Since the global financial crisis, companies have had to focus more on managing their cash flows, working capital, credit lines and risk exposures. The role of corporate treasury has been thrown into the spotlight and treasurers have expanded their remit to become risk managers and strategic influencers.
This is confirmed by a survey carried out by treasury consultancy TreaSolution, which found that more than two-fifths of treasurers believe that their department is of high strategic value to the company and more than half say it is of average strategic value.
PwC’s 2013 Global Working Capital Annual Review also highlights how company directors in Asia, Africa and Australasia have been placing an increased focus on working capital and cash flow management over the past year. Companies can no longer rely on growth to drive cash flow, so they are looking much more carefully at efficient liquidity management. This means that liquidity experts are more essential than ever. In light of this, how can corporate treasurers ensure their voice is heard by the Board?
Risky business
“The global financial crisis was a turning point for treasurers,” says Ian Farrar, Partner, Corporate Treasury Solutions at PwC in Hong Kong. “While the role of treasury for some organisations was previously undervalued, their role in raising funding, making efficient use of cash and managing risk has enhanced their position following the crisis as these activities moved up the agenda. Leading treasuries have built off this increased profile ever since, taking on increasingly broad responsibilities to manage all kinds of risk, from ‘bread and butter’ FX, interest rate risk and commodities, to commercial credit risk on receivables, insurance and involvement in M&A.”
Not all corporate treasuries have taken on more risk management and many companies have become increasingly risk-averse in response to financial uncertainty. Some practitioners report they have a far more restricted remit when it comes to the kind of hedging instruments company policy allows them to use. Lelaina Lim, CFO at the sport and fashion brand retailer RSH Ltd, based in Singapore, says: “Risk management has become dominant but also more conservative. In the past we could hedge with forwards – now we’re not allowed to do forward deals that could hurt the bottom line and it’s more plain vanilla. This more risk-averse policy was a decision that came from the group treasurer and senior management after 2009.”
Despite the conservative hedging policy, Lim is able to add value to RSH’s bottom line through combining her knowledge of the business – with the seasonal aspect of its retail cash flows – with her financial expertise. An example where both business and financial insight are needed is in the management of bank covenants. She says: “Treasury needs to ensure its knowledge of the business is so good there will be no breach of covenants – because in a breach, the bank can pull credit lines. But first the treasurer must understand both its business and the relative covenants – which include the needs of the business, such as seasonal differences. It then needs to work with the banks to ensure that these covenants have enough head room. This would reduce a lot of uncertainty and headache for the Board in case of a breach.”
Another consideration in Asia is that company structure can determine a company’s appetite for risk. PwC’s Farrar has identified two tiers of corporates in Hong Kong and China: the family-controlled businesses and large MNCs. Of the family-led companies, he says: “These tend to be quite conservative, so treasury’s hands may be tied in their activities. For example, such companies often shy away from the use of derivatives to manage risk.” In contrast, the treasury function tends to have a higher profile in multinationals. Farrar adds: “Their corporate treasurers are getting increasingly proactive. They are getting out into the business more and asking the Board and CFO for time on the agenda.”
Loosening the reins
Should Boards consider giving the treasury function more control over choice of hedging instruments? RSH’s Lim thinks so. She says: “If the group didn’t have such stringent restrictions, there would be more leeway for us to have investment and hedging strategies – and this could help the bottom line in a positive market. So our hands are tied but the risk is lower.”
She adds: “I think that if the Board listened to treasury and saw that treasury can do more, then it would be possible for us to follow a more aggressive higher-risk strategy – but the ongoing dialogue needs to be more open between us and the Board.”
Be relevant, be brief
One thing is required by all treasurers who want to demonstrate their value to senior management: good communication. When it comes to Boardroom meetings there are several skills every treasurer should have at his or her disposal.
For a start, according to PwC’s Farrar, how often the corporate treasurer participates in Board meetings is a sign of a healthy relationship and status for treasury within the organisation. He says: “When it comes to how treasury communicates with the Board, there are a variety of practices. Some companies have monthly meetings, while the best-in-class might have weekly meetings with a treasury steering committee. But for the majority, formal meetings more than once a month are quite rare.”
Dan Carmody, Managing Director at TreaSolution, agrees that regular meetings between the Board, senior management and the corporate treasurer open the door for good communication and raising treasury’s ability to influence. There are, however, cases in which treasury needs to be more involved. He says: “One reason for additional meetings and conversations is when a company has stringent liquidity management requirements – eg if it is trying to pay off some debt, or if a strategic move, such as an acquisition, is going to be made. In these cases, generally, treasury’s strategic involvement grows and treasury’s position becomes more integral.”
It’s not just the frequency of the meetings that you need to worry about. Getting the key messages across is also essential and this often has to be done in a very limited slot on the agenda.
Carmody says: “A lot of treasury information is quantified and can be transmitted by spreadsheets and graphics via email. A more detailed explanation of this data requires public speaking skills so a treasurer can communicate well with the Board, CEO or CFO. Furthermore, when giving presentations it is important to be very clear and concise. Public speaking skills can be developed if this isn’t a strong point.”
Anecdotally, Board members are showing more interest in treasury than they used to. One non-executive recently asked PwC’s Farrar for advice on what he should be asking his corporate treasurer. This suggests that Boards need to be educated about treasury and this is a role that should fall to the corporate treasurer.
