Treasury Practice

Taking centre stage

Published: Mar 2017
Musician plays guitar on stage

The importance of treasury within the organisation has grown in recent years – but what does this mean in practice and what tools and best practices can treasurers draw upon to support their evolving role?

Today’s treasury teams juggle all the usual mandates around cash and FX management, liquidity planning, banking relationships and trade finance. Yet these tasks have grown more complex as companies venture into new jurisdictions, global markets change and demands around risk management and transparency grow. This means that treasury expertise and strategic advice, particularly around funding and exposure to risk, is increasingly valued within corporations. In what areas are treasury teams taking centre stage to drive value across organisations, and is treasury getting the support it needs in its evolving role?

Care for cash

The evolution of the treasurer’s role has its roots in the 2008 financial crisis. The banking turmoil sparked a recognition amongst corporate boards that finance wouldn’t be as easily available, leading to a greater focus on cash management and raising finance. “Pre-financial crisis, the role of the treasurer was simpler,” said Duncan Kellaway, a partner at law firm Freshfields Bruckhaus Deringer. “Now it is more complicated.”

For treasurers in companies with overseas operations, the focus on cash flow and capex discipline has turned the spotlight to an area that was already one of treasury’s biggest headaches. Repatriating trapped cash, or profits stuck overseas, is a complex task that demands more tenacity, and more interaction with the wider business, than ever before. “Trapped cash has always been an issue for us but it has increased over the past three to five years because of problems in some jurisdictions around accessing dollars,” explains Carl Burman, Head of Treasury at Danish shipping and energy conglomerate Maersk.

Large current account deficits and a shortage of US dollars have seen governments in Maersk’s riskier markets like Egypt, Angola and Nigeria introduce FX controls, taxes and regulation to create barriers to repatriating profits. “We have business in challenging countries, particularly in Africa, and it is difficult to access the cash that we have generated in these places,” says Burman.

The fact that emerging markets often produce the best growth has helped raise the importance of trapped cash within companies. For Burman, making the issue felt across the company, by arguing that the relentless focus on profits in times of straitened liquidity should be equally balanced by caring for cash, has become a priority. “We have to align our key performance indicators so that people within the organisation care more about cash balances, and are not focused just on measuring earnings,” he says. “It is also about freeing up cash that already exists.”

His team have found that the trapped cash challenge varies from region to region, and requires much research. Burman notes, “As long as the topic of cash management is high on the agenda we can tap resources that exist across the organisation, and draw on the wider organisation for support.” He cites Maersk’s business finance divisions as especially useful partners in finding solutions. He also has the full support of the boardroom. “We have good access to management, and better access than many other parts of the company.”

Bond skills

Treasury is also evolving and adapting to a changing lending environment. Banks’ new capital requirements mean they are lending less, and for shorter periods of time. This has left businesses having to tap different sources of funding. “There has been a shift towards seeking more capital markets debt amongst UK corporates because it offers a deeper pool of investors,” says Kellaway. He notes that historically around 70% of UK corporates’ borrowings used to be from banks in the loan market, but that this has dropped off. US corporates, in comparison, have traditionally borrowed more from the debt capital markets.

This contrasts with Asia where banks still have an appetite to lend, observes Singapore-based Damian Glendinning, Treasurer at Chinese PC giant Lenovo. “UK and US banks are reluctant lenders and loans are often dependent on them providing other corporate services,” he says. “But Asian banks are still happy to lend as their main business.”

The ability to access the capital markets is certainly driving treasury behaviour at Maersk. The company, which is in the process of separating its energy and transport businesses, issued a dual-tranche EUR bond and a three-tranche NOK bond in 2016, following on from two multi tranche issues in 2015. “We can’t rely on bank funding to the same extent because banks are being regulated differently,” says Burman. “We are a capital-heavy company so this means we are becoming more dependent on debt market financing. It requires knowledge and highly skilled professionals.”

A key requirement of Burman’s 15-strong team based out of Copenhagen, part of a wider treasury and risk department of 60, is managing financial risk to maintain the company’s credit rating. Although the rating goes across currencies and isn’t specific to US dollar debt, an investment grade rating is crucial to the company’s ability to access the US dollar debt market where Maersk does the bulk of its borrowing. “You need people who understand financial risk. It is related to our US dollar credit rating from S&P and Moody’s which gives us access to the debt capital markets in dollars. The importance of this is changing the way we work,” he says.

