I think it is a bit of a snare and a delusion that is part of the BBC DNA, to say whenever anything goes wrong that it is the governance that has gone wrong.[333]—Lord Patten

270. In recent years all major public bodies, including the NHS and Parliament itself, have become subject to scrutiny by independent regulators. The extent to which the BBC Trust has been an effective, rigorous and independent overseer of the BBC is a matter of much debate. In recent years, the mistakes made over Savile, the Digital Media Initiative and severance pay have dominated the headlines, and the BBC's acceptance of additional costs and responsibilities following its privately negotiated licence fee settlement with the Government in 2010 has had ongoing strategic and budgetary ramifications. We heard from a number of witnesses that the BBC Trust was not working well in terms of either governing or regulating the BBC or acting as an effective advocate for the public and licence fee payers.

271. At best it has appeared a critical friend but to many it has seemed to be an apologist for the BBC when mistakes have surfaced. However, Dame Tessa Jowell explained that the role of the Trust had been quite seriously misrepresented. She explained that the "cheerleading" function was for the BBC [Executive] itself and the Trust had always been there to represent the licence fee payer:

The role of the Trust is to represent the public interest in the collection and the expenditure of more than £3.5 billion year on year. I hope that we can write out of the argument, in critiquing the Trust, the idea that somehow it was created to be both cheerleader and regulator. It never was, it should not be, and in the future the cheerleading role should be very clearly attached to the BBC [Executive] itself.[334]

272. Frayed relations were exposed during the appearances of directors general, chairmen, and trustees, past and present, at the Committee of Public Accounts hearings in 2013 following the exposure of excessive severance payments to senior executives and the poor management of the Digital Media Initiative, leading that Committee to describe a "dysfunctional relationship between the BBC Executive and the BBC Trust that casts doubt on the effectiveness of the BBC's governance model", which it considered as "broken".[335] During these occasions the public had seen different arms of the BBC appearing before parliamentary committees taking different positions which, in the opinion of David Liddiment, a founding member of the Trust, had not been in the interest of the BBC and had not shown good governance.[336] What was also exposed at this time was the BBC Trust Unit's[337] failure to identify problems that were occurring at the BBC Executive and to bring the problems to the attention of the Trustees. There appeared to be a breakdown in effective communications between the two boards, and on the Trust's part, a lack of alertness to indications of possible underlying problems at the BBC with organisational protocols being too rigidly adhered to.[338]

273. Prior to 2007, successive BBC Boards of Governors, who had governed the BBC since 1927, had performed a dual role in which they were responsible for leading and promoting the success of the BBC by directing and supervising its affairs, and representing and defending the institution, as well as judging its performance and representing licence fee payers and the public interest. This was a model widely seen as unsustainable in the run-up to the 2006 Charter review as the Governors could not continue to be both the regulator and "cheerleader" of the BBC. There was a strong belief that the Governors had, in effect, identified with the management of the BBC, leading to a perception that the BBC had been run in the pursuit of its own interests, rather than those of the licence fee payer, and that the governance arrangements lacked transparency, accountability and openness.[339]

274. In 2005, the Independent Panel on Charter Review appointed by the then Government and chaired by Lord Burns, recommended that the Board of Governors be replaced with a new independent body, a Public Service Broadcasting Commission (PSBC). This commission would have been independent of Ofcom, comprising Government-appointed non-executive commissioners, and would have taken over the BBC Governors' regulatory responsibilities including making sure the Corporation met its public service remit and provided value for money. It would have also advised Ministers on the level of the licence fee and would have allocated funding to the BBC and potentially some funding to others to produce public service content.[340]

275. The Panel had also recommended that the BBC be governed by a unitary board of executive and non-executive directors in line with best practice in corporate governance, with a non-executive Chairman at the helm. The board would have been responsible for deciding and delivering the BBC's programming output, subject to the oversight of the Public Service Broadcasting Commission, within its allocation of the licence fee. It would have been the BBC Board's responsibility to champion the BBC and be answerable to its critics.

276. There was surprise when Tessa Jowell, as Secretary of State, chose not to follow the recommendation of the Independent Panel which she had established. Instead, she opted for the model of the BBC Trust which more or less followed a structure that had been recommended by the BBC Governors, incorporating many features that had been outlined in their 2004 strategy paper, Building Public Value. Reflecting on her decision, Dame Tessa Jowell explained that she had found the Panel's proposed structure had insufficiently represented the public interest and for that reason she pursued what had been a middle course of three options, i.e. neither to continue with the BBC's Board of Governors nor to move to an external regulator.[341]

Creation of the BBC Trust

277. The two-tier structure of a BBC Trust and a BBC Executive board came into being in January 2007 and since then they have been the oversight and delivery institutions of the BBC. The Trust's 12 non-executive trustees and the Executive Board's seven executive and six non-executive directors together have the power to determine what the BBC does and does not do. Their respective roles and responsibilities are set out in the BBC's Royal Charter and Framework Agreement.

278. The BBC Trust is the sovereign body; it is responsible for approving the overall strategic direction of the BBC and for holding the Executive to account for delivering the BBC's services in accordance with its priorities. The BBC Trust sets 'purpose remits' for each of the public purposes laid down in the Charter, indicating the priorities it has set the Executive Board and how it will assess the performance of them. It also sets a service licence for every BBC service stating the scope, aims, objectives, headline budget and other important features of each service and how performance will be assessed by the Trust. The Trust also agrees the BBC's editorial guidelines and protects the BBC's independence. It is responsible for monitoring performance to ensure that the BBC provides value for money while staying true to its public purposes. The Trust is the final arbiter of complaints in respect of the impartiality and accuracy of the BBC's content. The BBC is also subject to Ofcom oversight in various areas.[342]

279. We heard that a fundamental flaw of the BBC Trust, like the BBC Board of Governors which preceded it, is essentially that it is impossible for the Trust to be the BBC's defender and champion whilst also providing independent regulation and scrutiny. Lord Burns told us that he continued to support his original proposal for a clear separation between the BBC and its regulator and believed that problems which had occurred since his report demonstrated that the BBC Trust system had not worked well.[343] A former member of his independent panel, Sir Howard Davies, was more forthright in recent comments:

