By Kate Holton and Alessandra Prentice
LONDON (Reuters) - BSkyB independent shareholders dealt James Murdoch a heavy blow on Tuesday with over 40 percent failing to back his re-election as chairman, venting their anger at his handling of a phone hacking scandal.
Several major shareholders told Reuters ahead of the key annual meeting that they would vote against the 38-year-old because they also want a truly independent chairman rather than an executive of Rupert Murdoch's News Corp, which owns 39 percent of BSkyB.
While James Murdoch was supported by some shareholders in the room and given strong support by the board, the result marks his second investor drubbing in just over a month after he endured a huge protest vote at News Corp in October.
News Corp had to withdraw its $12 billion offer for BSkyB in July following revelations that people working for a News Corp weekend tabloid, the News of the World, had hacked into the phones of celebrities and murder victims to secure stories.
Results from Tuesday's vote showed investors representing 75 percent of shares backed James Murdoch but excluding the stake held by his father's company, support stood at 56 percent with 31 percent opposed to his appointment and 13 percent of votes withheld.
"He has been given a bloody nose by shareholders in this vote and there may well be further developments," Tom Powdrill, a spokesman for the shareholder advisory group PIRC, said. "He has clearly lost the support of a large number of the company's owners."
Legal & General, which holds 2.9 percent of the BSkyB stock and is the fifth-largest shareholder, told Reuters it had voted against the re-election of James Murdoch. Standard Life, which owns less that half a percent of the stock, told the meeting it had also voted against him.
James Murdoch, who was well regarded as CEO of BSkyB between 2003 and 2007, had been expected to win re-election to that role, thanks to the support of family and allies.
Deputy chairman Nick Ferguson told the annual general meeting in central London that Murdoch had acted with integrity throughout his time at the company and said they supported him in the role.
"James Murdoch is a highly competent man," he said. "Over the last eight years we ... and the management of Sky have seen him exhibit only the very highest standards of integrity."
However Guy Jubb, head of governance and stewardship at Standard Life which manages over 6 million shares, told the meeting that they had opposed his re-election because of his conflicts of interest with the largest shareholder.
Murdoch is chairman of News International, News Corp's British newspaper arm, and deputy chief operating officer at News Corp.
"We were concerned that James Murdoch remains chairman of the board and that we should like to see a new and independent chairman appointed," Jubb said.
"We pointed out that our misgivings had been heightened by the revelations of stewardship short-comings at the News of the World, a title for which Mr Murdoch bore a measure of responsibility."
During the phone hacking furor Murdoch appeared regularly as a representative of News Corp and among a flurry of statements also gave evidence to a parliamentary committee that was later criticized by politicians as being misleading.
British media regulator Ofcom has said it is monitoring developments in the phone-hacking investigations. It has a duty to ensure that owners of UK media are "fit and proper."
Shares in BSkyB closed almost flat, slightly below the blue-chip FTSE index.
"It's a very clear shot against his bows," said Peel Hunt analyst Patrick Yau. "Some of the current shareholders are unhappy with his performance, not necessarily to do with BSkyB because the company has performed quite well, but in terms of wider issues and perhaps he needs to heed those warnings."
David Stewart, the chief executive of Odey Asset Management which is the sixth largest shareholder, said the vote should draw a line under the issue.
"We are pro him, providing his role is not detrimental to the running of this company," he told Reuters. "In our view it is not so far, but if it becomes so, then the board have to make another decision."
Other BSkyB members of the board linked to News Corp also received smaller protest votes.
Murdoch was not running the newspaper unit when the hacking took place but critics have accused him of failing to appreciate the scale of the problem and the impact it could have.
Investors are now concerned that the damage done to the family name could spread to BSkyB in the eyes of politicians, regulators and even consumers. So far, significant numbers of BSkyB customers have not switched away.
(This version corrects paragraph 5 to show 75 percent of shareholders supported James Murdoch, not 77 percent, after company issued amended statement)
(Additional reporting by Sarah Young and Sinead Cruise; Editing by Sophie Walker, Elaine Hardcastle, Chris Wickham and Helen Massy-Beresford)