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The Associated British Foods (ABF) is a corporation that processes and retails food in different regions of the world. ABF is required to abide by the United Kingdom’s regulations and codes since it is listed on London Stock Exchange. Among the codes the company should follow, there is the code of corporate governance and auditing, which spells out how corporations should report their financial performance and governance. The codes are essential to the healthy performance of organizations because there are situations that may create conflicts of interest between the executives and shareholders (Bartett 2009). The Board of Directors may lose its independence by being related to the management of the corporation closely, which would jeopardize the shareholders’ interests (Burns, Euske & Malina 2014). The existence of corporate governance codes addresses all the stakeholders’ concerns. The aim of this paper is to determine how effective ABF’s corporate governance and auditing system are, through the analysis of its Board of Directors, audit, nominations and remuneration committees. Additionally, it will analyse the disclosure and reporting policies and the company’s relationship with shareholders.
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The Composition of the Board and Its Responsibilities
The responsibility of any Board of Directors is to provide leadership and guidance to the corporation by creating policies that balance the needs of all the stakeholders (Davies & Aston 2011). The Board is made up of the chairman, the chief executive, the financial director, one non-executive director and six independent non-executive directors. The Board has conformed to the requirements of the United Kingdom (UK) corporate governance.
The UK code requires the roles of the chairman of the Board of Directors and the chief executive to be separate, which the ABF has ensured (Lapsley 2012). The chief executive officer is mandated to implement the policies and strategies created by the Board of Directors and manage ABF’s businesses. The chairman creates the Board’s agenda and ensures its effectiveness.
Secondly, the Boards of large companies should have at least 50% of its members being independent non-executive directors. ABF’s independent non-executive directors make up 60% of the Board, which is in compliance with the requirement. The roles of the non-executive directors of ABF are carried out as stipulated by the UK’s code of corporate governance. Each is highly qualified and holds senior positions either within the industry or in public life. Such qualifications enrich and empower the Board to carry out its mandate.
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The corporate governance code expects firms to have a senior independent director who should be appointed from the independent non-executive directors. The role of the senior director is facilitating cooperation between the Board and the shareholders, and mediates when there are stress and tension among members. ABF has a senior independent director named Tim Clarke. Clarke had completed his 9-year service as the senior independent director. The board followed the corporate code guidance and subjected his re-appointment to scrutiny and determine his independence. The importance of the senior director cannot be overemphasized, given the requirement of the Board to act as a unitary entity for the healthy performance of a company.
The Board has additional responsibilities, some of which include the formation of various committees. The committees include the audit, the remuneration and nomination committees. Each of the committees has distinct duties and regularly reports to the Board. Since the Board and its committees aim to maximize shareholders’ value, each must be evaluated to determine its performance and increase its efficiency. ABF has created various mechanisms to evaluate the performance of the Board and its committees. According to its 2014 annual report, the evaluation of the Board is spearheaded by the non-executive directors to ensure its objectivity (Associated British Foods 2014). It is imperative to assess the functioning of the various committees to understand the effectiveness of governance and auditing systems (Financial Reporting Council 2011).
The Audit Committee
The audit committee should be composed of non-executive directors to promote its independence (Solomon 2011). All the audit committee members at ABF are independent non-executive directors. UK’s code of corporate governance expects that among the members of the audit committee, one must be financially qualified (De Kluyver 2009). ABF’s committee chairman is Peter Smith who has extensive financial experience. He was PricewaterhouseCoopers’ senior partner, chairman of Cooper & Lybrand for two years and a non-executive director of Safeway plc. The experience exposed him to financial expertise, which helps him to execute duties as the chairman of the audit committee.
