical friends. We believe that is a duplication of the role of the Trustees.

83.  We recommend that there should be no non-executive members on the BBC's Executive Board.

APPOINTING THE CHAIRMAN

84.  The Green Paper is silent on how future chairmen of the BBC will be appointed. It simply states that all members of the BBC Trust shall be appointed by the Crown and that the process shall be subject to the full Nolan procedures for public appointments.[35] That is, current arrangements should continue, meaning that the Government retains the power to appoint the Chairman of the BBC. The job description will be drawn up by DCMS, the selection panel is likely to chaired by the Permanent Secretary at DCMS and the panel will recommend an appointee to the Secretary of State at DCMS who will have the power to accept or reject the recommendation. Again the Government have not seized the opportunity to ensure a truly independent BBC.

85.  Following Gavyn Davies's resignation, the Government decided an extra level of oversight was needed to ensure confidence in the independence of the process used to appoint his successor. To this end a scrutiny panel was convened in addition to the traditional selection panel. The scrutiny panel was chaired by the Commissioner for Public Appointments and included three senior privy counsellors. The aim of the scrutiny panel was to ensure that the appointment process was conducted professionally, openly and fairly and complied fully with the code of practice for public appointments. The members of the scrutiny panel were not involved in drawing up the job description or in selecting the best candidate, but were simply there to ensure that the process was carried out fairly and properly.

86.  The Leaders of the three main parties were each asked to nominate a privy counsellor to sit on the panel. However, the Conservative nominee, Lord Baker of Dorking, declined to take part. He argued that the scrutiny panel should be asked for views on the nature of the person who should get the job. In a letter to Dame Rennie Fritchie he stated "I would have expected the privy counsellors to be rather more involved in the selection process".

87.  Tony Wright MP, Chairman of the House of Commons Public Administration Committee, argued that these arrangements did not sufficiently ensure independence. He stated that "the Government… acknowledges the problem with the key constitutional appointments under the present arrangements. It seems to imply that the Nolan rules are not enough, even with someone like the present Commissioner for Public Appointments to keep an eye on the process".[36]

88.  We note that the Green Paper does not even go as far as to state that future appointments of BBC chairmen will have the additional layer of scrutiny that the last appointment had, however inadequate that may have been. But even if it did we do not believe that would go far enough. We believe that the chairman of the BBC should be chosen on the basis of a recommendation by a truly independent panel. To this end we recommend that there be a duty on the Secretary of State to appoint a selection panel with a majority of non-political members and with a balance between its members who have explicit political allegiances. The panel should be chaired by a non-political member who is not a civil servant. This panel should operate according to Nolan principles and should recommend a short-list of one to the Prime Minister.

89.  The Voice of the Listener and Viewer argued that "transparency in the appointment of its Trustees is absolutely essential… we believe that it is incumbent upon Parliament to establish a system which is open and transparent and which commands the respect of licence-fee payers" (p 162). We recommend that other members of the BBC Board (or the BBC Trust in the Government's model) should be appointed in a similar manner to that described above with consultation of the BBC Chairman.

90.  In conclusion, we urge the Government to fundamentally re-think the BBC Trust model and adopt our proposals.

Our model

91.  We propose a model which takes the three roles of management, governance and regulation and gives each of them to a different body.

MANAGEMENT AND GOVERNANCE

92.  For the reasons set out in paras 64 to 66 we propose a unitary BBC board, named the BBC Board, responsible for governing the BBC in accordance with best corporate governance practice. This board should see itself as responsible to the licence fee payer.

93.  The BBC Board should have a majority of non executives and a non-executive Chairman who would be the Chairman of the BBC. The Director-General, Deputy Director-General and the Director of Finance should all be members. The non-executive members should perform a wide range of governance functions such as chairing the remuneration, appointments, audit, standards and complaints committees.

94.  The BBC Board should sit above a management committee of senior executives which should be chaired by the Director-General. The appointments committee should make recommendations to the Board for the appointment of the Director-General.

95.  The role of the Board should be to provide strategic oversight of the BBC's activities; hold the BBC management to its public service remit; maintain programme standards of quality and distinctiveness and secure the BBC's editorial and journalistic independence. It should approve budgets and be accountable for the use of public money. It should have a clear and distinct complaints committee where complainants are directed in the first instance. However, it should not have regulatory responsibilities.

