A financial study of Associated British Foods

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Apart from the financial statements, many other financial and non-financial information about Associated British Foods plc ( ABF ) can also be accessed through the relevant disclosures in its annual report. Specifically, these disclosures include:

1.The main Corporate Governance Mechanisms and Features

1.1 The Size and Composition of the Board

The board of ABF comprises of three inside members (the Chairman,the Chief Executive and the Financial Executive), four independent non-executive directors and a senior independent non-executive director. The Chairman and the Chief Executive play different roles within the limits of their authorities and they are independent of each other. The non-executive directors keep fully independence and they have made notable contribution in the procedure of making critical decisions. The board is evaluated independently.

1.2 Role ,responsibilities and the mechanisms of governance

As stated in the annual report, the basic governance mechanism of ABF is based on the board of directors who is accountable for the company's overall performance and management. The directors are required to take charge of company business management as well as annual reports preparation. They also need to oversee the performance of the Chief Executive in order that the firm's performance is accurately reported to its shareholders.

Specifically, the board authorizes daily management to the Chief Executive. Meanwhile the board delegates some certain responsibilities to the board committees, especially the Audit, Remuneration and Nomination committees. In order to supervise the controlment, the board keeps its authorities of decision-making for a schedule of significant matters. It also requires the board committees to report regularly about their activities and performance.

1.3 The Remuneration Committee

The Remuneration committee of ABF comprises of five non-executive directors who are independent of each other. The Remuneration committee sets down the executive remuneration packages for executive directors under the supervision of the board while the remuneration of the non-executive directors is determined by the board.

The remuneration of executive directors are formed by four elements: base salary, annual and long-term incentives, pension provisions and other benefits.

2.The Ownership Structure

As stated in the notes to the financial statements in its annual report, ABF's ultimate parent company, Wittington Investments Limited hold 54.5% of the total issued ordinary share capital of Associated British Foods plc. As the Weston family hold the vast majority of Wittington Investment's share capital, the ownership structure of ABF can be put into family ownership category.

There have been debates about the influence of family ownership on firm performance. As Majluf and Silva (2008) stated, on one hand family businesses could make managers and owners more aligned and reduce the adverse influence of the agency problems. On the other hand, it is often the case that family ownership makes the management less effective for the lack of expertise and family members may act to pursue their own interets other than to maximize shareholders' wealth.

However, the annual report has also included the company's Share Incentive Plan, which is used to incentive its executives by allocating shares to well-performed executives. This will improve the corporate governance in the sense that managers' interests will be more aligned with the shareholders when they hold shares.

The Audit Report

Audit report opinion and assurance

The independent autitors' report in ABF's annual report aids the communication between auditor and financial statement reader. The report clearly expresses what have been audited and has provided a positive assurance by giving the auditors' opinion. It has also completed its review of the company's internal control system. A separate internal control report has been presented in the annual report.

The report has given opinions about the financial statements and other non-financial matters. The auditors attest that the validity and legality of the financial statements. They have also audited the Remuneration report and the Directors' report and attest that they are both consistent with the financial statements.

Non-audit services provided and audit independence

As can be seen from the table, the auditors have provided several non-auditor services to the company. These services include tax services, information technology services,due diligence and other services.

Defond et,al. (2002) point that auditor independence and objectivity will be reduced if auditors provide non-auditor services in the sense that auditors will economically rely on the client.

However, the audit committee of ABF has reviewed the independence of its auditors and assures that the use of the auditors for non-audit sevices are consistent with the regulatory requirements. Moreover, none of the auditors has personal interests in the audit process. Therefore the auditors of ABF remain independent.

4. The Audit Committee

According to Collier (1993), one of the main functions of the audit committee is to ensure the company's financial accounting and control framework. The audit committee of ABF is accountable for balancing the relationship between internal and external auditors and for overseeing the firm's internal audit procedure. It assists the board to gurantee information flows are accurately provided to shareholders by presenting a balanced assessment of the firm's financial position, which has improved the reliability of the firm's published information.

ABF's audit committee currently comprises of four non-executive directors and it is highly independent since it can access to company documents and can hire both internal and external auditors without any restriction.

Specifically, the audit committee oversights the performance of the external auditors by reviewing the extent to which they fulfil the agreed assignment. Meanwhile, it also assesses the external auditors' independence by reviewing the changes in external auditors, conflicts of interests and the non-audit services provided. In this way the audit committee enhances the independence of the external auditors.

As for the internal auditors, the audit committee is authorised to employs auditors within the company who need to report directly to the committee. With their assistance the committee will provide a complete review of the company's internal control framework. They also independently review the financial reports and statements, in which way the credibility of the published financial information can be improved.

5. Voluntary Disclosures

Corporate Responsibility

Corporate responsibility report is an independent component of ABF's annual report. As stated in the report, the firm has responsibilities to pay attention to the welfare of the employees, the protection of the environment and the ethical business relationships with other companies.

As shown in the table, the report has also disclosed the work-related deaths and injury rate. Meanwhile, the company's efforts to improve the safety system have been presented as well.

Environmental Disclosures

The report has included a clear environmental statement. The statement provides a summary of the main impacts from the firm's operations on the environment: energy usage, carbon dioxide emissions, water abstraction, waste water disposal and the waste generation and disposal.

The annual environmental performance data has provided in the report. As ABF is an international diversified company, its annual reports has emphasized that the legal and environmental laws in every country have been carefully considered and abided by the company.

The company's environmental objectives have been included in the report. As stated in the report, the company has made significant investments in minimizing the adverse environmental influences by its operation. In addition, the report has also stated ABF's environmental targets in reducing water usage and waste generation.

Other Disclosures

Economic dimension

In accordance with The Companies Act 2006, several sections in the annual report have included detailed reviews of the company's business performance in the financial year.

Meanwhile, the company's principal activities, dividends, research and development expenditure as well as the potential risk have been disclosed.

Employees and directors' share options have been disclosed as well.

Environmental dimension

As stated earlier, the adverse impacts on the environment by the company's operation have been presented in details.

Social dimension

In this respect the employees' health and safety, equality as well as their human rights have been recognized and emphasized in the annual report.

The potential impact of the voluntary disclosures

As stated in the annual report, the business review aims to aid shareholders to oversee and assess the directors' performance. Therefore such disclosures can improve the transparency of the company's operation and make the monitoring of the directors more effectively.

As Akhigbe and Martin (2006) noted, shareholders and analysts will estimate a firm's value on the basis of the corporate disclosures. High quality disclosures have positive association with the firm's value and opaque disclosures may lead the firm to be undervalued. In addition, an empirical study by Francis et al (2009) shows that there is a positive relationship between the extent of voluntary disclosures in the financial statements and the firm's earning quality.

The annual report of Associated British Foods plc has provided objective and high-quality voluntary disclosures in many respects, making the company's structure and activities better understanded by the public with respect to environmental and ethical criteria, which will promote the company's reputation to some extent and make the investors more confident about the firm.