Finding Best Practice for Corporate Treasury in the Deepening Credit Crisis

To bailout or not to bailout? That was the question vexing the US Houses of Congress last week, with every twist and turn being followed by near-hysterical stock market peaks and troughs around the world. Meanwhile, the Irish government took the unprecedented move of stepping in to guarantee all deposits, bonds and debts in its six main banks for two years… unprecedented until other nations fell over themselves to offer similar guarantees for fear of losing billions in savings to countries that beat them to the punch. But as Irish savings now outnumber national GDP, how watertight can this guarantee be? (Read more in the commentary: Europe’s Response to the Market Meltdown

It was against this backdrop of extraordinary global financial turmoil that EuroFinance’s annual International Cash and Treasury Management conference took place in Barcelona. With such uncertainty and, in some cases, panic in the air, maybe it was to be expected that in the test of the interactive voting facility 12% of delegates listed their gender as ‘other’. And with the only possible example of interbank lending of the week seen when a number of delegates from one major bank had their wallets pick pocketed outside a party held by one of their rivals, what lessons can be learnt from the past 12 months and how can treasurers negotiate a path for their organisation through these turbulent times?

A Year in the Life of Liquidity and Risk

The financial panic felt in western markets was put into some perspective in the first session at the conference, which looked at risk and liquidity changes in the past 12 months and examined what regional differences there may be. Damian Glendinning, global treasurer at Lenovo, is based in Singapore and so was able to offer a perspective from Asia. He said that while it was difficult to judge the overall impact in Asia, there was not the same feeling of crisis there. This is perhaps borne out of the fact that Asian corporates are generally happy to accept higher risks in order to generate higher rewards. The Association of Corporate Treasurers in Singapore has tried to introduce more caution into its members risk management policies but, as Glendinning pointed out, maybe now is actually the time to be less conservative because of the opportunities presented by current market conditions For example, a conservative hedging policy doesn’t make the most out of volatile FX markets. Lenovo also has a negative working capital position, which means it looks for funding from suppliers, not banks. In the current climate, this looks like a very strong position to take.

Andrey Rostovsky, head of treasury at OAO Lukoil, gave a slightly different perspective from Russia, alluding to the huge drop in the share price that forced the government to make a serious move to inject cash into the system. He added that Lukoil had tried to move into commercial paper, but that was hard to do. So, it needs a good relationship with its partnership banks on working capital.

But what effect is the credit crisis having on the risk management profile of large US corporates? According to Brent Callinicos, vice president and treasurer of Google, the crisis has made his company change their risk policy in the short term, by bringing in an added focus on the preservation of capital. But in the long term, he explained that their risk management plans were not changing for the sake of it, although they are adding flexibility earlier into these policies, which will allow proactive risk management that can be tailored to the many possible fluctuations of the credit crisis.

Callinicos’s point about the changes in short-term risk management policy changes was supported by Andrés Garcia Peralbo, treasury director at Inditex, who said that his company is also focussed on preservation of capital. A banker sitting next to me in the auditorium commented that this is why people were turning to his bank, as they have a AAA rating. This of course offers some sort of security. But the banks themselves admit they aren’t 100% sure of the asset quality on their books and the ratings agencies are trying to keep up with every development in the banking industry. It is sensible for treasurers to adopt a cautious and methodical approach when assessing their bank relationships, so as to ensure that, if they feel they must transfer banking allegiances, that this truly is a ‘flight to quality’ and not simply a case of ‘out of the frying pan, into the fire’.

Members of the panel for this discussion seemed largely happy with their banking relationships at the time of speaking. Inditex’s Peralbo said that his company’s relationships had not changed as they were with bigger banks – although maybe they were talking more often with them. Rostovsky from Lukoil explained that they have long-term bank relationships and that, while there may be ups and downs, on the whole it was ok. Lenovo’s Glendinning gave a very upbeat assessment, saying that nothing has changed in his company’s bank relationships, adding that the banks had been unstinting in their support. The only cautionary note came from Google’s Callinicos, who said that he is hearing from banks on a daily basis saying that they’re ok. However, he added that even if you’re comfortable with a bank’s credit rating, you should be careful as it may be totally different tomorrow. (Read more about bank consolidation here: Effective Risk Management Must Underpin Bank Consolidation

Not to be outdone by the panellists, delegates also had their chance to have their opinions heard, by voting on statements made about the key issues discussed. Sixty-seven per cent of delegates agreed that the credit crisis will effect companies investment programmes, 72% agreed that the credit crisis has prompted a flight to quality in investment portfolios, while 65% of delegates agreed that the credit crisis has prompted changes to FX hedging needs and management of counterparty risk. This echoes the sentiment of the panel and demonstrates some of the ways that the credit crisis is affecting corporates in their normal working procedures. However, 62% of delegates in the auditorium said that the credit crisis was not causing disruption in the financial supply chain (FSC). So, there is room for optimism, but again it is prudent to be vigilant, as there is a possibility that the effects of the credit crisis may take longer to be felt in some areas of the finance industry, such as FSC. Once again with this crisis, expect the unexpected.

