AFP2012: Risk Lurks in the Back of Treasurers’ Minds

Risk management remains a major concern for corporate treasurers attempting to steer their companies through choppy economic waters. Many are looking to uncover best practices in identifying, measuring, mitigating and measuring risk, but also trying to discover ways to turn risk into opportunity.

In the session entitled ‘Best Practices in Corporate Financial Risk Management: Market Study and Case Study with Pepsi’, Jiro Okochi, chief executive officer (CEO) and co-founder, Reval, presented recent survey results. Ada Cheng, vice president and assistant treasurer, Pepsi Co, joined him on the panel to illustrate treasury best practice in risk management.

The main findings of the survey include:

• The vast majority (92%) of chief financial officers (CFOs) see the main objective of risk management is to reduce earnings volatility. Forty-one percent of treasurers chose reduction in profit and loss volatility, while an equal amount said that protecting cash flow was of paramount importance.
• Most that review/update their risk management policy at least once a year. Still 12% say that they don’t have a formal risk management policy.
• The overall hedging strategy has returned to a traditional conservative approach, compared with 2010 when treasurers used selective hedging in reaction to market volatility.
• Exposure measurement is still a thorn in treasurers’ sides. Over half (58%) find measuring bank counterparty exposure difficult, whereas 63% find foreign exchange (FX) exposure difficult to measure. For most companies, FX is still not fully hedged.
• Only 20% use either a treasury risk management (TRM) system or a treasury management system (TSM) to hedge. Almost half (45%) still rely on spreadsheets for hedging.

Case Study: PepsiCo

Cheng said that PepsiCo, which operates in more than 200 countries and has 60-70 employees working in a centralised treasury structure, has generic risk management policies that are reviewed once a year. This does not mean that they are updated every year, but are regularly reviewed. It employs a conservative hedging strategy for underlying exposures.

Commodities risk is a focus area for PepsiCo, as volatility in commodity pricing increased dramatically between 2007-2012. These market changes, as well as changes within PepsiCo itself, in the past two to three years drove the need for change in commodities risk management (CRM) approach. The main CRM questions revolved around the global scope of the company, transparency, clarity of roles and simplicity.

PepsiCo developed a new centre of excellence (COE) model and upgraded the CRM model in order to put in place key risk management processes. The CRM was global in scope and approach. It defined coverage standards, defined governance process and standardised performance tracking across geographies and commodities.

Treasury and accounting, in partnership with global procurement, played key roles in executing risk management as defined by the COE. The COE developed global commodity playbooks, a new governance model, global reporting and an underlying data infrastructure. The playbooks included category insights, market groupings, strategy and coverage horizons, as well as detailed geographic background.

Cheng stressed the importance of understanding the business manufacturing side in order to hedge. As a result, PepsiCo treasury works very closely with business, for any change in the manufacturing cycle or country specific issues will have an impact on the hedging strategy.

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