Issuing bonds also requires proactive interaction with the capital markets. Successful issues call for imagination, and an ability for treasury to plan and forecast in advance. The focus could be on raising money for longer periods of time, or raising new debt while continuing to have existing debt in place. “In the current market it is more than just knowing that debt is due to mature, and issuing more,” explains Martin Hutchings, also a partner in Freshfields’ banking team. “Treasurers often will not want all debt to mature at the same time, as that presents refinancing risk. They will try to spread maturities to ensure that their company is not looking for a lump sum in one go.”

Treasury also needs to be opportunistic and ready to take advantage of market conditions. “Issuing debt could be a liability management exercise, where a company will buy back debt and replace it with cheaper borrowing because the existing debt has a higher interest,” says Hutchings.

Treasury’s involvement in marketing bond issues can also be intense. If it is an established name, and the company frequently issues debt, treasury’s input is small. But smaller organisations have to do extensive road shows that will involve large amounts of treasury time and expertise.

As companies increasingly tap the debt market, so treasury needs to forge strong relationships that allow visibility across the company. This means ensuring the company isn’t doing anything that could jeopardise its credit rating or that could breach any of its existing covenants, in particular its financial ratios. “If a company is negotiating a loan agreement, banks will seek to impose various restrictive covenants. Treasurers need to know that no part of the organisation is doing, or is likely to want to do, anything that could breach those covenants,” explains Hutchings.

It is also important that treasury knows what is coming down the line in terms of major corporate events such as disposals or acquisitions. Kellaway adds: “Treasurers have to go and actively talk to other parts of the organisation, both at inception of the financing but also as an ongoing risk management process.”

FX management

“The decisions that treasury takes on hedging can make or break a company. We have a hedging policy in our operating rules, and how to manage the currency exposure is a key question,” says Lenovo’s Glendinning, outlining another evolving and growing treasury task.

Glendinning oversees an important and strategic hedging programme shaped around managing the FX risk that arises from a mismatch between costs and revenue. The computer giant has a dollar-heavy cost base given that many of its key suppliers are US companies, like the chip, hard drive and operating system manufacturers. Yet less than 30% of Lenovo’s revenue is in the same currency, due to sales in China, Europe, Japan and other countries.

And FX risk can be just as dangerous for small and mid-market businesses venturing into new markets as it is for multinationals. A study by the Association of Chartered and Certified Accountants and Kantox, a foreign exchange provider, found that finance officers in SMEs do not usually understand, or sufficiently hedge, foreign exchange risk. Around one-third of companies sampled in 2012 reported that the amount of FX loss, or gain, had exceeded US$1m, resulting in a direct impact on profit margins.

In fact, FX management is such a risk that treasury needs more support from the board, argues Deloitte. According to the consultancy’s 2016 Global Foreign Exchange Survey, corporate boards lack visibility of their company’s current FX exposures. This gives boards a limited ability to challenge and guide FX strategy, and results in some companies being slow to measure the commercial effectiveness of their FX risk management activities. “The impact of FX management on profitability was tracked by less than half of survey respondents, and 21% did not measure performance at all,” explains Karlien Porre, a Partner at Deloitte who leads the treasury advisory team and co-authored the survey.

It could help if boards empowered treasury to be more decisive. “Many corporations tie themselves in knots with bureaucracy and hierarchy when it comes to making a decision around FX,” notes Jonathan Pryor, Head of FX Dealing in Investec’s corporate and institutional treasury department. “It means the market has moved by 3% and the opportunity is lost. Decision makers need to be empowered to make the most of opportunities, yet many bang their heads against a brick wall and make no decision at all.” He adds: “The ideal situation for us it to have the board review its hedging strategy once a year, and leave the day-to-day operations to treasury.”

In turn, treasury needs to ensure much clearer communication with the board regarding FX strategy. Treasurers need “strong communication skills” to ensure the board “clearly understands” the risk treasury faces and how treasury activities add value to the business, argues Porre. “The fact that this communication often happens indirectly via the CFO further adds to this need,” she says. “If a treasurer can’t explain treasury matters succinctly to their CFO in 15 minutes, how would they expect the CFO to explain it to the Board in five minutes?”