The confusion of roles enshrined in the Jowell proposals, were put into effect in the last Charter, is at the heart of the problems we have seen. It was an accident waiting to happen. This is not an observation informed by hindsight. When the then-government put these proposals to Parliament they were widely derided…

The system was well understood to be flawed from the start, has failed in exactly the way knowledgeable observers said it would fail, and therefore must be reformed in a structural way. [344]

280. According to Lord Burns, there needed to be one body which made sure the licence fee was spent in a way that fulfilled the requirements of the Charter and a totally separate body to run the BBC. Several other witnesses shared his view. Greg Dyke told us that the "BBC Chairman" should not be the chairman of the regulator. In his opinion, the creation of the Trust had been a 'terrible fudge' that had not worked:

You saw the disaster over Jimmy Savile, over the appointment of a director-general and the rest of it. That was because I do not think anyone was quite clear in that whole system who was responsible for what. …What they did was they half-divorced and did not do it properly. What you need is the full divorce. Therefore, you need the regulator to be outside the BBC. It is either Ofcom or [OfBeeb]. I would have always gone with Ofcom personally. But [Ofbeeb] was the compromise that then was not acceptable to anybody.[345]

281. Lord Birt supported the idea of the BBC having a management board that learnt from private sector practice, through input from non-executive directors, but who were there not necessarily to examine whether the BBC was properly addressing the interests of every group of licence fee payers, but looking to ensure that the organisation was well run, that it had the right talent, that the right processes were in place, and that it was spending money efficiently.[346] Lord Grade pointed out that, although the object of establishing the Trust had been to create separation between those running the organisation and those overseeing it, there was a case that general responsibility for the oversight of the BBC's income from the licence fee should be located inside the Corporation so that a check to ensure the proper use of public money could be applied from the start.[347]

282. Gavyn Davies told us that he had liked the role of the "BBC Chairman" as it was in the 1980s and 90s, especially the fact that the Governors had been independent of Government, the whole industry, and other regulators. In his mind, the establishment of the Trust had generated unrealistic expectations of what the Chairman of the Trust could do.[348] He supported the idea of the role of "BBC Chairman" being returned to the main BBC. This would far more clearly mark out the Trust as representing licence fee payers, which would be a better solution. Greg Dyke also pointed out that the relationship between the Chairman and the Director General was key and that this had broken down to a degree during the BBC's handling of the Savile affair:

The relationship between the chairman and the chief executive is all-important in any organisation. It is the most important relationship probably in the organisation. I thought at the stage at which George Entwistle was clearly in difficulty, he needed significantly more support than he had.[349]

283. On the other hand, Professor Barnett believed that it was too early to make changes to the BBC's governance structure. In his view, there would always be a learning curve to any new governance system, and so the Trust should be afforded a little more time to get things right:

Of course there have been mistakes, as there always will be. These are human beings involved. It is not an easy job. There is no counsel of perfection in terms of governance of the BBC. It is a public institution. It is part of the market and it is part of the state, but it is separate from both. It is complicated. There will always be tensions. I think it is important to give the Trust a little bit of time to get things right.[350]

Nonetheless, Professor Barnett could see the case for establishing a non-executive chairman of the BBC, 'whose job would be a lightning conductor, to take some of the flak', and also be able to stand up for the BBC, rather than principally for the licence fee payers.

284. In respect of his role as Director General, Lord Hall told us he was responsible to the Trust for the overall direction, operation, and spending of the BBC. The Executive and the Trust jointly agreed the overall strategy for BBC but it was the Trust's role to hold the Executive to account for delivery. Since 2011, there have been two internal reviews which have looked at how effectively the BBC's governance has operated.[351]^, [352] The second, in 2013, was a joint review between the Trust and the Executive, instigated as a consequence of the excessive severance payouts and other high-profile management failings. Whilst the review concluded that much of the arrangement worked well, it found that there was still confusion over which body was responsible for what in certain key operational areas and this had undermined confidence in the governance and operation of the BBC. As a result, several actions were taken to clarify respective roles and responsibilities and to make the oversight of the BBC more transparent. For instance, the Executive has strengthened the non-executive representation on its Board—although it still has a majority of BBC executives—and it has been made clear that the Trust should not involve itself in operational decision-making.

285. Sir Howard Davies described the Trust's 2013 governance review conclusions as trying "to apply sticking plaster to the wound". He noted, for instance, that one of the outcome actions of the Trust, to "not involve itself in operational decision-making", meant that it indeed had been involving itself in this way before, betraying "a remarkable lack of confidence in the executive", and foresaw that "A mere undertaking to be good boys and girls in future, and to say please and thank-you to each other, will not do the trick."[353]

286. According to Lord Hall, it would be possible to adapt all sorts of models for the BBC's governance and regulation but he found that since the clarification of their respective roles in the 2013 review, the BBC Trust and Executive were making the current model work.[354] Given that Lord Hall spent eight years as a non-executive director on the Channel 4 Board, we asked him whether a unitary board structure could work for the BBC.[355] He pointed out that Channel 4 was a much smaller and less complex organisation than the BBC, not only in terms of how its income was earned but also in the way it was spent. He added: "The right way to govern something that is so fundamental to the UK and bigger in size than Channel 4 is that you end up with something that is very akin to a trust and executive board."[356]

287. In our opinion, when failings have occurred at the BBC in the present Charter period the Trust has not demonstrated the institutional independence necessary to scrutinise the problems at hand or be a candid critic of the Corporation and its executives. The Trust is, after all, part of the BBC: the Chairman of the Trust is entitled to be called the Chairman of the BBC and, unlike other regulators, it appoints the chief executive (in this instance, the director general) of the body it is intended to regulate and whose performance it is intended to judge objectively.[357]

288. In respect of regulation, Lord Birt told us that he wanted to see the BBC being regulated much more in the tradition of Ofcom, where it was overseen by a "more beady" regulator with staff more experienced in that field.[358] A question which arises is whether some of the Trust's oversight roles and responsibilities should transfer to Ofcom or whether it should pass to a separate external body with oversight of the money that was spent by the BBC and more generally to support public service content, as had been envisaged by Lord Burns' independent panel. Lord Birt told us:

