The Evolving Role of the Treasurer and Meeting Constituent Expectations
In what might be the start of an economic recovery, companies around the globe are shifting their priorities as they endeavor to thrive rather than merely survive. As a result of the recent economic environment many companies find themselves with staff that is much leaner than they were just a few years ago. As a result, roles within many organisations seem to be in constant flux, but perhaps none so much as those within treasury departments.
Historically, a treasurer’s primary task has been to manage balance sheet and cash flows – focusing solely on the numbers involved with money coming in and going out. However, in speaking with treasurers at a wide range of public and private corporations, it is clear that treasury groups are expanding beyond the operational and tactical realm to take on a much more strategic role.
Of course, the responsibilities of the corporate treasurer have been evolving for several years as companies continue looking for better ways to centralise their cash and information. Yet, today’s economic environment has put a new emphasis on the critical role treasury plays in providing the insight necessary to make smart, informed business decisions. The role has expanded beyond what was traditional and now includes such activity as: monitoring counterparty risk, improving liquidity management focused on capital preservation and in some cases overseeing departments such as investor relations and the company’s mergers and acquisitions (M&A) area.
For example, a corporate treasurer at a company with annual sales of around US$6bn said that in the past three months, cash forecasts received little, if any, attention from senior management. Today, these forecasts are prepared weekly, and if they are delayed for any reason, he can expect a call demanding a status update because in today’s environment this information is time critical. This data is vital for decisions impacting all areas of the corporation – from managing liquidity and foreign exchange (FX) risk, to M&A advising, to investor relations and more. This underscores the multi-faceted and important role of the treasury department.
Figure 1: Corporate Treasury Responsibilities
For the first time in most of our lifetimes, many treasurers are concerned with the counterparty risk posed by their banking relationships as a direct result of the market volatility. Just as investors are concerned about the financial stability of their investments, corporations and their treasurers are as concerned about the financial health of their financial service providers. This concern has led many companies to pay much closer attention to a bank’s credit rating before choosing them as a provider or deciding to make a switch. As Andreas Fischer, CEO and treasurer of the Wurth Group of North America notes: “With the changes in the finance sector, the stability and credit worthiness of our bank and investment partners became paramount. In the past, a minimum credit rating was the main factor in qualifying a banking partner. After the market shift, this system was questioned.”
This important activity has been incorporated into the responsibilities of the corporate treasurer. The treasury department now is responsible for monitoring and establishing a ‘watch list’ for their main banking partners. The components of the list include such activities as monitoring:
This information compiled by the corporate treasurer then serves as the basis as to whether the relationship should be continued or put under further scrutiny.
According to John Dieker, treasurer of Greif: “While there has always been a focus on risk, the types of risk and our appetite for it has certainly changed. We continue to pay close attention to all of our key risk areas. However, commodity, credit and counterparty risks have been elevated over the past year. The highly volatile commodity prices, customers impacted by the global economic downturn and failures of financial institutions have caused our company to improve its systems for monitoring and mitigating these risks.”
These types of concerns have prompted other treasurers to act in some of the following ways:
The current market conditions also gave many companies the impetus to centralise cash management among their subsidiaries throughout the world. A treasurer for a US$2bn company with multiple global subsidiaries stated that increasing the line of sight and creating a more reliable cash flow are his main focus. The treasurer of another company with revenues of US$3bn explained that at one time their subsidiaries were autonomous in managing their own liquidity. They had pockets of cash literally scattered around the globe with no systematic reporting – everything was done on an ad hoc basis. In years past, the company was much more casual about knowing what their cash positions were globally since they were flush with cash and had easy access to credit.
Now, led by the treasurer, the company has taken steps to consolidate accounts and put a more reliable reporting mechanism in place. They now have close to 90% of their global subsidiaries providing account balance details regularly via SWIFT or proprietary bank systems – a project that took months because it involved a significant shift in the way subsidiaries worked and communicated with their parent company. Thanks to this keen focus on global treasury, the parent company has both control and visibility of funds from its subsidiaries, which is a significant benefit during a time when cash maybe in demand.