Glendinning’s response to the FX burden? Quoting the adage that managers should manage while the role of the board is one of oversight and governance, he believes that treasury has the prime responsibility for managing hedging programmes. While board reviews are more than welcome, and should be encouraged, there are potential issues. “Do boards always have the technical skills to review a hedging programme?” he questions. “There will often be a number of people on the board who do understand it and who have a qualified opinion, but a board member with, say, marketing experience will not. Boards should satisfy themselves that a process exists, and that it is being run competently. If there are indicators that it isn’t, ask questions.”

Get smart

As companies’ demands on treasury change, so treasury skills are having to evolve. Today’s treasury needs people with accounting backgrounds and financial market expertise, regulatory knowledge and, importantly, an understanding of where risk lies within a business. It is an expanding skillset echoed in the ACT’s Strategic Treasury Report: 40% of respondents said they were spending more time on risk management compared to a year ago while 64% said their role was more varied than five years ago. Treasurers also reported that operations and controls have declined in focus in recent years.

Yet treasury teams remain small. According to the Nordea Treasury 2017 Survey, conducted by the Swedish financial services provider, the average team is now eight people, up from seven. The report noted that much of the growth in treasury for the largest blue chips has been “involuntary” and driven by a need for more compliance and reporting staff, rather than treasury’s increasingly complex and crucial role. And the compliance mantle, treasurers point out, is not a strategic role.

“The financial regulation that we see is an inconvenience and cost rather than a strategic problem,” says Glendinning. “It is annoying that it takes us six months to open a bank account, but the Board is not asking me about this. Although regulation around currency hedging is making it harder and more expensive, I am paid to manage this.”

Technology to the rescue

Technological innovation is key to helping treasury improve efficiency and reduce cost alongside an expanding workload. Maersk is in the process of implementing a whole new treasury system in its largest IT investment in “a long time,” says Burman. In smaller-scale innovation, his team now has software for monitoring and pricing derivatives and improving the company’s hedging capabilities. Burman is also introducing software to help monitor bank fees, thereby boosting transparency. “We deal with quite a few banks and it is important to have fee transparency,” he says. “Going forward we will work on solutions around electronic payments and supply chain finance too.”

The treasury challenge is also helped by access to much more information than in the past, increasing market knowledge and risk awareness. “It used to be a case of treasury showing the board positions from an excel spread sheet,” says Investec’s Pryor. “Now, if a customer trades through us they can see analysis of their entire position. It allows much more informed risk management decisions; they can plot the next 12 months.” It’s a direction of travel that he predicts will see more departments execute and monitor their positions online and put together scenario analysis using banks advisory services.


Treasury also needs clear visibility through the whole company. This helps the department negotiate with commercial teams if market conditions become more challenging, something UK treasury teams have had to do post-Brexit following the fall in sterling to a 30-year low against the dollar. “This was the kind of situation when treasury needed to be able to go to their commercial and sales teams and provide informed and rational arguments as to why costs have risen so dramatically,” said Pryor.

Managing FX risk also increasingly demands strong relationships reaching out through the business, argues Deloitte’s Porre. “Treasurers need to understand FX risk through their whole supply chain; they need to be able to say where their exposure arises, gauge the ability to pass it on and see what the competition is doing.”

Ensuring visibility calls for soft skills like good communication, and a broader ability to persuade and motivate others. Technical and analytical skills are critical but treasury needs people with behavioural skills too – people who can think how does this matter, how does it drive behaviour and how does it impact the bottom line, argues Deloitte’s Porre.


Treasury has grown in importance and influence since the financial crisis and is playing a more strategic role around fundraising, cash management and capital allocation. Yet it is worth bearing in mind that this trend is also relative to the financial health of the company. If sales are strong and growing, cash is coming in fast, receivables are collected quickly and margins are high, treasury doesn’t have such a strategic function. “If a company is short of cash, the treasurer is powerful and important. In contrast, if it is a company which is cash rich, treasury is likely to be less central,” concludes Glendinning.

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