I am more attracted to the notion of a stand-alone regulator. Why? Because of the scale and importance of the BBC in our national life. Do I think it would be a disaster if it went to Ofcom? No, because Ofcom has been an especially effective regulator, in my judgment, but it regulates an awful lot of stuff. I would start to be nervous that bringing in something that was so big, of such importance and, of course, has strong public policy purposes—Ofcom would then have the job of holding the ring, which, in the end, I would rather politicians do than delegate the holding of the ring between the public sector and the private sector in broadcasting to a regulatory body.[359]

289. Lord Burns continues to prefer a separate body rather than passing regulatory responsibility for the BBC entirely to Ofcom, for the same reasons. Yet he told us he could easily envisage a situation where what was now the Trust became a subsidiary of Ofcom, where it undertook a different type of job to the one carried out for commercial PSBs because the BBC required detailed oversight of how the licence fee was spent and whether its Charter objectives were being met:

The issue to me is I think Ofcom could do the job, but it would be a much bigger addition to their role than it is to do that job for Channel 4, which is why I would still on balance be in favour of the proposal that we put forward 10 years ago, which was to have a separate organisation to do this. But I certainly think that having it in Ofcom would be an improvement over the ambiguity that we have under the present arrangement. As I say, it is the ambiguity that I see as the biggest problem to be resolved here. The question of where it goes to is a bit more finely balanced.[360]

290. Despite the problems that had occurred, Lord Burns told us that the Trust had done some "very good work" in introducing purpose remits for each BBC service and public value tests for assessing new and existing services.[361] Many witnesses told us they thought these mechanisms were valuable and wanted them preserved. For instance, David Liddiment pointed to the way the Trust had monitored the BBC's distinctiveness and impact on the commercial sector. The Trust has been in a position to make adjustments to BBC service licences where it found them overstepping the mark. According to Mr Liddiment, the last thing that the BBC needed was light touch regulation:

[The BBC] is a big beast and it is operating in markets, so part of its instinct is to be competitive. That is a good thing but it does mean from time to time it is not always as focused on its public purposes or as being distinctive as it needs to be, and you need a body that keeps it in line. Do not get me wrong; not to tell it what to do but to give the appropriate tension between its public values and the efficiency and competitiveness of the entity itself. We want it to be efficient. We want it to be competitive. We want it to be well run, but we want it to be focused on the public purposes, on the public values.[362]

291. We see three key requirements for effective stewardship of the licence fee income, giving assurance that the money passed to the BBC is well spent in meeting its public purposes. First, the BBC must have robust internal governance and compliance mechanisms to ensure that its management determine and deliver BBC services to the high standards expected of the Corporation and within its funding limits. The BBC's governance must also ensure that the Corporation has the correct resources in place to meet its objectives in accordance with its strategic aims. Second, there needs to be independent regulatory oversight to ensure the BBC is complying with its statutory obligations and achieving set quotas, adhering to its editorial guidelines and broadcasting codes, and that its activities are conducted fairly in a way that does not impact adversely on its commercial counterparts. Third, given that the BBC is in receipt of over £3.7 billion of public money, it must be scrutinised and held accountable—internally and externally—for meeting the strategic aims which have been set for the Corporation to achieve its PSB obligations, and ensuring that its activities secure the best value for money, and satisfy the expectations of those who pay for its services. This will involve consulting licence fee payers regularly to find out what is expected of the BBC and how well the BBC is serving audiences.

292. A number of our witnesses held the view that the Trust has neither acted as a fully effective governor nor a regulator of the BBC and consequently we consider the status quo is not an option.[363] While views on the best form of governance varied, there was general agreement with the principle of making a clear distinction between internal corporate governance and independent external regulation and oversight of licence fee payers' interests. To achieve this, there needed to be a unitary board of the BBC headed by a non-executive Chairman, as well as an independent external regulator. We consider options for this below.

293. We believe that the establishment in the 2007 Charter of an oversight and regulatory Trust within the BBC has led to it being too close to the BBC Executive and it being seen on many occasions as being far too protective of the BBC as an institution, rather than acting as an effective and objective regulator and advocate of the licence fee payer and wider public interest. Incidents like its handling of the Savile affair, oversight of the Digital Media Initiative, and its representation of licence fee payers in the 2010 settlement have demonstrated that the BBC Trust has not lived up to its name and we believe it was a mistake not to accept Lord Burns' independent panel's recommendation at the time of the last Charter renewal for fully independent external oversight of the BBC. We believe that the BBC Trust should be abolished and new arrangements made for both the regulation of the BBC and for the BBC to be held accountable to licence fee payers.

294. We have set out our own preferred model for governance and regulation of the BBC which, although based on external, independent oversight of the BBC, deviates from Lord Burns' 2005 model. The main difference between our proposals and his panel's is that we do not consider the oversight body should have a formal role in approving the BBC's overall strategy nor should it formally set the BBC's spending priorities. It will have an advisory role. If it were formally to approve strategies and service budgets this would confuse and undermine lines of accountability and give the BBC Board less control over its activities. If the BBC is to be properly held accountable then the body overseeing it must be completely separated from the BBC so that it is placed to appraise the Corporation objectively and recommend a strategic direction in line with licence fee payers' interests and wishes and in accordance with the needs of public service broadcasting.

A unitary BBC Board

295. It is our view that the separate entities of a BBC Trust and an Executive Board of the BBC should be replaced by a unitary board comprising a non-executive Chairman, a majority of non-executive directors, and a small number of executive directors including the Director General. As previously proposed by the Burns' Panel, the board would follow the best corporate governance practice of other large and complex organisations as set out in the Combined Code on Corporate Governance, whilst recognising the BBC's uniqueness and the lack of obvious parallels. The Board's functions would include collective responsibility for promoting the success of the BBC by directing and supervising its affairs; leadership of the BBC, within a framework of prudent and effective controls enabling risk to be assessed and managed; determining the BBC's strategic aims, ensuring that the necessary financial and human resources were in place for the BBC to meet its objectives, and reviewing management performance. This would include formulating the strategic business plan with supporting detailed financial information to be scrutinised by an independent external body, the Public Service Broadcasting Commission (PSBC), and monitoring progress against that plan. The unitary board would also define the BBC's values and standards and ensure that they were met. The board would also maintain committees covering key matters including nominations (advising the board on recruitment of the Director General and other executive directors), remuneration (to advise the board on compensation arrangements for executive directors), audit (to further the highest standards of financial accountability), and complaints (with appeals to be referred to Ofcom on content code matters).