While visibility into the overall financial health of a company has certainly always been key, the current economic climate has senior treasury managers looking at their company’s liquidity as a main concern, as opposed to a tacit assumption. In fact, according to the June 2009 Duke University/CFO Magazine Global Business Outlook Survey, which polled more than 1,300 CFOs across an array of global public and private companies, one of the primary concerns today is the inability to adequately plan for the future due to economic uncertainty – making working capital management and liquidity all the more important.
The survey also found that 60% of US companies are credit constrained. For these firms, interest rate premiums and fees can be double those of companies considered unconstrained – with many having to provide collateral in order to secure credit at all. While conditions are somewhat better for unconstrained companies, according to the survey only a third of these say they have been able to successfully negotiate more favourable terms with lenders.
Managing liquidity in terms of ensuring that the right amount of cash is in the right place at the right time has become an increasingly critical component of a company’s capital strategy, and therefore a sharpened focus for the treasury group. According to the treasurer of a US$6bn public company: “Every senior manager now understands, lives and breathes liquidity.”
Of course it is not surprising that the burden of improving the way a company manages liquidity has fallen on treasury. With this, there is a new emphasis on increasing liquidity over the long term in an effort to become more nimble in the marketplace, i.e. able to make business decisions quickly and intelligently. As such, many treasurers have had to become more resourceful in seeking nontraditional forms of financing. Many are entering the lending arena sooner than they normally would have in order to avoid potential execution risk. Others, like one US$2bn privately-held company, have been exploring additional vendor finance programmes and non-bank sources for capital such as private placements. In addition, this economic downturn has slowly brought about a re-emergence of securitisation programmes, which can effectively help companies manage the volatility of their operational cash flows.
Beyond this, treasurers are also tapping into internal sources of capital, whether by implementing liquidity tools, such as pooling structures or by redeploying cash from other regions. As an example, a treasurer for a public company with revenues of US$1.6bn explained that the company no longer takes the minimum amount of cash from their subsidiaries, but instead focuses on building up organisational cash reserves centrally. At one time, this money might have been used to pay down debt, but today the focus is on security and capital preservation.
What has certainly changed in this environment is the perception that a company can have ‘too much’ cash on hand. Once seen as a negative from a strategic standpoint, being well-capitalised and highly liquid is the sign of a strong treasury function, and therefore a strong company, today. To this point, the Duke University/CFO Magazine Global Business Outlook Survey found that liquidity at lower-rated companies continues to suffer because they are finding it difficult to secure credit at reasonable rates. At the same time, companies with strong credit ratings find that conditions for them in the credit markets are beginning to level out.
As an example, one publicly-held US-based company with US$5bn in sales modified its business model to not only preserve capital, but also to maximise its operational flexibility by entering into longer-term fixed cost, performance-based contracts with its major vendors. According to the treasurer: “Because of an environment in which significant cash reserves are key, we changed our business model while still ensuring our vendors were paid in a timely manner.”
Most of the treasurers interviewed said that their focus is now on capital preservation. This has impacted various aspects of the treasury operation including investment policies, which not surprisingly have become more conservative. According to the treasurer of a US$13bn public company, while profitability is certainly the objective, the emphasis has shifted to protecting the capital that already exists.
To this end, some treasury groups have taken a further step – they are more closely monitoring the outside asset managers they have tasked to invest for them to ensure that all investments are made in accordance with corporate policy. As a result, treasurers are looking for better ways to monitor investments themselves instead of relying solely on asset managers – some are even independently conducting periodic mark-to-market reviews of their portfolios. This additional monitoring which has fallen to the corporate treasurer is an additional attempt to reduce risk and mitigate financial losses.
Some companies are expanding the role of treasury to include the responsibility for overseeing various departments, including mergers and acquisitions and investor relations, tax, among others. This further attests to the increased visibility and expanse of treasury, previously held to be simply a tactical role.
Treasury has always been an integral part of an acquisitive company’s deal team. However, where once the treasury group was brought in towards the end of negotiations to iron out the fine details of a transaction, many acquisitive companies now involve treasury from the deal’s inception and throughout the entire process.