96.  Ensuring the accuracy of BBC reporting is a governance issue and not a regulatory issue. Governance addresses "must do" matters and one such vital matter is ensuring accuracy of reporting. Regulation addresses "must not do" issues. Regulation can inhibit inaccuracy through effective and appropriate sanctions. But it cannot actively ensure accuracy or monitor output for accuracy on a day-to-day basis. Accuracy is a particularly important governance issue as the events which led to Lord Hutton's inquiry show. We believe that a major role of the BBC Board must be to foster and maintain a commitment to accuracy among BBC staff.

97.  The membership of the BBC Board will be important. The Green Paper states that "Trust members need to be able to reflect the interests of a wide range of different communities (including members with the knowledge and expertise to understand and articulate the interests of individual devolved nations) and they need to have a range of expertise…".[37]

98.  The Public Voice coalition told us that "all of the proposed purposes inherently require the BBC to be closely and continuously engaged with citizens and civil society. It is therefore vital to have a sufficient number of individuals appointed who have a real engagement with and experience of civil society and community action… and not just to rely on 'traditional' recruiting grounds among former public servants, financial experts and so on" (p 167). As well as reflecting the interests of a range of communities we also believe it would be valuable to the BBC if some of those responsible for its governance had specific skills and expertise in relevant media fields.

99.  We believe it is vital that the skills of the Board members go beyond financial and managerial qualifications. Members of the Board should represent a range of experience from across public life, business, the professions and civil society. We do not believe that any Board member should have duties to represent a particular constituency or interest group. The aim of the selection process should be to find the best members irrespective of where they come from. Members of the Board should be the best people for the job from across the United Kingdom. We would expect the Board between them to have experience and knowledge of the nations and regions of the United Kingdom.

REGULATION OF CONTENT

100.  An independent regulator is also vital. However, we do not think that the creation of a new regulatory body as proposed by Lord Burns represents value for money or makes broadcasting regulation either more effective or clearer for the public.

101.  Ofcom already exists as the wider industry regulator and, if it were to develop a stronger Content Board, it could be given further duties to regulate the content of BBC television and radio. It already has the competence and experience to regulate PSB because of its varied duties to regulate Channel 4 (a non-profit organisation with a PSB remit), Channel 3 and Channel five (hybrid broadcasters with commercial and public service goals), and the BBC (in respect of all aspects of content regulation not reserved for the BBC Governors). It also has a duty to report regularly on public service broadcasting generally.

102.  We received evidence against Ofcom being given the same powers of content regulation for the BBC as it has for other broadcasters. For example, the Campaign for Press and Broadcasting Freedom stated in its written evidence that "there should be review of the current levels of Ofcom regulation of the BBC to cut back the extent to which that essentially commercially orientated regulator can interfere with the BBC's activities, and that includes Ofcom's role as the final arbiter of complaints" (p 479). Lord Burns told us that his panel had considered whether Ofcom could take on full regulation of the BBC but had decided that regulation of the BBC would be quite different from regulating other broadcasters. He cited a range of issues unique to the BBC such as ensuring "value for money… how the licence fee is being spent, whether or not it is being spent in a way and with a quality that meets the remit that it is being given by the government"(Q 233).

103.  We note concerns that Ofcom is an economic regulator. However Ofcom is not solely an economic regulator. It already regulates the content of other broadcasters and is charged with reporting regularly on PSB in the UK. Section 12(1) of the Communications Act 2003 established a Content Board as a committee of the main Ofcom board. The Content Board serves as Ofcom's primary forum for the regulation of television and radio quality and standards. It is charged with understanding, analysing and championing the voices and interest of the viewer, the listener and citizen. Ofcom explains that "It will examine issues where the citizen interest extends beyond the consumer interest, with focus on those aspects of the public interest which competition and market forces do not reach".[38]

104.  In its response to the Green Paper Ofcom does not propose that it should take on the regulation of all BBC content. However it does call for the Government to move towards greater clarity and consistency in content regulation and argues that the current arrangement, which split Tier 1 regulation between Ofcom and the BBC, risks implying to the public that there are no common standards of acceptability and quality which should be applied to all broadcast news reporting.

