Dealing With Risk in a Volatile World

The ACT1 Annual Conference in Edinburgh, on 28 to 30 April this year, was held against a backdrop of global financial turmoil. What began as a domestic issue in the US housing market has escalated into a global credit crunch – inter-bank lending has collapsed, high profile banks have been hit badly and large share percentages have been wiped off global markets. It is appropriate, then, that the topic of this year’s conference was ‘dealing with risk in a volatile world’. How should treasurers be responding to current concerns in order to best steer their organisation through the choppy waters? The main conference session gathered four leading lights of finance to discuss this topic.

Express Yourself

Matthew Hurn, group treasurer at Mubadala Development Company, spoke about the role of treasury within the structure of the organisation. He pointed out that treasury is in a good position to add value to the overall organisation, as long as two key points are remembered:

  1. Cover the basics.
  2. Communicate what you’re doing with the board/shareholders.

The role of the treasurer is constantly evolving, with new responsibilities such as risk management, compliance and financial reporting increasing, on top of core tasks on the cash management and payments side. The challenge of the corporate treasurer is to not only manage all of these responsibilities, but to also make sure that they tell the board what they are doing, why they are doing it now and what the end benefit for the organisation will be. The treasury department is a crucial area of any business and a level of transparency is required if the board and shareholders are to understand the reasons for treasury’s actions and listen to its recommendations on future policy.

Risky Business

Risk was the main topic of a presentation given by Mervyn Davies, the chairman of Standard Chartered. He admitted that while banks have preached about risk for 20 years, something fundamental has evidently gone wrong within the financial services industry. (The irony of Societe Generale sponsoring a session on risk management was not lost on the conference delegates that I spoke to.)

So where did the financial services industry go wrong when it comes to the credit crunch? Standard Chartered’s Davies offered the opinion that it had perhaps been forgotten that financial services is a cyclical industry. Since 2002 there has been low volatility and, in some quarters, the financial services industry was lulled into a false sense of security as a result.

There are a number of lessons that Davies said the credit crunch has highlighted:

  • Liquidity is just as important as credit.
  • Miscalculating risk can be fatal.
  • Pay levels need to be carefully controlled, or they will affect risk management.
  • The financial services industry is now a truly global business. There are no barriers due to technological advances.

Picking up on the final point, the global nature of financial services is highlighted by new trade corridors that are opening up, such as Asia to Latin America and Asia to Africa. Asia has been a big winner from the current weak market conditions in the west and Davies predicted more deals such as that of Tata purchasing Jaguar and Land Rover, large Asian companies will purchase blue riband, luxury western brands. A straw poll of those in the auditorium showed overwhelming support for Asia over Latin America as being the big economic winner over the next decade.

The emergence of sovereign wealth funds, a trend linked to growth in commodity prices, is helping emerging countries to buy western assets, in what Davies at Standard Chartered described as a new “industrial revolution.” For example, the foreign assets held by the Gulf Co-operation Council (GCC) countries now total over 50% more than China. Corporates in Europe and the US should be embracing this fundamental shift, or risk failure, warned Davies. He said the role of the treasurer in this environment is to push for change and to make their boards listen, which echoes the earlier thoughts of Matthew Hurn at Mubadala Development Company.

Of course, this might be a problem if you are operating in the public company arena. It can be a fundamental problem for UK companies in this space to actually know who owns them, particularly with the rise of hedge fund ownerships, etc. So before treasury can have a transparent relationship with the board, it will need to find out who actually sits at the top table. In some cases, this is easier said than done.

Have You Got the Energy?

James Smith, chairman of Shell UK, was at the ACT Conference to talk about the energy challenges currently faced by the world and to translate what they meant to corporate treasury departments.

There is currently an energy challenge in terms of what energy we use, how available this is, how much it costs and what side-effects occur from its use. Shell’s Smith sees this as a subset of something even larger, using the phrase “from Bali to Copenhagen,” the two global economic forums (Bali in December 2007 and Copenhagen scheduled for 2009) designed to find permanent answers to global warming and climate change. The system is under particular pressure from economic and demographic growth, which Smith sees as increasing by three and a half to four times by the mid-21st century. This is a major pressure on the energy system.

Energy efficiency and decarbonisation are two of the ways to counter this problem. Shell’s Smith argued that the rebirth of coal as a fuel source of choice is hitting decarbonisation. While it is possible to be cynical of the motives of an oil man griping about coal, it is true that clean coal technologies do not tend to affect carbon output and carbon capture technologies are still in a nascent stage… but all of this may be getting off the point slightly. The question is, what does this all mean for the corporate treasurer? Smith had a four-point plan to highlight where these topics overlap:

  1. Risk – Can you insure climate risks?
  2. Cost – Get the cost of carbon into your financial planning system.
  3. Advocacy – If you’re not at the table, you’re on the menu! There is a clear first-mover advantage on this issue.
  4. Opportunity – Customers are looking for new things – take the lead.

Smith also supported investment in technology experts and solutions around the world, a characteristic that Shell is renowned for. This is something that they have in common with Dyson, whose CEO, Martin McCourt, was also speaking at the ACT Conference. For instance, in 2002, Dyson moved their production operations to Malaysia, keeping a research and development facility in the UK.

Accentuate Your Positive Differentiators

With the weighty topics of global financial meltdown and environmental catastrophe dominating proceedings, it came as some relief to the gathered delegates to hear a UK success story. This was provided by McCourt at Dyson. He gave an energetic presentation about the history of his company, describing how by extolling the virtues of their differentiators to their established competitors, this company has grown from one man’s vision into a global, multi-product enterprise. Dyson started by making a (literally) revolutionary vacuum cleaner, and now market a whole range of cleaners, accessories and washing machines around the world. The company’s latest marketed invention was onstage with McCourt, a hand dryer that shoots out high-pressurised air to scrape water off your hands. Anyone getting the train home from Edinburgh would have had the pleasure of using one of these in the station’s restroom!

Dyson is a dynamic company that has succeeded in moving passed the novelty of its initial invention to be a truly global player. Along the way, they have changed the capital structure of the company, having previously never borrowed money before. McCourt explained that the company’s treasury department played a key role in making this happen. His assertion that he views the treasury department as a profit generator drew some laughs from the crowded delegate hall, but in essence he is correct, treasury can add value to an organisation by following best practice and ensuring they have a strong voice at board level. Maybe this was actually nervous laughter from the crowd – in times of economic trouble, chairmen and chief executives will be looking for every department to produce better results for the company… if you’re a treasurer it is certainly time to make sure they know exactly what you do!

1The Association of Corporate Treasurers (ACT) is a UK-based body for finance professionals.

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