There are several reasons for this shift. Above all else, a treasurer’s rigorous analytic input can have a very real and significant impact on the bottom line profitability of any given deal. Their input is based on specific knowledge of the company’s cash positions and the economic climate, combined with the ability to forecast the overall financial picture of the merged company. Treasury also ensures that each deal is structured properly from a cash flow and tax perspective, and in many acquisitive companies, the treasurer is now an active participant in managing the M&A pipeline.
For many publicly held companies, long-term objectives remain unchanged – to minimise corporate risk while also maximising shareholder value. Of course, the various ways in which a company raises capital has a significant impact on how they are perceived by shareholders. It is the job of investor relations to communicate an improved risk profile to the investor community. As a result of the current economic environment, the investor relations area has increasingly become reliant on the treasury group to expertly manage liquidity and risk. As one treasurer from a public firm with just over US$3bn in annual sales put it: “Our strong balance sheet was seen by analysts as a strategic asset.”
A well-run treasury group gains recognition and visibility within an organisation in the face of economic uncertainty and, as such, treasury’s role has become more critical to the decision making process. For instance, a treasurer from a private company with annual revenues of US$2bn notes a far more dynamic and proactive relationship with their executive management team and board of directors. “Where previously we were required to report to the board infrequently, today the reporting requirements are much more frequent and more sophisticated. For example, the treasury group is now required to run 10 to 12 different ‘what if’ scenarios based on the anticipation of the Fed changing the discount rate.”
In this same company, the once quarterly treasury updates prepared for the finance committee are now monthly. They go first to the finance committee, then to the board, then to the shareholders and/or the company owners. Generally, treasurers say there is now far more risk-related information distributed to the board, as well as more ad hoc discussions and presentations.
Due to this heightened awareness, treasury initiatives focused on greater efficiency that once may have languished on the back burner for years are now being approved. This includes consolidating bank accounts and banking relationships to move toward a more centralised operational structure, as well as leveraging enterprise resource planning (ERP) and bank systems to maximise straight-through processing and improve visibility. While in the past IT departments focused on other corporate-wide projects, they are now working closely with treasury groups to minimize the number of platforms from which a company operates. At the same time, they are working together to maximise what is already in place, such as treasury workstations and ERPs that may not have been used to their full potential.
One main question on the minds of the CFO and CEO is: do we have enough cash on hand to fund our strategy? The information to answer this question needs to be easily accessible. To do that, many companies find they must upgrade systems and streamline processes – internally and at their banks. As a result, companies in general and treasury groups in particular are looking to their banks to become more than simple service providers.
When corporate treasurers are asked how their role changed over the past year, the responses vary. However, overall there is now much more focus on what the treasury group does day-to-day. “In some respects it’s gratifying, and in other respects it’s like walking a high wire,” stated a treasurer from an US$11bn publicly-held company. On the other hand, the treasurer of a US$2bn private firm reported that the role has become more defensive and less strategic over time, specifically as it relates to investment decisions. This seeming disparity indicates that there is not one set way in which successful companies’ treasury groups operate – with unconstrained companies having greater flexibility to be strategic in their thinking than those considered credit-constrained.
What’s the bottom line for these treasurers? Senior management now realises how vital the role is to the company’s overall financial health. One treasurer said: “People understand our value now, and that bodes well for our department.” As such, companies are far more willing today than ever before to invest in the process changes necessary to ensure they have visibility and control over cash positions.
The consensus seems to be that the treasury group today has a ‘louder voice at the table’, with the current economic climate having positioned the treasurer as a partner in the success of the business. Treasury is no longer viewed as a silo that simply pays bills and manages debt, but has much broader responsibilities and is an important part of what makes the company tick. And while the outlook for the economy remains uncertain with some reporting potential signs of a recovery, what is clear through is that the treasury function continues to evolve with broader responsibilities that include: monitoring counterparty risk, improving liquidity management focused on capital preservation and, in some cases, overseeing departments such as investor relations. This implies that the role will continue to expand and the treasurer will play a pivotal role in positioning their companies for the market upturn.