105.  In his evidence to us Lord Currie of Marylebone, Chairman of Ofcom, said that he thought there were advantages to the BBC being regulated by an outside body (QQ 408 and 409). He went on to state that "On balance if we were pressed we would say it would make sense for us to do the regulatory role"(Q 416). The Commercial Radio Companies Association argued for Ofcom to be given this role. In its evidence to us it stated "Ofcom should apply any type of regulation which commonly applies to all broadcasters… External regulation of such matters will bring increased scrutiny, improve public confidence and deliver important cross-industry consistency in adjudications" (p 330).

106.  We believe that that in order to secure clearly independent regulation and clarity for complainants, Ofcom should take final responsibility for BBC programme regulation. This would mean that the Ofcom Content Board would have the same regulatory responsibilities for BBC content as it has in respect of other terrestrial public service broadcasters.

107.  This recommendation would mean that Ofcom would be responsible for adjudicating on appeals of complaints relating to the BBC's output, including complains about accuracy. However, the BBC Board would be responsible for monitoring the accuracy of BBC output and putting in place measures to safeguard and improve the accuracy of BBC reports. As we noted in para 96, ensuring the accuracy of BBC reporting is a governance not a regulatory issue.

108.  A condition of Ofcom being given this new responsibility must be that the Ofcom Content Board is significantly strengthened. At the moment the Content Board is a sub-committee of the main Ofcom Board. It does not have an independent budget or independent staff. In contrast, the Ofcom Consumer Panel was established by the Communications Act 2003 as an independent advisory panel. The Consumer Panel has a responsibility to understand consumer issues and concerns related to the communications sector. These include issues affecting rural consumers, older people, people with disabilities and those who are on low incomes or otherwise disadvantaged. The Consumer Panel operates at arms length from Ofcom and has an independent staff and budget. We believe that it is partly because the Consumer Panel has been given this status, and the Content Board has not, that Ofcom is widely perceived as a narrow economic regulator. We therefore recommend that the Content Board should be given its own budget and staff with specific skills in the area of content regulation. It should be re-established as a semi-autonomous body in the mould of the Consumer Panel and should operate in a similarly open and transparent manner. We recognise that this recommendation and the others in this section will require legislation.

109.  As mentioned in para 93 we recommend that the BBC Board should have a complaints sub-committee chaired by a non-executive. Ofcom's role should be to adjudicate on appeals against decisions on complaints made by the BBC Board. Ofcom's duties should be similar to those of a Court of Appeal. The BBC should respond to all complaints in the first instance. This could be secured by complainants first contacting the BBC, who would inform complainants of the opportunity to appeal to Ofcom if the BBC did not resolve the complaint in a fair and timely way. Similarly Ofcom would refer to the BBC all complaints about the BBC which it had received directly and would only take-up complaints if the complainant rejected the resolution offered by the BBC. In order for this proposal to work it will be important for the BBC and Ofcom to ensure that their standards, codes and complaints procedures are compatible.

110.  If this model is adopted then we believe that it will mark an improvement for the viewer and listener. Unlike now there will be a route for complainants to secure independent adjudication if they wish to appeal against BBC decisions on complaints. Unlike now it will be clear that all complaints should be directed first to the BBC and only on appeal to Ofcom and specifically the Ofcom Content Board which will have the skills and resources to take on this new duty.

Accountability for the use of public money

111.  In his evidence Lord Currie of Marylebone was very clear that while he would support Ofcom taking on content regulatory duties in respect of the BBC "that is separate from holding the BBC to account for its use of public funds in the public interest. Those are two separate roles. I do not see that latter role as ours" (Q 416). We agree with Lord Currie that Ofcom should not take on the role of holding the BBC to account for its use of public money. We recommend that the BBC Board should be responsible for ensuring the BBC secures value for money and the Board should be accountable for its use of public money. This addresses Lord Burns's point that ensuring the licence fee is spent in a sensible way is particular to the BBC and would not fit neatly with Ofcom's remit.

