It’s not easy to take a long-term strategic view both of your company, and of the world around it. But treasurers, who sit at the heart of the organisation, can and should be the ones who join the many dots between the different needs and expectations of various business units, and help drive long term growth. This is a look at how this can be achieved.
Peter van Rood, corporate director of treasury at AkzoNobel says treasury has two strategic pillars that it has to offer the organisation it is part of. The first of these concerns financial risk management. “It requires partnering with other functions, such as insurance, pensions, M&A and taxation to optimise the governance and exposure management of the five financial risk categories for a company – capital risk, liquidity risk, interest rate risk, currency risk and credit risk. It’s only by working together with M&A and taxation on the first two, with pensions on the third and with the business units on the fourth and fifth risk category can this be realised.” The second point relates to functional excellence. “An infrastructure that allows for maximum efficiency in processing transactions, whether these are payments, FX dealings, trade finance or short-term investment and/or borrowings, means treasury can support its businesses by taking out costs and improving adaptability,” says van Rood.
Indeed, taking the long view in treasury management is about bringing clarity of thought to internal processes and operations against the backdrop of an all-too-chaotic financial world.
The main challenge to the long-view way of thinking comes from the post-2008 economic environment. The world economy is global but it remains fragmented. “Everywhere that you look, you can see a different picture,” says Stéphane Garelli, professor at the Institute of Management Development (IMD), Lausanne. “Some countries are in recession, while others are doing reasonably well. Some are witnessing inflation, yet some are seeing deflation. You name it, we have it.” Taking a closer look at some of the world’s biggest economies shows exactly how complex the picture is for treasurers
Global mixed picture
The US still offers the deepest capital markets and is fundamentally committed to entrepreneurship. “The US is a flexible and dynamic economy,” says Gabriel Stein, managing director at Stein Brothers. “It has also dramatically improved its competitive position over the past few years, not least relative to countries such as China.” However, operational and risk management concerns remain. “The US is slow to implement innovations, like electronic payments to replace cheque payments, and its fiscal and legal regime are at the high end of the risk spectrum,” says van Rood. “This has become more of an issue due to the need for fiscal discipline, which adds to the risk of cross border dealing.”
China faces problems in contrast to the improving situation in the US. There are signs of overheating in certain sectors of the economy with a debt bubble and potential housing bubble. “They want to crack down on these issues without slowing their economy – in other words they want to have their cake and eat it,” cautions Stein. “At the same time they are trying to switch from a monitoring policy that is based on quantitative measures to one that is primarily based on interest rates. The issue here is that some of the main problems China is having – excess debt and a shadow banking area that is to some extent out of control – are actually better treated with quantitative measures.”
China has the advantages of above global average growth levels and an increasingly more consistent liberalisation policy of its capital flows. Treasurers must balance these positives against an environment where the government still frequently steps in commercially, and not always in a manner that can easily be predicted. “Despite good news in the area of liberalisation, it is still one of the most regulated countries in the world, also from a treasury perspective,” says van Rood. “This has implications on setting up companies, funding them, repatriating funds and dealing with FX risks.”
Meanwhile, in Europe the underlying structural problems in the euro area remain. Another euro crisis cannot be ruled out. “While the easing of austerity is good news in some cases, it depends on how this is treated,” says Stein. “If it is treated as an opportunity to plan structural reform and further implement these then that is fine. But if countries treat this as an excuse to no longer make any of these structural changes, that is a worry.”
For many treasurers, any structural issues in Europe that prolong austerity measures and quantitative easing can be an issue. For instance, interest rates still remain low, which places pressure on corporates that hold large defined benefit pension obligation liabilities.
Elsewhere, the Brics are not necessarily the robust engine of growth they have been. “The emerging markets are no longer the saviour of the global economy in the same way that they were thought of in previous years,” says Stein. “Brazil has problems, Russia has very substantial problems with the energy revolution that is going on, India is having inflationary problems.”
With all of this uncertainty in the financial world, treasurers need to make clear strategic decisions right now that can support business growth in the long term.
