A very corporate loss of nerve

With licence fee negotiations at a critical point, the word from the top is clear: ministers must be

It was a valiant attempt at a joke. "We were hoping that John would be here tonight, but we couldn't afford his fee." Embarrassed laughter greeted Mark Thompson's attempt to make light of the Humphrys affair. This was the Monday night of the Labour conference and only a smattering of cabinet ministers were present at the BBC's party. In an adjoining room of the Grand Hotel, the Times newspaper was playing host to everyone who was anyone in new Labour.

The BBC, the organisation that took on the government and lost thanks to Lord Hutton and his wretched report, has not been welcomed in from the cold. This is not, however, because it continues to offend the powers that be. With licence fee negotiations at a critical point, the instructions from the top are clear: do anything to win back the favour of ministers and do nothing to offend. As a result, and to the consternation of many of its staff, the BBC and its journalists are losing their nerve.

After the Times produced its recent sting against Humphrys, suggesting he had maligned Labour politicians in an after-dinner speech, there was alarm among senior BBC news staff. They were not surprised that the government had engaged sympathetic journalists to spread its black propaganda for it. They were shocked, however, at the craven fashion in which their management and governors responded. According to a number of people involved, Michael Grade, the BBC's chairman, phoned several executives that weekend demanding that the Today presenter be sacked. Further calls ensued between 14 senior executives, none of whom knew what to do. Thompson, the director general, was minded to agree with Grade but when, on the Monday, he saw the furious reaction to the government's antics in the rest of the media, particularly the Daily Mail, he changed his mind. In the end Humphrys was merely rapped on the knuckles, but insiders know the true significance of this episode: this was not an exercise in independent management, merely the calibration of two competing fears - of ministers and of media moguls.

Grade scarcely conceals his annoyance that Thompson did not go further. Nor does the chairman hide his disdain for what he calls "difficult" journalists. He holds the view, now modish in a small but influential circle of people, that British journalism is a "problem" and that public figures, particularly politicians, should be shown more deference. "Michael would like to see a high-profile casualty to demonstrate to ministers that his new governance strategy has teeth," says a senior executive familiar with the working of the corporation's many boards. "Humphrys would have been a nice fat plum."

Since taking over in April 2004, Grade has made reform of the BBC's governance a top priority. His plan, expected to be endorsed in a government white paper, involves a board of trustees. Below the trustees will be a board of management, including for the first time external non-executive directors. Then comes the executive board, as exists, and then the board of journalism. It is a veritable industry of scrutiny and second-guessing - as one executive puts it, "almost as if the programmes being produced are a danger to the public health".

The caution implicit in such thinking has permeated deep in the corporation, particularly the news division. I worked at the BBC for three years and have spoken to dozens of senior journalists and some managers who are very much troubled. With few exceptions, these high-calibre people are drawing the same conclusion: there is little to be gained in the current climate and, if you take risks, much to be lost.

The clearest sign of a corporate loss of courage came on 27 April, in the middle of the general election. On that day Mark Byford, Thompson's number two and the man in charge of journalism at the BBC, received a leaked copy of the Attorney General's legal advice on the Iraq war, then a piece of journalistic dynamite. Instead of handing it straight to his top political reporters, Byford farmed it out to a diplomatic correspondent for checks. That left the field clear for Channel 4 News to break the story. Many senior BBC journalists, among them Andrew Marr, then political editor, were furious. Byford, the man who famously said the BBC's job was not to break news stories, recently received a £94,000 bonus. As staff face job cuts - also part of the Grade/Thompson drive to please the government - most of the top management have been cashing their cheques.

Another example of excessive caution came as recently as 28 September, when the BBC six o'clock news made only the briefest reference to the forced eviction of 82-year-old Walter Wolfgang from the Labour conference in Brighton. ITV's early-evening news led on the story, which soon dominated the news agenda. The BBC's new political editor, Nick Robinson, was said to have "kicked the furniture" in fury and it was at his insistence that the story got due prominence in the ten o'clock bulletin.

Foreign coverage is also affected. One of Grade's first actions was to decree a review of EU coverage, because he believed it was pro-European. The BBC has also created a position of Middle East bureau chief, a London-based journalist whose role is to introduce greater "context" into coverage from the field. The man appointed, Jeremy Bowen, is experienced and robust. However, several of the corporation's top foreign correspondents fear that more is at work here than an editorial rearrangement; they suspect that the Israeli government's dogged lobbying of the BBC to replace or muzzle its Jerusalem-based correspondent, Orla Guerin, is finally bearing fruit.

Then came Katrina. I am told that after Rupert Murdoch quoted Tony Blair as having denounced BBC coverage as "anti-American", several executives, including Byford, phoned Downing Street to ask if there was anything they could do to smooth out the problem. In public the coverage was defended, but in-house discussions have left many journalists with the clear impression that in future they must tread more carefully. This seems all the stranger when you consider that Murdoch's Fox News channel was at least as critical of the US government as the BBC.

The second-guessing of journalists by managers appears to be part strategic and part spontaneous. Just after the 7 July bombings in London there was a row about the BBC's apparent reluctance to use the word "terrorist". When Grade was questioned about this - on Today, as it happened - he asserted that the editorial guidelines discouraging loose use of the word were there only for "guidance". Yet journalists and editors have long been told that breaches of those same guidelines are a disciplinary matter.

It seems strange to recall that Grade's appointment was welcomed with enthusiasm and relief throughout the BBC. Here was a man with a strong track record at the corporation and Channel 4, who declared that "the editorial independence of the BBC is paramount in maintaining the support of the viewers and listeners". Lord Birt's entreaties from inside Downing Street for Blair to veto Grade added to the cachet of the new boss.

He certainly did not arrive at an easy time. Whatever the rights and wrongs of Hutton, the affair was badly handled by Greg Dyke and Gavyn Davies, the previous director general and chairman, who could also be fairly criticised for dumbing down much of television output. The BBC did need to look again at the principles of public service broadcasting at a time of rapid change, and it needed to ask difficult questions about the kind of journalism it wanted to do. Grade's mistake, and, to a lesser extent, Thompson's, is to have undermined the self-confidence of a great institu-tion in a desperate attempt to mend fences with the government.

It is a cliche, but no less true for that, that both at home and around the world the BBC is respected more than any other British institution. The row with the government over Iraq did not undermine that trust; it reinforced it. Most members of the public knew which side they believed. The market research and the public meetings presided over by Davies and the previous set of governors delivered a consistent message: viewers and listeners did not think the BBC's journalists were too tough on politicians. If anything, they considered them too gentle.

By muzzling journalism and deliberately avoiding giving offence to the government and the establishment - as many in-side the corporation insist that BBC bosses are doing - Grade, Thompson, Byford and their senior colleagues are betraying those viewers and listeners. And those people know it is happening, as I saw myself when taking part in a recent edition of Any Questions. When members of the panel defended Humphrys, not one hand was raised in the audience to support the BBC management. These were no metropolitan lefties, but loyal Radio 4 listeners from Exeter and the Devon countryside.

The audience knows that BBC journalism needs rigour, but also knows it needs backbone. That is something it lost the day Lord Hutton delivered his verdict, and it has yet to recover.