296. Such a structure for the BBC should enable the Corporation to be more agile and dynamic in undertaking corporate governance and taking strategic decisions on priorities in line with its public purposes. It would also restore the "critical friend" support role of a Chairman and non-executive directors that was removed in 2007. The non-executives would be at closer hand and be able more effectively to challenge and contribute to the development of strategy, scrutinise management, satisfy themselves that financial information was accurate and that financial controls and systems of risk management were robust and defensible, and determine appropriate levels of remuneration of executive directors, as well as have a stronger role in appointing and, where appropriate, removing senior management and in succession planning.

297. A unitary board, which we refer to from now on as the "BBC Board", should be the body accountable for the BBC's management and delivery of the BBC's strategic aims. If this were the case, then the BBC Board should set, agree and own its overall strategy. Others would contribute to the process through expressing views about the shape of BBC services and scrutinising the BBC's performance, but the BBC must approve its own strategy otherwise lines of accountability are obscured. We note, however, that in its advice the Burns Panel proposed that the Public Service Broadcasting Commission not only subject to open and transparent scrutiny the strategic plan for the BBC prepared by the BBC board, but also "approve it or reject it in response to that scrutiny and to oversee its execution". The strategic plan agreed between the PSBC and the BBC, it suggested, might cover such issues as the number and broad objectives of television and radio channels, online and other services, including commercial services; the broad allocation of expenditure by service, audiences and genre to meet the needs of all licence fee payers; specific targets for each channel in terms of type of content and measures of success (along the lines of service Licences); and arrangements for the periodic review of channels and other activities of the BBC, whether commercial or funded by the licence fee. We consider this further below.

298. Similarly, a BBC Board committed to fulfilling its Charter and Agreement obligations, with effective internal compliance mechanisms, which could be set out in the Agreement, should be the body setting the BBC's priorities and agreeing the parameters and remits of individual services, taking into account the input and recommendations of the external oversight body and licence fee payers. It should be required to do so in a clear and transparent way so that others may judge performance. In addition, the Board must be wholly in control of its spending.

299. The Director General, as the BBC's chief executive officer and editor-in-chief, should be responsible to the BBC Board for the BBC's content. He or she should be answerable to the Board in respect of the BBC's delivery, but it should be the Board that owns the BBC's business plan and editorial guidelines and it should be ultimately responsible for the BBC's performance, and be held to account when mistakes or problems occur. Finally, the BBC Board must through all of its efforts ensure that the BBC secures value for money, irrespective of the additional role of external oversight in this area, and it should be answerable for the BBC's expenditure of the licence fee.

300. Under the BBC's Board there would be a management team responsible for the operational delivery of the BBC's services. Through the Director General and the other executive directors who sat ex-officio on the BBC Board, the management team would be held accountable for its performance.

Licence fee payers' interests: Public Service Broadcasting Commission

301. We envisage the establishment of a new Public Service Broadcasting Commission (PSBC) to hold the BBC Board to account for its performance, although it would also have wider duties in relation to public service broadcasting. The principal role of the PSBC would be to represent the public interest in public service broadcasting to which the BBC is expected to make the most significant contribution. A high-level responsibility of the PSBC would be to scrutinise the BBC to make sure the nearly £4 billion of public money it received each year was being well spent. The PSBC would be independent of Government and Parliament but answerable to both. The PSBC would be there to represent and champion licence fee payers' interests.

302. As noted above, the Burns Panel proposed a formal role for the PSBC in not only subjecting to open and transparent scrutiny the strategic plan prepared by the BBC board, but in formulating that plan, approving or rejecting it, and overseeing its execution. Our view is that this risks the re-creation of something very similar to the BBC Trust, including reintroducing additional layers of decision making and working counter to the objective of a more agile and dynamic BBC board able to make decisions and act more effectively. Our preference is that the PSBC not have a formal role in approving the BBC's overall strategy: its duty in the first instance would be to scrutinise the BBC's strategy in a very public way, publishing its views on the BBC Board's performance and future priorities. Similarly, the PSBC would scrutinise individual services against their purpose remits, as has happened with service licence agreements under the Trust, holding the BBC to account for performance and making recommendations on spending priorities and for changes to service remits. The PSBC would not formally set individual budgets nor would it have a role in formally approving service remits.

303. In respect of the BBC's commercial counterparts, it would be at the Commission's discretion to carry out public value tests on BBC services. The BBC would be expected to submit proposals for new services or closure of services to the Commission. The PSBC's appraisal on these occasions would be informed by market impact assessments conducted by Ofcom, as before. There would be an expectation on the BBC to follow the PSBC's conclusions by either abandoning a proposal or making adjustments to existing services, to avoid adverse impact and to assure public value.

304. A further role of the PSBC would be to conduct public consultations on the BBC's services and to make recommendations as a consequence. The PSBC would advise the BBC Board, in a similar way to how Ofcom currently advises the Channel 4 Board, on its performance and strategies in serving audiences and meeting its public service remit. Mr Liddiment told us that even after eight years of its existence, he would have thought that not many people knew what the Trust was for.[364] This must not be the case with the new Commission: it would need to establish a much more prominent and meaningful relationship with the public who pay for the BBC and its PSB content.

305. In terms of public funding for PSB, it would remain a responsibility of the Government to set the licence fee (or its replacement), following negotiations with the BBC, and through consultations and debates in Parliament, and taking into account the advice of the Commission. In advising the Government on this, the PSBC would take into consideration past performance of the BBC and others, future PSB requirements and importantly those of the BBC. The PSBC could be given a role in allocating a proportion of the licence fee (or its replacement) on a competitive basis to the BBC and others for production of PSB content.