The following are the 10 key actions treasurers should consider implementing now.
Ten key actions for the long view
1. Don’t be afraid to tackle big projects
“The long view is all about being courageous,” is what Patricia Greenfield, head of treasury operations, AstraZeneca, says. “Don’t live with processes or technology that is substandard, be brave and change it. There is enough information out there for people not to be scared of completely reconfiguring your treasury department.”
For example, you may have been in the situation where as soon as you implemented a new treasury management system (TMS) it was immediately in decline because you were not brave enough to put a budget in each year to make sure that you kept up at least with the current version. Courage to believe in what you actually can do will have dramatic results.
2. Create platforms that you can leverage
Having a harmonised payments process and platform with centralised controls and review can make a huge difference in terms of efficiency and lowering processing costs.
“In this particular environment, growth is very hard to come by, so the focus tends to be more on profitability,” says Ben Krajcir, assistant treasurer at Brady Corporation. “Here it is important to have automated solutions that we are able to leverage based on the fluctuation of the yield curve. We have also worked to create a treasury function that can easily integrate new acquisitions. This all comes back to our platforms and processes so we can integrate new functions as quickly as possible.”
3. If you think you need funding, get it today
The low/no interest rate environment that exists today will not be around forever. Any rise in interest rates, combined with the likely tapering off of quantitative easing, means the bond markets could continue to sell. “Corporates need to be aware that the yield curve will initially steepen and eventually shift upwards,” says Stein. “That steepening will probably be along most of the curves, so you are going to see very much lower short rates, but from three years onwards it is going to rise.”
This means that funding should be on the agenda of treasurers today. Rick Martin, executive director of treasury and investor relations for Virgin Media, which recently merged with Liberty Global, says: “Certainly, the current interest rate environment remains attractive. However, Virgin Media and the Liberty Global group generally also take a proactive stance toward ensuring we are financing well ahead of actual need. In fact, the average tenor of Liberty Global’s debt exceeds seven years.” He adds: “That’s a great comfort to all stakeholders especially in a post-2008 environment, and a real testament to my colleagues across the company.”
4. Align financial architecture with market outlook
Treasurers need to weigh up what possible impact any negative growth outlook in countries may have on their own company. “To manage for uncertainty, one needs to have a strong capital architecture and a lot of liquid funds,” says Ramaswamy Govindan, vice president – corporate finance & risk management at Larsen & Toubro. “The second thing is that you need to be seriously long on market volatility. People that have been doing this for the past several months have an advantage, but I think that even now if you find an instrument that gives you some flexibility, that will help a lot.” While premiums have gone up, they are still reasonable. “Even with the volatility we have seen in US treasuries, the premiums are lower than they have been,” adds Govindan.
5. Look to flexible instruments from a risk perspective
Risk management processes are integrated with cash management in the treasury function more than ever before. Martin agrees with this, pointing to the range of data and tools used by Virgin Media and Liberty Global generally to monitor risk. “Jointly with our Liberty Global group treasury colleagues, substantially all of Virgin Media’s debt has been matched to our underlying currency, and has been fixed on interest rates. This allows operating management to place its collective focus where it should be, on continuing to grow free cash flow.” foreign exchange planning while minimising their risk exposure. A good example of such an instrument is foreign currency options. “We use options for this purpose and it seems to be working at this moment in time,” says Govindan.
6. The right scenario
Being prepared for varying degrees of volatility is critical, and carrying out scenario planning is important so as to be ready for any eventuality. The warning signs of impending volatility are with us today. For example, a number of periphery countries in the euro area have moved into a current account surplus. “The reason this has occurred is because domestic demand has collapsed in these countries so they are not importing any more,” says Stein.
Indeed, the European Union’s statistical office Eurostat notes that euro area imports in May 2013 were down 6% year-on-year, while imports to the EU as a whole over the same time from countries such as Norway (-16%), Japan (-14%) and Brazil (-11%) fell dramatically. “If countries are not importing, they naturally move to a current account surplus. This can create volatility around things such as the prices of goods and services.” To be able to have a contingency plan for any acceptable eventuality, scenario analysis is useful. “You really need to have five or six scenarios on any area where the company may experience volatility, and know what the company’s response to the scenario should be,” says Govindan. “You need to be alive to what has been happening, and to think through the implications for your organisation.”
