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  • Eurofinance21

Entering the boardroom


How much has changed in treasury over three decades? Both a lot and very little, say veterans.

by Justin Pugsley

Published: 12 October 2021

In the 30 years since EuroFinance began, company treasuries have evolved from paper-driven, people-heavy processes to lean, automated strategic advisories, according to a panel of treasury veterans at the International Treasury Management Virtual Week.

Treasurers are now enriching the boardroom debate over a company’s strategic options by being able, for instance, to bring perspectives on the cost of capital and the practicalities of doing business in certain countries where currency convertibility is an issue.

Robert Farrow, General Manager, Corporate Treasurer at SABIC

“Having the access and the armoury for liquidity to support those capital allocation decisions, and having a seat at the table for that, has become more of a day job than it was in the past,” said Robert Farrow, General Manager, Corporate Treasurer at SABIC, a Saudi-based chemicals group.

The new role for treasury also includes influencing other corporate objectives, such as making sure there is sufficient liquidity to fund dividend streams, share buybacks, capital investment and acquisitions.

“I think the treasury will become a thought centre,” said Mark Kirkland, Group Treasurer at Constellium, a manufacturer of aluminium products. “So we can advise based on reports what we believe will happen or should happen in the company.”

Technology as enabler

30 years ago, such thought leadership was impossible, with treasurers being hampered the burden of processing data, rather than acting on it. Technology has enabled them to leap ahead.

Nandini Mongia, SVP and Treasurer at US insurer Prudential Financial

“We’ve already seen a fair amount of automation in the treasury function. It is all about using technology to create capacity for talent to deliver insights to guide management decision making,” said Nandini Mongia, SVP and Treasurer at US insurer Prudential Financial.

“There was a big move years ago to automate. Before that, people outsourced their treasury to cheaper locations,” Kirkland noted. “Over time many of the processing jobs will disappear”.

For example, buying and selling currencies and foreign exchange hedging was once done over the phone with a bank. That has been replaced with electronic trading platforms delivering more data, control and cost savings to treasurers. And the size of treasury departments has shrunk in line with the adoption of automation – a trend Kirkland believes has further to run.

Mongia expanded on some of the practicalities of supporting her company’s growth strategy. In the heavily-regulated life insurance sector, it is about ensuring that long-term promises made to customers can be kept – potentially decades into the future. “We want to make sure that there are available resources to support those promises, even under a very wide range of stresses,” she said.

But that’s not all. The current focus on environment, social and governance criteria is also impacting treasurers.

“I think with ESG coming in, and going to market now, the covenants that you’re going to worry about would be “are you meeting your carbon emissions targets”, rather than covenants back in 1991, which would have been scaring the heck out of you with your interest coverage,” said Farrow. In the early nineties, UK interest rates hit low double digits and US ones were in high single digits.

More companies are issuing ESG compliant bonds, but as the roundtable’s treasurers warned there is much more to this process than simply attaching a ‘green’ label. Many potential investors will probe a firm’s ESG credentials and will certainly question any negative publicity related to environmental damage.

Mark Kirkland, Group Treasurer at Constellium

Kirkland explained that Constellium, which has already launched several ESG linked bonds this year, has been reducing its carbon emissions and includes lowering carbon intensity as one of its key performance indicators.

Meanwhile, ultra low and even negative interest rates have caused treasurers to ponder their liquidity management strategies. Mongia said these factors are influencing capital optimisation particularly as holding too much cash can be expensive.

She said getting the balance right requires judgement and involves stress testing for various scenarios to help inform how big cash buffers should be. For many treasurers, security
still likely trumps absolute optimisation.

“And now of course there’s a penalty to holding too much cash,” said Kirkland, explaining that negotiating commitments with banks years in advance is important, particularly for companies lower down the credit spectrum. “You have to have different sources of liquidity, but not keep too much cash out unless you pay penalties for that too,” he added.

Value of banking relationships

This brave new world is influencing banking relationships too. Greater automation and the commoditisation of basic services, such as payments, means that costs to treasurers are generally falling.

“The euro, standardisation, the ability to move payments cross-border has made life a lot easier, a lot more efficient,” said Kirkland explaining that banks used to make 4% transferring guilders to Deutsche marks and back again. The Single Euro Payments Area has reduced the cost of payments within the eurozone to just cents forcing banks to reinvent themselves. However, he bemoans that in the US it still costs $25 to wire money across the country.

Though digitisation and commoditisation have weakened personal interactions between banks and treasurers, relationships still have value. “For very large payments, navigating complexities, especially internationally, does require strong banking relationships to get things done like (moving) non-deliverable forwards from one account to the next and to then be hedged,” Mongia explained.

Despite many changes in the role of the treasurer, certain principles will remain sacrosanct. As Kirkland explained, maintaining liquidity is the number one priority for a treasurer. He identified financial risk management and payments governance as two other key tasks.

In the words of Farrow, “I think when there’s a good old fashioned crisis, and we’ve seen enough of them, that’s when treasury usually gets taken extremely seriously”.