306. In the course of its work, we would expect the chairman of the PSBC to produce an annual report for Parliament and for him or her to appear before parliamentary committees such as ours to account for their work and to assess the performance of the BBC and any other recipients of public money in producing public service type content.

Regulation: Ofcom

307. Ofcom would carry out all other regulation of the BBC as it does for the commercial PSBs. Ofcom would also oversee production and statutory quotas related to the BBC, as well as take on responsibility for complaints over fair trading. A significant change would be that Ofcom would take on all content regulation for the BBC; we consider this change in further detail below. We believe that Ofcom, given its responsibility for the whole broadcasting sector, would probably remain best placed to carrying out PSB reviews of the entire sector, which would also significantly inform the PSBC, but this arrangement could be reviewed.

Transparency in appointments

308. Currently, the Chairman of the BBC Trust is appointed by Government following an open competition and then subject to a pre-appointment hearing by our Committee. The Chairman of the Trust is responsible for appointing the Director General, under a process that should be open and fair. This did not happen last time, following the resignation of George Entwistle. It was also the case that two other members of the Executive board were directly recruited by Lord Hall without the posts being advertised. We were told by the Trust that Lord Hall's appointment had been made under "exceptional circumstances".[365] Similarly, in the case of the direct appointments made by the Director General himself, again we were told there were exceptional circumstances that had led him to bypass an open recruitment process. Lord Hall explained:

When I was constructing the team and thinking about constructing the team, I felt that the BBC was in some crisis. I wanted to move quickly to get the top team in place, and so, in those exceptional circumstances, a mixture of direct appointments of people who are stars in their world was right, as well as moving some people and also having an open competition for some of the other jobs.[366]

309. We do not think that it is appropriate under the present system that the regulator appoints the Chief Executive and Chair of the body it oversees. Under our preferred structure, the Chairman of the BBC would be appointed by the Government, as now happens with the Chairman of the Trust. In all other appointments there must be a duty to operate in a fair and transparent manner, especially given the BBC is a public sector organisation. As we have stated, the Chairman of the BBC would appoint the Director General after an open recruitment process had taken place, in line with advice of the Board's nomination committee, which would be chaired by non-executive directors as usually happens on a plc-style board.

310. During our questioning of the BBC Executive, we were not convinced that the current challenge to BBC executives has been as robust as we would expect. The BBC Board would need to recruit non-executive directors who were likely to give a tough challenge to the BBC Executives and whose corporate governance experience and skills were suitable to the BBC's public service remit and its public sector position.

Chairman of the BBC

311. The new Chairman of the BBC would be ultimately accountable for the BBC's performance. He would be answerable for the BBC's actions, be champion of its creative endeavours, and be the guardian of the BBC's independence, supported, of course, by the BBC's constitutional protections and a strong board. Whilst the PSBC would help secure the BBC's independence given its role in overseeing the BBC as an institution and representing the public interest in the Corporation, it would ultimately be the responsibility of the Chairman of the BBC to defend the broadcaster's position from political or other challenges which might be a threat to its position.

312. It would be likely that the type of character profile and experience needed for the Chairman of the BBC post would be different from the requirements sought for the head of the Public Service Broadcasting Commission. Both would be demanding positions and attract a significant amount of media attention, but the former would require someone with considerable management experience at board level of a large public or private sector organisation whereas the latter would be likely to require a person who had come from a regulatory background.

Composition of the PSBC

313. The Commission would consist of a small number of Commissioners. They would be non-executive and be of the type, experience and skills that would be expected in a role of public interest oversight of a broadcasting/communications sector. The Commission would be supported by a small administrative staff and professional advisers (as it would be scrutinising, rather than shadowing, the working of the BBC, it is likely that the Commission would be a smaller and less expensive body than the Trust). The Government, following best practice on public appointments, would appoint the Commissioners, including the chairman of the PSBC.

314. The PSBC would be a separate entity to Ofcom but it would have close ties to the main regulator. We believe it will be important that there is a distinction in approach between the BBC and the commercial public service broadcasters given the need to scrutinise the amount of public money spent by the BBC and to evaluate the Corporation's success in achieving its remit across all its services. However, the PSBC could be established on a similar footing to Ofcom's Content Board where it has its own Chair, board and identity. We see the Commission's staff coming from similar backgrounds to those in Ofcom, rather than from the BBC, and perhaps being seconded from the main regulator.

315. The following table illustrates our preferred division of roles for the oversight of the BBC.

Oversight of BBC performance
Governance	Regulation	Ensuring accountability
The BBC Board would be responsible for: ·  Promoting the success of the BBC by directing and supervising its affairs. ·  Determining and setting the BBC's strategic aims, ensuring that the necessary financial and human resources were in place for the BBC to meet its objectives and reviewing management performance. ·  Deciding and delivering the BBC output in line with its funding allocation and borrowing limits and public purposes. ·  Defining adequate systems to define and maintain editorial standards, ensuring value for money and dealing with complaints in the first instance. ·  Defining the BBC values and standards and ensuring they were met. ·  Maintain the BBC's editorial independence.	Ofcom would: ·  Conduct regulation of the BBC's commercial activities in respect of competition and fair trading. ·  Conduct market impact assessments (for the PSBC) on the BBC's proposals for new services or closure of existing services. ·  Oversee quotas for: hours of news and currents affairs programming, regional programming, original production and regional production. ·  Carry out periodic PSB reviews for the whole PSB sector. ·  Carry out content regulation of the BBC and be the final arbiter of complaints about BBC content, including matters of impartiality and accuracy.	The Public Service Broadcasting Commission would be accountable to Parliament and Government. It would: ·  Scrutinise the BBC's strategic plan and delivery against its objectives and public purpose remit. ·  Represent licence fee/broadcasting levy payers views and consult and engagement with them on BBC services. ·  Review and report on BBC service remits. ·  Initiate public value tests of BBC services and review proposals for new services and closures. ·  Recommend to Government and Parliament the overall level of the licence fee. ·  Advise on the allocation of the licence fee between the BBC and others. The NAO would: ·  Have unfettered access to the BBC in carrying out value for money investigations.