7. Prepare for taxation
A combination of government debt and corporate cash surpluses raise the real concern that taxation will be used as a tool to boost government coffers. “Taxation will become a very serious issue,” says Garelli. “You should not tax people too much, that is fair enough, but if you do not tax enough then you go into debt. To use the US as an example, in 2011, 24% of the US GDP was raised in taxes. This is the lowest level in 40 years.”
David K Waltz, an S&P 500 assistant treasurer, can see two influences from tax on corporate cash surpluses. “First, if growth investments are made in a country where repatriation needs to occur, which triggers a tax event, this simply further increases the hurdle that needs to be cleared,” he says. “Second, investment analysis is performed on after-tax cash flows. If cash flows are lower due to higher taxes, this again raises the return hurdle that needs to be cleared.”
Garelli asserts: “The world of treasury will probably see much more change in the next three years than it has in the past 30 years.” Considered preparation for this ‘oncoming storm’ of taxation will stand treasury in good stead for the future.
8. Be the glue in a cohesive organisation
The treasury department has a good exposure to the financial goings on in the outside world. Couple this with the rise of the role of the treasurer within the organisational structure of companies and the treasurer is in the perfect strategic position to join the dots. Treasury can provide potentially lucrative information to the business – for example, as domestic demand grows in the US, it would make sense for an organisation to direct its sales at this market. Seeing the bigger picture can also allow treasurers to assist the board in its strategic decisions.
“As well as playing a key cash management role, treasury has become more strategic in nature,” says Govindan. “We are planning and adding value to the business. This will continue to grow.”
This sentiment is echoed by Virgin Media’s Martin. “Close coordination with operating colleagues whether pursuing organic or inorganic activity is essential,” he says. “Look no further than our recent merger with Liberty Global, where financing of the transaction required a deep knowledge of the business – not just as it stands, but as we expect it to be in future. On a personal level, the chance to learn from operating colleagues, and to help them understand the dark arts of the capital markets, is immensely rewarding – and most of the time, it’s a heck of a lot of fun as well.”
9. Be clear about regulatory consequences
In the post-crisis world, the threatened regulatory burden is working its way through the financial system. It is only a matter of time before the twin dilemmas of additional compliance and increased costs are at the door of the treasury department. “For the treasurers, it is a question of cost and also how time consuming it will be – management time and working time, for example,” says Garelli. “You can comply with everything and produce an extraordinary amount of paperwork, but then you also have to ask yourself how the people that receive the paperwork will interpret it. There are all the ingredients for some monumental administrative work.”
10. Seize the positives
With regulatory unintended consequences looming, it can be forgotten that compliance measures can provide treasurers with the opportunity to re-evaluate all their processes. Take the Single Euro Payments Area (Sepa) as an example. “Sepa is a reality,” says Séverine Le Blévennec, director treasury Europe, Middle East & Africa for Honeywell. “Companies should be using Sepa as a catalyst to revisit all of their banking relationships and the structure of their banking and their organisation.”
Le Blévennec has firsthand experience of doing exactly that, as the Honeywell treasury team found that the more it put into its Sepa project, the more value it was able to derive from it.
“When restructuring banking relationships, corporates can analyse results from Request for Proposals [RFPs] in a rationalised manner,” says Le Blévennec. “Set your criteria and rate the different criteria so that you know exactly what you are looking for. Ask the bank for information that is relevant to you. For example, if you have an RFP that is asking for the pricing of certain types of transactions, you should know which transactions are most important to you. These are the ones you have to negotiate the hardest on, because this is where you are spending. A whole process such as this can spring from a simple compliance project.
Treasurers that have implemented these 10 actions are in the best possible position to steer their organisations to successful future growth. Have you checked them all off your ‘to do’ list?