Treasury is what you make it
Since Lehman Brothers first filed for Chapter 11 in September 2008, corporate treasury worldwide has been on a bit of a white-knuckle roller coaster ride. But amid the late nights and tight spots, there has been a lot of opportunity for financial practitioners to really prove their worth. Gary Slawther is the Corporate Treasurer at Octal, a manufacturer of the polymer resin PET (polyethylene terephthalate), which is used to make plastic bottles and packaging products, headquartered in Oman. He says: “My career has blossomed in companies during difficult times – with a higher profile you can achieve greater things.”
“Sometimes the role of corporate treasurer is what you make of it, so you have to make yourself valuable. I enjoy being at the heart of commercial issues – in business, everything involves cash and risk. If treasury doesn’t know everything that’s happening in the business, it can’t manage the risk – you have to know about the problems and how to support the business,” he adds.
On the subject of precisely how to achieve a higher profile and make the role of corporate treasurer as valuable as it can be, Slawther emphasises communication and the ability to win over the Board. He says: “Board meetings are a big learning curve – you quickly learn what keeps their attention (which is usually short). When the company runs out of cash, then you have their full attention – and you have to tell them how you’re going to use your skills to ease cash flow in a three-minute pitch – so brevity and the ability to focus on what is important are essential.”
The perfect partner
Communication isn’t just an upward flow – it’s also important for treasurers to really understand their business. Slawther says he has become familiar with the plastics production process and can engage with people on the operational and production side of Octal. Having a working knowledge of all parts of the business can prove to be very valuable indeed to the treasurer. “Keep your eyes and ears open – most companies are poor on communications, so build internal networks around the business that allow you to communicate. A lot of operational people will view you as the person who makes sure their wages get to the bank – engage in the business and never assume you know it all – learn and know the business,” says Slawther.
According to TreaSolution’s Carmody, treasury should strive to be the cash and financial risk management experts within an organisation. He says: “By creating an ‘internal gravity’ pertaining to treasury department functions this may encourage business units to ask treasury for cash and financial risk management support and expertise.”
That’s not to say that treasurers should be consulted on every company matter – this article doesn’t make the case for treasury world-domination. But when it comes to strategic decisions that involve investment, financial risk and cash – and many do – then a wise Board will get treasury involved at an early stage.
Treasury from the CFO’s perspective
So what is the view from the other side? Honnus Cheung is the CFO for Asia Pacific, Travelzoo (Asia Pacific) Inc., based in Hong Kong. Treasury reports into her while other financial functions – tax, audit, risk management – also come under her remit. Travelzoo is an internet media company and publisher of travel and entertainment deals, operating globally.
The CFO sees the treasurer as a vital partner who provides valuable support to the business units, as well as providing international liquidity management expertise. For example, treasury can advise sales on how to negotiate better terms for sales contracts, to improve day’s sales outstanding (DSO) or day’s payables outstanding (DPO). Cheung says: “Sometimes getting a contract doesn’t mean getting the cash flow. Data on cash availability is essential to the CFO and the Board, but the data needs to be timely and transparent. Treasury can work closely with the business units and in particular with sales and the procurement team; they can assist the business units to structure a better DPO/DSO to increase the flexibility of working capital, and ensure that all financial positions are managed as efficiently as possible.”
As CFO, Cheung also believes that the treasurer should have an international outlook and a broad level of understanding outside treasury, with awareness of the political as well as the financial environment. She says: “They need to have the minimum capital structure requirement knowledge of different jurisdictions, eg repatriation rules, minimum debt and equity ratio regulation. Being a competent regional treasurer, they can advise on how to leverage the regional cash pool to benefit different countries, how to get a better and low risk yield from idle cash and funding requirements via issuance of debt, shares or IPO for long-term investment.” She adds that sensitivity to currency fluctuations in Asia, as well as against the US dollar and euro, is also a key part of the treasurer’s role.
All about the bottom line
Industry sector also affects how treasury can influence company strategy. While a consumer goods retailer might have constant cash inflows and certain short-term market risk exposures, a property development company needs to take a longer view, with long-term investments and a more complex debt structure.
Sharon Sng is Head of Corporate Finance at CapitaLand, one of Asia’s biggest real-estate companies, headquartered and listed in Singapore. Its property portfolio includes shopping malls, offices and homes and the role of corporate finance is wide-ranging. While Sng is involved in the company’s investment decisions, she also plays an important coordinating role in ensuring each of the company’s entities presents a consistent brand to investors.
She says: “A key contribution of our function is being involved in the investment decisions process early on. Being in a capital intensive sector where investments have longer gestation periods, the financing decision has a significant impact on the returns and consequently investment structures and final decision. CapitaLand has eight listed entities within the group, including the parent company, hence it is particularly important that fundraising activity across the group is well coordinated, to avoid confusing investors and the market, as well as to ensure the success of each fundraising.”
The fundamental things
So whether your corporate treasury is already a part of the company’s strategic decisions or perhaps you’d like to increase your standing with the CFO, the Board or with other business units, it’s worth remembering that the basic treasury skills continue to be the most valued. Octal’s Slawther says that in times of growth or crisis, treasurers shouldn’t forget that their core areas of expertise will always be essential to senior management: “The fundamental things – risk, return and cash – never change. In times of exuberance and downturns, these fundamentals still apply. However, the value the executive Board places on treasury has changed as we have been through a challenging period. In times of cash constraint, treasurers can reveal their true worth. So you don’t just need people with tech skills, but someone who is able to sit down monthly with the Board and translate the issues into a language people can understand.”