316. We would envisage the PSBC having a significant power in its scrutiny over the BBC in a comparable way to that of select committees and their scrutiny of Government. The power of publicity should allow the PSBC to draw attention to matters of concern or to recommend alternative options that needed to be explored. We would see the PSBC working in conjunction with Parliament in a way similar to that of regulators such as Ofcom. The establishment of a PSBC would not negate the BBC's production of annual reports to Parliament and its accountability to Committees such as ours.

317. Clearly, our model for oversight of the BBC represents a departure from Lords Burns' panel's recommendation in 2005. Whilst we consider the BBC must have ability to manage its affairs, Charter Review would need to give careful consideration over what ex post sanctions and backstop powers might be necessary, in extremis, for the PSBC vis-à-vis the BBC. We note that in the case of S4C, the Trust has a backstop power, that as a last resort, it has the ability to reduce or withdraw funding from the broadcaster should it be in dispute over a breach of the operating agreement between the two bodies. A similar power could be at the disposal of the PSBC in the case of its oversight of the BBC. As we have stated, we would envisage the BBC being in a position of advising on the level of the BBC's future funding as well as managing a fund which would be allocated on contestable basis for certain PSB content and genres to which the BBC would be a potential recipient. Such control and facilities would afford the Commission certain influence over the BBC and others and encourage adherence to its directions and recommendations. We have set out a comparison showing the Trust, Lord Burns' and our own proposed models for oversight of the BBC as annex A below.[367]

318. We recommend that the BBC should have a unitary board with a non-executive Chair, on which the Director General and executive and non-executive directors sit, where the Board has complete responsibility for the BBC's corporate governance and operations. The Board should comprise a majority of non-executive members.

319. We recommend that the non-executive Chair of the BBC Board be known as the BBC Chairman. The Board should have the power to hire and fire the Director General in line with the advice of a nomination committee of the BBC Board.

320. We believe that a Public Service Broadcasting Commission should take on the role of scrutinising the BBC's strategic plan, assessing its overall performance, making recommendations to the BBC in line with its assessments, and advising Government and Parliament on the BBC's and other PSB funding requirements.

321. We recommend that the non-executive Chairman of the Board be appointed under the same process that currently operates for the Chairman of the BBC Trust. That is to say a process led by Government, overseen by the Commissioner for Public Appointments and subject to a pre-appointment hearing of our Committee. A similar process should be run for the Chair of the Public Service Broadcasting Commission.

322. The Public Service Broadcasting Commission will need to engender a much more direct and meaningful engagement with licence fee/broadcasting levy payers than its predecessor on BBC services and PSB more generally including through web technologies and social media. Beyond 2016, we would expect the PSBC to commission research on viewers' and listeners' attitudes, willingness to pay, and for greater independent and critical assessment of the BBC's services than has happened before.

323. We recommend that as an ultimate sanction, the PSBC should have at its disposal a backstop power where it could recommend withholding some funding from the BBC in cases where there was a persistent disregard for the views of licence fee (broadcasting levy) payers as represented through PSBC recommendations on BBC services and activities. We consider the PSBC would have influence over the BBC by virtue of its role in advising on the level of the BBC's future funding requirement as well as through managing a contestable fund for certain PSB content and genres. The independent panel should consider the design and scale of an appropriate sanction mechanism.

324. We recognise that very careful consideration must be given in the Charter Review process as to where some of the functions of the unitary BBC Board and the external regulator/public interest oversight body best sit. We recommend that the independent panel consider which elements of BBC oversight and governance should be exclusively in the unitary board and which ones must be transferred to the external, oversight body in its role of providing independent scrutiny of the BBC.

Ensuring value for money

325. The National Audit Office has been conducting value for money examinations at the BBC for a number of years, both on behalf the BBC Trust and, before it, the BBC Governors. Unlike its reports on central government, these examinations are not performed under the statutory powers but are provided for by a framework agreement between the Secretary of State for Culture, Media and Sport and the BBC.

326. The coalition's programme for Government included a commitment to "give the NAO full access to the BBC's accounts to ensure transparency" by November 2011. In a letter to the then Secretary of State in September 2010, Amyas Morse, Comptroller and Auditor General, set out what the NAO needed in order to be able to do an effective job on behalf of Parliament examining value for money at the BBC.[368] He said that the NAO needed:

·  the ability to decide on its programme of value for money work;

·  unfettered access to information held by the BBC; and

·  the ability to report independently to Parliament.

327. Amyas Morse went on to say that the NAO's value for money work would be strengthened if it were to become the auditor of the BBC's accounts. He said the case for the NAO to audit the BBC's accounts stood on its own merits as the BBC's funding was the only significant block of money voted by Parliament that was not audited by the Comptroller and Auditor General. However, the CAG made it quite clear that just as the NAO did not question the merits of government policy objectives, it should not question the BBC's editorial judgements.

328. In a further letter to the Secretary of State in October 2010, Amyas Morse said that he was disappointed that it remained the Government's view that any NAO reports should reach Parliament via the BBC Trust and the Secretary of State.[369] This meant that the CAG could not control the timing of publication. This raises the possibility that the BBC Trust or the Secretary of State could redact material or indeed not publish the report under the current arrangements. It also meant that the BBC, unlike other organisations, responded to the issues raised by any reports before they had been considered in Parliament.

329. Four years later, the CAG had still not obtained the access to the BBC he believed the NAO required and on occasions his officers still encountered lengthy delays in their requests for information.[370] The CAG pointed out that, although the situation had improved in recent years, in certain situations the BBC could still be very restrictive:

I would still say that I think it is possible, particularly in difficult areas, to find that the BBC does not provide evidence where, in their judgment, it is covered by commercial and confidentiality grounds or, indeed, information privilege grounds, privacy grounds. While those are in themselves not invalid, you get the sense of how widely those principles are being applied, and I have never seen them more widely applied.[371]

Sir Amyas Morse told us that he continued to want statutory access to the BBC for his work. This could be achieved by either specifying the NAO's right of access to the BBC in the BBC's Charter and Framework Agreement or by making the NAO the BBC's official auditor. Sir Amyas explained:

There are various ways that could be achieved, but I would like to have statutory access rather than access by agreement. A lot of things I have talked to you about, which are less obstructions than they used to be but still potentially there and actually there in some cases, [they] would not be there if I had a statutory right to do the work. So, for whatever means that I could get that, that would really transform our ability to do our work properly.[372]

330. As it stands, Sajid Javid, the Secretary of State, told us that he considered NAO access to the BBC was an important issue that should be looked at but the current arrangements could not change without going through the Charter review process.[373] In our view, given the BBC's willingness to compete and compare and benchmark its costs in a more transparent way we see no reason for maintaining restrictions on the NAO access to the BBC accounts. As the BBC is looking to move its production operation to a more commercial footing there is an even greater need for opening up the BBC to NAO value-for-money investigations where there is a culture of openness and co-operation. We recommend that the BBC Charter and Framework Agreement are amended to allow the NAO to have statutory access to the BBC accounts. Clearly, if the BBC Trust is no longer in existence the process for publishing the NAO reports on the BBC will need to be revised. We see no strong reason why the NAO should not adopt the same publishing regime for the BBC as it has in place for its reports on Government departments and agencies.

Regulation of BBC content

331. The regulation of the BBC, and the roles for Ofcom and the BBC Trust, are currently set out in the Communications Act 2003 and in the BBC Charter and the BBC Agreement. Ofcom sets the Broadcasting Code for the whole broadcasting industry and the Code's rules apply to the BBC's public services, except for matters of impartiality and accuracy. The exclusion of 'impartiality and accuracy' from Ofcom's remit for the BBC is not set in the BBC Charter or the 2003 Communications Act but in the Framework Agreement between the BBC and the Secretary of State.[374] Ofcom's Code applies to the BBC in the following areas:

·  Protection of under-18s;

·  Harm and offence;

·  Avoidance of inciting crime or disorder;

·  Responsible approach to religious content;

·  Prohibition of use of images of very brief duration; and

·  Fairness and privacy.

332. Currently, the Trust approves the BBC's Editorial Guidelines against which the BBC must operate and judges the BBC's delivery against them. The BBC Editorial Guidelines provide the way in which BBC should meet Ofcom codes but are more demanding in terms of the standards expected. Where the Trust finds BBC content in breach of the Guidelines it can sanction (but not fine) the BBC and can ask for an 'on-air apology'. The public can complain to Ofcom about BBC editorial matters if they wish, except in relation to impartiality and accuracy. Ultimately, where Ofcom considers that its Code has been breached "seriously, deliberately, repeatedly, or recklessly", it can impose sanctions, which range from a requirement to broadcast a correction or statement of a finding to a fine of no more than £250,000.[375]

333. Clearly, at the very heart of the BBC is its role as an impartial news provider. In carrying out this function, it is essential that the BBC has complete freedom from any political or commercial pressures. The Trust has been positioned to defend and protect the BBC's independence, a role that we see passing to a new BBC Board and BBC Chairman.

334. Our inquiry did not examine the way complaints about BBC's output are handled in any depth but a significant amount of correspondence that we receive as a Committee relates to the BBC and its output and also the way complaints are handled by the BBC and the Trust. Given the importance of the BBC's impartiality, it is nearly always the case that it is inappropriate for us to intervene in individual cases. Nevertheless, a common theme we have noted is that members of the public who believe they have reason to complain are often dissatisfied that their complaint or point of view has not been considered independently. For many the BBC Trust is essentially part of the BBC and as such the Corporation is seen as a self-regulating body and there is great dissatisfaction that there is no option for an impartial adjudication of a complaint about the BBC by an independent body.

Number of editorial and general complaints in 2013/14

·  The BBC received 192,459 editorial and general complaints: of which 485 went on to the BBC's Editorial Complaints Unit (the second tier of the BBC's complaints process) and 277 of these complainants appealed to the Trust for a third-tier review.

·  Ofcom dealt with 12,774 complaints (6,337 cases[376]) about broadcasting standards. Of these 11,732 complaints (6,804 cases) did not require further investigation or fell outside Ofcom's remit: 1,012 complaints (253 cases) raised substantial issues that warranted further investigation.

Source: BBC Annual Report and Account 2013/14 and Ofcom Annual Report 2013/14

335. Richard Hooper and Philip Graf, both former Deputy Chairmen at Ofcom and former chairs of the Ofcom Content Board, told us that they favoured all content regulation of the BBC transferring from the BBC Trust to Ofcom. Mr Hooper believed that if this were to happen, it would have the effect of strengthening the BBC's independence. He explained:

I think it is in the BBC's interests for [responsibility for all content regulation] to move to Ofcom because when the right-wing press say the BBC is full of lefties and the BBC Trust has to adjudicate that, there is always a difficulty because you have the Mandy Rice-Davies issue of, "They would say that, wouldn't they?" Whereas if you give it to Ofcom … [its] judgment on whether the BBC is full of lefties would have some independent power.[377]

Ed Richards, former Chief Executive of Ofcom, believed that it was a "red herring" that the Trust was somehow more independent of Government than Ofcom:

I regard this as a complete red herring and a poor argument, and let me tell you why. The essential point of interaction between the Government and Ofcom is the appointment of the chairman. The Government appoints the chairman, exactly the same as is the case with the BBC Trust. That is the primary point of interaction. After that, the BBC Trust's independence is secured through the Royal Charter but even in that territory, as we know from the post-Leveson debate, there are plenty of people who feel that that model itself is prone to and could be subject to political manipulation. In [Ofcom's] case, our independence is secured not only through primary legislation here but also our independence is legally protected in European law… I can tell you from very personal experience there has not been a single occasion in which we have been subject to inappropriate political pressure in relation to what we are talking about here, which is broadcasting, by a Minister of the Conservatives, the Labour Party or the Liberal Democrats. I think that is because there is a very widespread and accepted understanding that those things should be dealt with completely independently by the independent regulator, and that has been the case.[378]

336. If Ofcom were to take on all final complaints on BBC content—those that appealed the BBC Board's decision—it would be important that there was a level playing field in respect of its investigations. We believe that Ofcom's Content Board would need to be given extra resources commensurate with this new responsibility. The BBC would continue to consider all complaints in the first instance, and attempt to resolve matters internally. The final level of review within the BBC would be to the BBC Board but in most cases such appeals would be delegated to an editorial complaints unit, as is the case now.

