What would happen if treasurers ruled the world? The annual ACT conference and exhibition, held last week in Glasgow, posed this question. Here are some of the conclusions.
What would happen if treasurers ruled the world? The somewhat partisan audience gathered at this year’s ACT annual conference held in Glasgow last week were asked to reflect on what might be if they were to take over the reins, at least in a business context. Through the medium of appropriately themed track sessions – covering the likes of credit ratings for midcap businesses, risk visibility, emerging markets, FX risk, funding, M&A, regulation and investment policy – the conference imagined a world where the treasurer was the heart and soul of decision-making.
Focused ‘workshops, roundtables and master-classes’ on topics such as emerging market currency exposures, technology trends, supply chain finance, and optimising the working capital cycle were also on offer, alongside a spirited Question Time (led by consummate broadcaster, Kirsty Wark) and a sideways look at the creative drive of treasury (delivered by genuinely funny former Guardian columnist, Guy Browning). The scene was seemingly set for the treasury profession to feel good about itself in an economic environment that is still stuttering along, albeit with signs of good things to come (or at least “a moderate reduction in overall default rate” as S&P’s Managing Director of Corporate Ratings, Trevor Pritchard, saw it).
Hedge. Don’t hedge.
In the ‘Managing Emerging Market Currency Exposures’ workshop, Lloyds Bank’s Head of Financial Risk Advisory, Yuri Polyakov and Head of FX Solutions, Jeremy Adams, put the 30 or so attendees into the boardroom and asked questions to determine their reactions to certain situations (which EM would you choose to operate in? Why? How significant can EM FX risk be? Which risk solutions work?). The message from the session is that although EM FX hedging looks expensive, not hedging can prove even more costly: consider whether the business can generate enough profit to afford proper risk management; always create a risk checklist before entering an EM to evidence effective analysis of the facts; keep risk policy sufficiently flexible to cover a range of hedging instruments; and try to see hedging holistically rather than focusing only on the most volatile markets.
Amongst the track sessions, the ‘Creditworthiness’ strand served up a slice of confidence for corporates seeking to navigate still slightly choppy waters with the news that corporate credit ratings are recovering in quality, with share buy-back almost back to 2002 levels, bond issuance “holding up well” and a “modest improvement in credit transmission”.
Smurfit Kappa’s Group Treasurer, Paul Regan, explained how securing a credit rating was “very valuable in terms of access to the full range of credit”, despite the difficulties presented in trying to emerge from a highly leveraged position. “Once you are leveraged, it takes a lot to convince people you are no longer in that space”. In the same session, Graham Clemett, CFO of Workspace, saw the goal of securing a corporate rating as one which necessarily sees the company’s management as “part of the story you have to sell” (“how good are they; what is their track record?”).
The genuinely humourous interlude that was ‘Treasury Voodoo’ (the almost capacity crowd were laughing for once not out of embarrassment) saw writer and Director of the Smokehouse consultancy, Guy Browning, expound the virtues of keeping creative thoughts simple (and to keep going until the idea is a simple as it can be) and avoiding “general and board-level muppetry” (a full review will follow).
If treasurers ruled the world… there would be no barriers to new markets. So the track session of the same name would have it. With most of the focus fixedly on Asian EMs, the African market was left largely on the side-lines. This omission apart, James Binns, Managing Director, Head of Working Capital Advisory, EMEA, for Deutsche Bank believes that many EMs are expanding and that “the future looks good, but we need to position ourselves now”.
A more cautious view (perhaps expectedly so given his company’s stock-in-trade) was that of risk technology vendor, FiREapps’ VP, Strategic Market Development, Andy Gage. He sees “rough seas ahead”. There has been a “net headwind” from EM currencies in the last couple of years and although not all companies have sustained a direct hit, most are now “much more sensitive” to their exposures. The threat is forcing intense questioning specific to corporate currency exposures, risks and actions being taken, from analysts during report and earnings calls. Boards should be consulting treasurers on these issues as a matter urgency.
Unilever’s Director of Global Treasury Operations, Hans van den Bosch, saw regulatory differences in EMs as a major challenge. He accepted it as “part of the D&E [Developing and Emerging Markets] world” but insisted risk management should be a company-wide and cross-functional activity. An obvious concern for all is political risk. This is hardest of all to contend with, noted ACT’s Development Director, James Lockyer. In purely financial terms it is, he said, “un-hedgeable”.
Although Gage pointed out that EM FX risk is to an extent a “personal issue”, with one CFO likely to view it differently to another, van den Bosch’s advice was not to be “over-emotional” about its peaks and troughs, his company at least being run “not by quarters but by decades”. To this end, he added that treasury should be seen as a facilitator of risk management “not a dispenser of data”.
AstraZeneca, Pfizer and M&As
M&A is big on the agenda right now, with Pfizer and AstraZeneca battling it out in the boardroom (and the popular press). Both had treasury representatives present but not even Kirsty Wark could get them to talk about that issue. Perhaps by chance though, the latter’s Group Head of Tax & Treasury, Ian Brimicombe joined the panel discussing the notion that treasurers can play a pivotal role in M&A from start to finish. Brimicombe spoke of the need for a “coherent financial perspective”. M&A, he added, often needs a “rapid response” which will be based on a “collaborative approach”.
Indeed, said Tom Greene, Group Treasurer at Shire, “acquisitions can be like busses; there are none for ages then several come along at once”. Shire is acquisitive by nature and may be looking at 20 opportunities at any one time, but the team is often “unsure as to which will come through”. Treasurers cannot be involved in every deal but the earlier they are involved the better, in terms of “making sure the right tax and finance pieces are in place”, said Amec’s Director of Tax and Treasury, Alan Dick.
According to Bank of America Merrill Lynch’s Treasury Solutions Director, Dennis Sweeney, many treasurers have taken on a broader role as a result of the financial crisis. As such they have been involved in the assessment of many decisions around the funding structure of M&A. However, treasurers do need to demonstrate the value they can deliver if they are to be brought in early to major deals, he noted. “They need to be good at networking and communication to secure that involvement.”
Treasurer of the Board
That same ‘soft’ skillset would be required if ‘…the treasurer would have a regular voice in the boardroom’. In this session the concept of ‘strategic treasurer’ was mooted. By connecting with the rest of the business it can be possible for the treasurer to “understand and facilitate the wider business objectives”, said Ben Green, Managing Director, Corporate & FI Strategies, Product Structuring for Lloyds Bank. Forget insular treasury operations; remove functional silos by introducing and offering the analytical skills of treasury as a means of breaking down complex financial issues. By presenting solutions to key stakeholders through a “filter of relevance”, everyone that needs it will have access to the vast pool of internal and external treasury resources (described by Green as “possibly the broadest network of external advisors out of any business function”).
The key to treasury inclusion, he added, “is to avoid the temptation to delve too deeply into the tools of the trade but to look upwards and understand what the CEO and board are trying to achieve”. The mark of the ‘strategic treasurer’ is this one who knows how to communicate with all stakeholders and to be a true “agent for change”.
Talking of change, remember how in the 1600s, the Dutch went on a tulip-buying frenzy which culminated in the ruin of many an investor? Netherlands-based treasury software and consultancy firm, Wieltec, decided to play on its national heritage by distributing bunches of the showy spring-blooming perennials on its stand. Was this an antidote to the usual pens, packets of mints and soft toys that delegates traditionally hoover up before heading home? Or was it a coded cautionary note for those desperately seeking investment yield? If treasurers ruled the world… perhaps speculative bubbles would never happen.