Audit of the BBC

112.  Before the passage of the Communications Act 2003 the National Audit Office (NAO) did not carry out value for money reviews of BBC activities. Following the passage of the Act, the NAO is carrying out some reviews, at the invitation of the BBC, for the period up to the expiry of the current Royal Charter in 2006. However, in contrast to the arrangements that usually apply to public bodies, the Comptroller and Auditor General has neither a right of access to the BBC nor discretion to choose which topics or areas of activity to examine. The BBC is the only publicly funded body for which the NAO does not have the right to conduct a full and independently selected programme of Value for Money Reviews. The Government has said it recognises that increased powers of access could be passed to the NAO and that it will consider the matter again once it is clear how the current arrangement is working.[39]

113.  We took evidence from Sir John Bourn KCB, the Comptroller and Auditor General. He told us that the current programme of reviews was going well and the relationship between the NAO and the BBC had been co-operative (QQ 1319 and 1322). However, both he and the House of Commons Select Committee on Public Accounts considered that the current arrangements can only be seen as an interim measure which should lead to the Comptroller and Auditor General being given full rights of access to the BBC to carry out Value for Money Reviews and to report the results independently to Parliament (p 517 and Q 1306).

114.  The Government is cautious about extending the NAO's access because of the public's belief that politicians should not be given increased powers over the BBC.[40] However, the Government's research shows that the public is concerned that the BBC may not deliver value for money. Only 46 per cent of the public surveyed thought it delivered fairly good or very good value for money, compared to 33 per cent taking the opposite view.[41] The BBC should take note of these figures.

115.  Giving the NAO the right to conduct a full programme of Value for Money reviews would not open the door to increased political interference in the BBC's editorial or programming decisions. Rather it promises to assist materially the Board (Governors or Trust) in securing the value for money that licence fee payers rightly expect. We believe that NAO scrutiny will help the BBC combat perceptions of inefficiency and waste and increase public confidence that it has nothing to hide in its use of public money. The NAO has a long track record of examining cultural organisations without any question of editorial interference arising. Indeed, it already audits the BBC World Service and Sir Robert Phillis, previously Managing Director of the BBC World Service, told us that "We were subject to regular NAO reviews and I found them valuable… I do not believe the BBC should have anything to fear from scrutiny by the National Audit Office" (Q 1304).

116.  Sir John Bourn assured us that there was no chance that the NAO would get involved in programming decisions if it were to audit the BBC "In no sense is it the idea, as it were, to put forward our own scheme of programmes, any more than in our current audit of the Arts Council we suggest that different operas should be shown at Covent Garden than the ones that are shown… most of our work develops around better management of assets, better procurement arrangements and a better analysis of human resource management and issues of that kind" (Q 1308).

117.  Another reason why some observers may be hesitant about giving the NAO increased access to the BBC is because the NAO might stifle risk taking and innovation. However, Edward Leigh, Chairman of the Commons Public Accounts Committee, assured us that "the approach of the Committee of Public Accounts and the NAO is very much one of supporting well-managed risk taking and innovation" (p 517).

118.  The NAO has the expertise necessary to properly assess whether the BBC is securing value for money in its use of public funds. The public is concerned about this. We recommend that the NAO should have full right of access to the BBC and the power to conduct and independently select the subject of Value for Money Reviews. It should report the results to Parliament. This does not mean the NAO will be responsible for the financial audit of the BBC and we endorse the current position whereby the BBC chooses the firm which conducts its annual financial audit.

23   BBC Annual Report and Accounts 2004/5, p. 104. This figure is derived from summing the licence fee income of £2940 million and the World Service grant in aid of £225 million. Back

24   The BBC's Journalism After Hutton: The Report of the Neil Review Team, June 2004. Back

25   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government (March 2005) para 5.1. Back

26   In this chapter we only consider the regulation of content. The regulation of those BBC activities which have an impact on the market are considered in chapter seven. Back

27   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: What you said about the BBC, July 2004, p. 43. Back

28   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, p. 64. Back

29   Building Public Value, Renewing the BBC for a digital world, p. 23. Back

30   Ibid. Back

31   Review of the role and effectiveness of non-executive directors, Derek Higgs, January 2003. Back

32   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, box 5.5. Back

33   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, para 5.31. Back

34   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, para 5.28. Back

35   Ibid, para 5.24 Back

36  http://www.parliament.uk/parliamentary_committees/public_administration_select_committee/pasc_03_04_pn_09.cfm Back

37   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, p. 12. Back

38   http://www.ofcom.org.uk/about/csg/ocb/functions_role/?a=87101. Back

39   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: A strong BBC, independent of government, March 2005, para. 5.61. Back

40   Ibid, para. 5.61. Back

41   Department for Culture, Media and Sport, Review of the BBC's Royal Charter: What you said about the BBC. (July 2004). Back