This month's question
“Unethical business is increasingly in the spotlight. How can treasury help improve their company’s ethics?”
Chris Dark, President International, C2FO
There are certainly a number of overtly unethical practices that fall within the scope of finance and treasury, including bribery, money laundering, lack of accounting competence and transparency and high-risk investment strategies. These should all be regulated by internal corporate guidelines and codes of conduct, with fines and criminal charges as the ultimate enforcement for violations.
Some more subtle unethical behaviours that generally garner less media attention revolve around supply chain policies and payments. Late payment of invoices to small and medium enterprises (SMEs) is a huge issue globally, contributing to the liquidity crisis currently facing many SMEs. It has a significant impact on the ability of small businesses to grow and is considered to be a major factor holding back the global economy.
A recent Bloomberg Business article reported that China’s unpaid invoices or late payments currently total $590bn. According to authors Ye Xie and Fox Hu: “The raft of unpaid bills…shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”
It takes an average of 83 days for the typical Chinese firm to collect on completed sales, and the average days sales outstanding for SMEs across Asia Pacific continues to increase year over year.
Also, there is the uncertainty of when the payment will come. If a buyer is consistently late in paying, the supplier may plan ahead, but the volatility becomes the crucial issue for cash flow.
When companies pay late, pay erratically or extend payment terms beyond what their suppliers can afford, the end result is that the SMEs risk being unable to fund the working capital they need to grow, or just to survive. In these situations, suppliers often have limited options to access adequate funds for working capital. Broadly speaking, they can either take on debt or monetise invoices before they are due to be paid.
“Late payment of invoices to SMEs is a huge issue globally, contributing to the liquidity crisis currently facing many SMEs.”
Traditionally, banks have been the primary source of working capital funding for SMEs, either via loans or overdrafts. While this is still an option, lending to SMEs has declined since the start of the global financial crisis.
Treasury’s role in improving company ethics can be demonstrated via programmes designed to support the SMEs that make up their supply chain. One model that offers early payment to SMEs is dynamic discounting, which allows a buyer and supplier to establish new payment terms, with the discount amount being calculated ‘dynamically’ based on the number of days left until an invoice is due.
C2FO, for example, has created the first market for working capital, allowing buyers and suppliers to collaborate to discover the unique price for early payment that’s profitable for both.
When treasury actively solves the issue of late payments with a supplier-friendly solution, all businesses become more profitable as a result of fairly priced liquidity flowing down the tiers of the supply chain. The end result is increased trust between buyers and suppliers, reduced supply chain risk and an improved corporate reputation – all of which is thoroughly ethical.
Steven Wade, Global Project Director, Ethical Corporation
The Volkswagen emissions scandal sparked a 70% fall in earnings per share, Brazil’s Samarco Dam Disaster has resulted in $5bn payment of damages and #BoycottBlackFriday helped reduce retail sales by 11% at a crucial time of year for the sector. These very recent revelations of unethical behaviour are in the spotlight, and have a very serious risk to the treasury function of a business – one which isn’t so well-addressed. Unexpected fines, investors pulling out and opportunity costs from customer policies can have a big impact on the bottom line and, ultimately, on business longevity.
Consider this example of the intersection between ethics and treasury departments: a mining company operating in Asia will save money and meet regulatory requirements by using local suppliers in their projects. However, the company’s payment terms can conflict with the suppliers’ capacity to deliver projects and cutting out cost-competitive local options.
Needless to say, the ethics employed by any organisation is the responsibility of everyone involved, but there are numerous ways in which treasury departments can make significant contributions, namely, by creating the right culture, engaging on ethical issues and reporting on performance.
The focus should be on a transparent approach when it comes to ethical matters particularly with internal decision-makers, and stakeholders such as investors. Obviously, there are some issues around competitiveness that will prevent complete transparency – but the more open conversations had around ethical issues enable treasury to view the biggest risks to the department.
“The focus should be on a transparent approach when it comes to ethical matters particularly with internal decision-makers, and stakeholders such as investors.”
The second bit of advice is concerning engagement. Each business is different and corporates need to engage stakeholders to be able to understand both which environmental, social and governance issues are most relevant to their businesses’ success, and how best to assist different aspects of business units. Clear communication lines with internal decision makers, and also with those outside of the business with whom treasury frequently work, is key in ensuring this engagement is as efficient and effective as possible. Certainly, in our own research undertaken in preparation for The Responsible Business Summit Asia, we found that most business professionals in the Asia Pacific region are primarily concerned about stakeholder engagement, supplier collaboration and ethical business strategies.
You also cannot manage that which is not measured. Once treasury have an idea of the key ethical issues for the company, realistic KPIs need to be set in order to mitigate these risks, and then report upon progress and findings. It is similarly important to set up a monitoring mechanism to highlight risks before they gain momentum. Financial and non-financial reporting is becoming more integrated and most exchanges require non-financial reporting, so it is important to contribute to this data collection where possible.
Finally, whilst there’s a lot of focus on the negative aspects of unethical business practice, it is important for treasury departments to spend a little time in considering the positives that ethical business can have on the bottom line. As a supplier, responsible business practices are an important differentiator when winning contracts. What’s more, responsible business is a core value for the majority of millennials who as mega trends suggest will be your future customers and employees – it’s important to make them choose your business.
The next question:
“What constitutes best practice in bank account management?”
Please send your comments and responses to firstname.lastname@example.org