Sainsbury's forced into humiliating climbdown over Prosser hiring

J Sainsbury was forced into a humiliating climb-down by its shareholders last night when it announced that its chairman elect, Sir Ian Prosser, would not be joining its board at the end of next month.

Institutional investors had unanimously condemned the struggling supermarket's decision to appoint Sir Ian, who was much criticised during his tenure as executive chairman of Bass, the beer-to-hotels group.

Sainsbury's said it had "considered carefully the reaction of certain institutional shareholders" and realised that it would need to think again.

The delay to its search means Sir Peter Davis, who moves up to the chairmanship when Justin King joins as chief executive next month, is likely to forfeit a bonus worth more than £800,000 for not managing to find a successor by his end-of-March deadline.

The need to restart the recruitment process is a major embarrassment for the supermarket group that has been trounced both by its rivals and the Government inquiry into the sector during the past 12 months. It ceded second place in the UK supermarket league to Asda last summer and faces dropping from third to fourth once Wm Morrison completes its takeover of Safeway.

Commenting on the widespread antipathy to the news of his nomination, Sir Ian said: "I do not believe it is now in the best interests of Sainsbury for me to take up this appointment." Despite signing a letter of agreement, which secured him a salary of £150,000 for his first year and £350,000 a year when he became chairman, Sir Ian will receive nothing for deciding not to join Sainsbury's. A close friend said he did not intend to seek compensation.

The charge of finding a new chairman elect will switch from Sir George Bull, who retires as Sainsbury's chairman at the end of March, to Lord Levene, the former government trouble-shooter who chairs the insurance market Lloyd's of London and is the supermarket chain's senior non-executive director. Anna Mann, the doyenne of the headhunting world who works for Whitehead Mann and who suggested Sir Ian for the role, was not expected to be given a second chance, sources close to Sainsbury's said.

Institutional investors welcomed Sainsbury's volte-face and commended Sir Ian's humility. "The board and Sir Ian were wise to reflect on their intention. Sir Ian's decision not to proceed deserves respect," one top 10 shareholder said. However, they made it clear that any fresh appointment would face a similar degree of scrutiny. "The board ... must adopt a selection process that delivers a successor to Sir Peter who commands broad and unambiguous support," the shareholder added.

Another large investor said: "Companies maintaining contact with their shareholder base is vital to the retention of shareholder confidence. This is particularly true for those businesses facing significant business or management issues."

Observers said Sainsbury's decision represented another victory for shareholder activism in a year that has seen a massive outcry against "fat cat" salaries and rewards for failure, and the ousting of Michael Green as the chairman elect of ITV after a senior fund manager objected to his nomination.

It leaves the 60-year-old Sir Ian's ability to amass an Allan Leighton-esque portfolio of directorships in serious doubt. Last year Sir Ian opted not to join the emerging markets bank Standard Chartered as chairman after shareholders again opposed the appointment. He also agreed to stay for just seven months as chairman of InterContinental Hotels, which was spun out of Six Continents (the rechristened Bass) rather than two years as he had originally intended.

However Sir Ian, who has previously served on the boards of Boots and Lloyds TSB, is still non-executive deputy chairman of BP as well as GlaxoSmithKline's senior independent director.