Sir David Arculus has quit as deputy president of the CBI after regulators found customers of Severn Trent Water had been overcharged by #42 million while he was at the helm.
Sir David was due to take over as president of the business group in June, but announced his resignation two weeks after Ofwat concluded "deliberately miscalculated or poorly supported" data had inflated bills at the Midlands utility.
The water supplier - a subsidiary of London-listed Severn Trent - is in the process of refunding households but the final penalty will only be known once an ongoing probe by the Serious Fraud Office into reliability of "leakage data" is concluded.
Sir David chaired Severn Trent between 1998 and 2004 and said he was confident "high standards of governance were in place" at the company. The board, under his leadership, "acted properly when the problems emerged".
But he added: "As chairman of the parent company at the time the allegations were made against the subsidiary, Severn Trent Water, I believe I must bear my share of the responsibility for events in the organisation. At the present time, the level of public interest in what happened at Severn Trent Water is such that I believe it would distract from my ability to represent the interests of British business.
"I have therefore decided to stand down from my formal role as CBI deputy resident at this time. I will continue to fully support the organisation and its work."
The CBI stressed it was Sir David's decision and he had not been pushed from the post which he took up last June. A search for a successor was now under way, with no clear favourites among the 100-strong CBI President's Committee which traditionally supplies a candidate.
CBI president and Cadbury chairman John Sunderland said he was saddened by the news but understood the decision.
"David is a man of integrity and is clearly determined to put the interests of the CBI before his own," he said.
"I am sad that David has felt it necessary to take this step but I understand his decision.
"I am grateful to David for the action he has taken and for his continued upport whilst this matter is resolved."
Ofwat found no evidence of a company-wide attempt to mislead on issues of bad debt or metered customers bills although it did find evidence of a limited number of staff who became aware of wrong behaviour but did not raise any concerns.
The matter came to light after a senior employee complained to a Sunday newspaper about the way leakage data was reported.
Sir David is a non-executive director of Spain's Telefonica, Barclays and Pearson. He became chairman of mobile phone operator O2 in June 2004 after leaving Severn Trent.
He also chaired the Better Regulation Task Force, an unpaid role for which he was knighted.