The code further requires the committee to have terms of reference, clarifying duties, responsibilities and authority of the committee. The ABF has updated terms of reference for the committee, which conform to all the requirements. Reviewing financial reporting procedures, the consistency of reports, internal financial controls, whistleblowing and fraud regulations are the responsibilities of the audit committee (Gurd 2008). The committee should have access to every type of information that can help it achieve its objectives (Mallin 2011). The company has provided the committee with access to every resource in the company. The committee can interview employees from all levels and may even seek the assistance of external professionals where appropriate. Once the help of the professionals has been solicited, the committee can advise the board on risks and internal controls. The committee closely monitors the relationship between the auditors and the company.
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Some organizations have risk assessment committees separately from the financial audit committees (Cavusgil, Knight & Riesenberger 2012). ABF has only the audit committee that also evaluates risks based on the strategies adopted by the management. The risk assessment helps both the management and the Board to decide how to realign strategies to avoid the riskiest ventures. Some of the risks identified in the year 2014 included product safety, health and nutrition, health and safety, management succession, supply chain and suppliers’ reliability (Associated British Foods 2014).
Since the company operates within the food processing industry, the highest risk it can face is reputation damage in case of poor food hygiene. The identification of product safety as a risk has helped the company to create mitigation factors and, thus, avoid negative publicity and potential loss of business.
The health and nutrition risk factor reflects the changing trends where consumers are concerned with the health implications of the food they consume. The mitigation steps to the nutrition and health risk include the continuous improvement of recipes to reduce fat, salt and calorie content.
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The workplace safety assessment is essential because it reduces accidents and loss of labour hours (Lee 2009). The audits identify the areas prone to accidents and recommend solutions.
Management succession is critical to ABF to ensure that the operations are not interrupted during leadership change. Since it represents a risk to the corporation, its identification is crucial as it helps the Board to plan for a seamless transition (Hopkin 2010). The risk posed by unreliable suppliers relate to poor working conditions of their workers, which taints the brand of ABF. The company has created a code of conduct for suppliers to eliminate the risk.
Long-term relationships with specific external auditors may lead to unprofessional associations, which may incapacitate the auditor from providing independent reviews (Luftig 2012). ABF has identified this possibility and has created mechanisms to ensure that it changes external auditors from time to time. One case in the company’s 2014 financial report can demonstrate how the independent components help. In the case, the management provided the committee with a report that they had no knowledge of misstatements in their report while the auditors identified some. The work of the committee was to make a determination of the case. After deliberations, the committee determined that there were no serious errors that necessitated adjustment in the management’s report.
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The complexity of managing large corporations may make it strenuous for the directors and managers to determine the adequacy of internal risk management and controls (Morden 2007). As such, the internal auditors provide assurance to the Board and management on the appropriateness of these internal aspects. The ABF’s audit committee analyses these assurance reports and makes recommendations to the Board.
The Nominations Committee
ABF has a nomination committee that facilitates the appointment of the members of the Board. The committee’s duties include reviewing the functioning of the Board and its composition. Once it completes its, the committee recommends the appropriate course of action to the Board. The committee’s primary duty is to make recommendation so that when the Board decides to nominate new directors, its decision is based on facts. The committee also contemplates the suitable succession policies and initiates the search for new members (Jalilvand & Malliaris 2012). The committee identifies the deficient skills within the Board and searches for the prospective candidates. Additionally, it considers diversity in terms of gender and variety of skills possessed by the candidates. ABF complies with the code of corporate governance by ensuring that the majority of the members are independent non-executive directors (Rezaee 2008). The committee has the power to sermon senior management executives and directors to attend its meetings. Since the chairman of the Board is in charge of the committee, his absence is required when the committee is discussing his successor. As such, the committee remains independent and conducts its duties without undue influence (Anderson 2006).