337. We recommend that Ofcom become the final arbiter of complaints over BBC content including matters concerning impartiality and accuracy, but that complaints should be considered by the BBC in the first instance. Ofcom should be given additional resources for taking on this role which are commensurate with the responsibility and estimated workload. We believe this transfer of responsibility will, if anything, strengthen the independence of the BBC, and also make the complaints process simpler, and appear more transparent and fair.

S4C

338. S4C is a public service broadcaster, established by statute, which provides a Welsh language television channel both within Wales and across the UK. The Secretary of State for Culture, Media and Sport has a statutory duty to ensure sufficient funding for S4C. Under the terms of the licence fee settlement of October 2010, responsibility for the majority of S4C funding transferred from the DCMS to the BBC Trust through the licence fee. From 1 April 2013, 90% of S4C's funding (£76 million) derived from the licence fee with 8% (£6.787 million) maintained by DCMS until March 2016. The DCMS contribution for 2016-17 is not yet known. The remaining 2% comes from commercial income. S4C values highly the duality of its funding, and see it as helping secure its independence. The statutory duty to ensure sufficient funding for S4C is now enshrined in section 31 of the Public Bodies Act 2011.

339. S4C maintains editorial, operational and managerial independence. It is overseen by the S4C Authority. In 2011, the BBC Trust and S4C Authority agreed a governance and accountability position in respect of S4C. The agreement lasts for the period up to the end of the current BBC Charter and is intended to ensure the editorial and managerial independence of the S4C service. It states that the BBC Trust will undertake and publish an annual performance assessment of S4C, measuring performance against the terms of an operating agreement. There is, in extremis, the ability of the BBC Trust to reduce or withdraw funding from S4C if the terms of the operating agreement are not being met.

340. Ian Jones, Chief Executive of S4C, told us that the status of the S4C Authority as an independent statutory corporation should not be adversely affected or undermined by the granting of a new Royal Charter to the BBC.[379] We agree. We recommend that the Trust's current oversight of S4C's licence fee funding passes to the Public Service Broadcasting Commission in 2017 should the majority of S4C's income continue to come through the licence fee (or a new broadcasting levy). It will be important that S4C remains independent operationally and managerially over its affairs and editorially over its content.

334   Q540 Back

335   Committee of Public Accounts, Thirty-Third Report of Session 2013-14, BBC severance packages, HC 476, para 7 Back

336   Q727 Back

337   Staff of the Trust Unit support the Chairman and Trustees in their work by providing independent advice and administrative support. The Trust Unit is made up of the Director and five teams and currently employs about 70 staff. In 2013/14, direct Trust expenditure was £9.3 million and it paid a further £2.7 million to Ofcom in regulatory fees. Back

338   See: Oral Evidence taken before the Committee of Public Accounts on 9 September 2013, Severance payments and wider benefits for senior BBC managers, HC 476-ii, Qq277-302 and Qq360-64  Back

339   Further advice from the Independent Panel, Letter from the Lord Burns to Rt Hon. Tessa Jowell MP, Secretary of State for Culture, Media and Sport, dated 27 January 2005  Back

340   Lord Burn's independent panel's preferred option was called Ofbeeb.  Back

341   Q544 Back

342   See: paras 334-340 Back

343   Q284 Back

344   Sir Howard Davies, writing on "Need for clarity at the Corporation for who is responsible for what", in "Is the BBC in Crisis?", published in 2014 by Abramis academic publishing.  Back

345   Q116 (Greg Dyke) Back

346   Q129 Back

347   Q128 Back

348   Q113 Back

349   Q199 (Greg Dyke) Back

350   Q277 (Professor Barnett) Back

351   Review of BBC Governance, BBC Trust, July 2011 Back

352   Review of BBC Internal Governance, a joint review by the BBC Trust and the Executive Board, December 2013 Back

353   Howard Davies, writing on "Need for clarity at the Corporation on who is responsible for what", in "Is the BBC in Crisis?", published in 2014, Abramis academic publishing Back

354   Q580 Back

355   Lord Hall was Deputy Chair of Channel 4 between 2012 to March 2013 Back

356   Q580 Back

357   Article 10 of the BBC Charter states that the Chairman of the Trust may also be known as Chairman of the BBC, although in view of Article 8 this is an honorary title, as the members of the BBC (all the members of the BBC Trust and the Executive Board) "will never act as a single corporate body, but only as members of the Trust or Board to which they belong." Back

358   Q145 Back

359   Q145 Back

360   Q285 (Lord Burns) Back

361   Q295 Back

362   Q746 Back

363   Lord Burns (Q284); Professor Beckett (FBB0022), para 4.2; Lord Birt, (Q145); BSkyB (Qq388-89); Channel 4 (FBB0067); Commercial Broadcasters Association (Qq389 & 396); Greg Dyke (Q199); David Elstein (FBB0104); Global Radio (Q169); Philip Graf (Q296); Richard Hooper (Q285); Lis Howell (Q277); ITV plc (Q346); KM Group (Qq192 & 226); Newspaper Society (Qq225 & 227); National Union of Journalists (FBB0079), para 35; RadioCentre (FBB0086), para 15.  Back

364   Q697 Back

365   Q731 Back

366   Oral evidence taken before the Culture, Media and Sport Committee on 25 April 2013, HC1099-I, Q10 Back

367   See page 127 Back

368   See NAO website: Letter from CAG to the Secretary of State for Culture, Media and Sport, 17 September 2010 Back

369   See NAO website: Letter from CAG to the Secretary of State for Culture, Media and Sport. 22 October 2010 Back

370   Q528 Back

371   Q527 Back

372   Q534 Back

373   Q799 Back

374   Cm 6872, Schedule 46 (2)(b) Back

375   Ofcom (FBB0085), para 3.27 Back

376   Individual complaints received by Ofcom are assigned cases. A case is opened when Ofcom is assessing a specific programme or issue and may consist of one or more complaints. Back

377   Q285 (Richard Hooper) Back

378   Q516 Back

379   Q461 Back