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The committee facilitated the appointment Ruth Cairnie an independent non-executive member of the Board in 2014. The committee engaged the assistance of external consultants to increase the likelihood of getting the best candidate during the process of her appointment. Spenser Stuart consulting firm was chosen since it is a signatory member to the Voluntary Code of Conduct for Executive Search Firms. The considerations for the director included the existing skills in the Board and the experience of the prospective director. The committee considered the re-election of non-executive directors by reviewing the Board’s annual performance evaluation within the same year. The report indicated excellent duty performance by the Board members, and recommended their re-election, prior to their approval by shareholders during the annual general meeting. The involvement of the shareholders in the appointment of the directors is an indication of commendable performance by the corporation’s leadership (Pearce & Robinson 2009).
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The Remuneration Committee
ABF has a remuneration committee as required by the code of corporate governance. It sets the policies of the remuneration of the directors. The committee determines the pay and compensation for the directors and sets the targets upon which to base the remuneration of those compensated according to their performance. Any changes in the compensation policy are communicated to the shareholders before being approved by the Board. The UK’s code of corporate governance requires the committee to be made up of non-executive independent directors (Robertson & Athanassiou 2009). Unfortunately, ABF’s remuneration committee is chaired by its Board of Director’s chairman. The presence of the Board’s chairman in the committee raises suspicion of its objectivity, since it determines the remuneration of executive directors. The Board’s chairman presence reduces the independence of the committee because he might influence the members when setting his pay package. The regulations of the London Stock Exchange demands that any company listed on its market must comply with the set code or provide an explanation for failure to comply (Northcott & Doolin 2008). The ABF has utilized this provision to explain its decision to have the Board’s chairman as the chair of the remuneration committee. The company argues that it is imperative for Mr. Sinclair to be the chairman of the committee because of his expertise and experience. The corporation claims that there are other governance structures that would preserve the committee’s objectivity in its attempt to counter accusations that the committee’s integrity may be compromised. Despite the explanation given, it is unethical for a person to be involved in deciding his remuneration. The company should have provided the specific mechanisms in the company that may preserve the integrity of the committee with Sinclair as the chairman.
Disclosure and Reporting Policies
The corporation has a discrete disclosure policy and reports all financial and non-financial performance of its businesses. The existence of the internal and external auditors, the audit committee and regular reports to the shareholders is a clear sign that the company values integrity (Paulino 2009). ABF decided to abide by the UK Listing Authority’s Disclosure and Transparency rules since 2008. The regulations require a corporation to report its performance regularly, create measures to control inside information and provide information to stakeholders (Lefley 2006).
Relationship with Shareholders
A cordial relationship between the company and its shareholders depend on the communication process (Bogt & Helden 2012). Since shareholders may not have access to the Board regularly, the company communicates with them through various channels. Apart from the annual reports and accounts, shareholders receive interim management reports, which outline its prospects and achievements. Additionally, the management plans meetings with institutional shareholders on regular basis to discuss performance. Annual general meetings provide chance for investors to seek clarification and raise their concern. The senior independent non-executive director is present at general meetings to solve queries that the shareholders could not communicate to the chairman or chief executive officer (Zawawi & Hoque 2010). The company’s secretary disseminates information to shareholders on matters of corporate responsibility and governance.
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ABF’s auditing and governance systems are effective to a great extent. The company has complied with the UK’s code of corporate governance with regard to the formation of audit and nomination committees. The committees have maintained independence and objectivity, which safeguard the interests of all the stakeholders. The annual reports identify the responsibilities of the Board members, financial performance and the company’s conformity to regulations. The identification of risks and weaknesses in internal control systems help to devise methods of mitigating them and thus cushion shareholders from losses. The nomination committee provides the company with an effective way of selecting qualified directors who in turn provide high-quality service to the company. Independent directors mitigate possible conflicts of interest, which would reduce the value of shareholders’ investments.
The only shortcoming with the corporate governance of ABF is the composition of the remuneration committee. The presence of the Board’s chairman in the committee creates a conflict of interest and jeopardizes the independence of the committee. His absence can rectify the situation and make the whole corporate governance system a success. The disclosure, reporting and shareholder relations improve the effectiveness of the governance because they address the concerns of all the stakeholders.