The Voice of the Delegates

Once the experts had given their views on how the credit crisis is effecting liquidity and risk issues for treasurers, the delegates had their chance. Now, as the gender question mentioned earlier shows, you can get a few unexpected results when taking a poll of hordes of treasurers, but the results can give a good general insight into the themes and trends that are occupying the minds of treasury professionals.

Thinking about credit availability, 57% of the delegates in Barcelona said that there has been less availability of credit in the past three months. But when given the option of whether they were more concerned about credit availability, recession or inflation, credit availability only received 29% of the votes, comprehensively beaten by recession, which scored 64%. This was backed up by the fact that over a quarter of delegates (27%) thought that central banks around the world have handled the financial crisis badly. Sixty per cent thought the response had been ‘Ok’, but this was certainly not an overwhelming vote of support. Looking forward, 33% of delegates were ‘very worried’ about credit availability in the next six months, with a majority of 53% saying that they are ‘moderately worried’. And the air of caution was backed up by the fact that an overwhelming 85% of the audience rejected the idea that the credit crunch will be a distant memory by this time next year. With the number of extraordinary events in the financial industry that have taken place in the past few weeks, it is hard to disagree with this point of view.

Moving onto a more positive footing, 80% of delegates thought that the crisis is an opportunity to buy assets cheaply, demonstrating a very bullish attitude from the audience. Possibly this could have been added to by the bankers in the hall, similar to the gentleman from the AAA bank mentioned earlier, who are seeing institutions that 18 months ago would have been their rivals now crumbling in value. When looking at which region will grow faster in 2009 out of the US and the EU, the EU came out on top nearly two to one ahead (62% to 38%). Bearing in mind the venue for the conference being in warm and sunny Barcelona, this result may have partly reflect some continental pride from the European majority of delegates. In reality this is a tough question to call and the action taken by the US government in the short-term will go a long way to deciding the final result. This is one topic to revisit in one year, five years and even a decade from now.

With governments around the world having received a metaphorical bloody nose from delegates earlier in the day, the audience now had the chance to play politics by casting their votes on a couple of very important upcoming elections. When asked who the next president of the US will be, Barak Obama won by a landslide 74% to John McCain’s 26%. If this turns out to be the percentage split in November, there may not be enough chads in Florida (pregnant, hanging, or otherwise inclined) to deliver another Republican president. While this result reflects similar polls carried outside of the US throughout the campaign, global polls tend not to make too much difference to the American public who know that it is they alone who have the responsibility to make this important choice every four years. The McCain vote here may also have been hit by his perceived weakness on the subject of the economy, praising the strong fundamentals of the US economy and then trying to suspend campaigning in order to concentrate on finding a solution to the economic crisis. If Senator McCain does happen to find himself in Florida on the campaign trail, he may well need a new pair of flip-flops.

Another of the traditional powerhouse global economies with an election on the horizon is Germany. When asked who the next German Chancellor will be, delegates gave incumbent Angela Merkel an even larger majority than that of Obama, as she received 76%. Frank-Walter Steinmeier’s campaign team should possibly be concerned as he only finished third in the poll on 10%, behind ‘A.N. Other’s’ 14%. However, since this poll, Merkel has appeared to guarantee 100% of bank savings in Germany in a similar model to Ireland, before it then transpired that there will probably not be formal legislation in the country to formally increase protection. Even by the standards of the current market confusion, this seems to be an astonishing clarification that has already had a large effect on European markets. The credit crisis will make and break several high profile political careers, and it remains to be seen what effect this breakdown in communication will have on Chancellor Merkel’s long-term prospects.

And finally, after the serious nature of most of the topics on discussion, it should cheer everyone up that 15% of all delegates think that, in the new James Bond film, Quantum of Solace, Bond’s enemy will be none other than SEPA:

JB: “Do you expect me to talk, Hartsink?”*
GH: “No Mr Bond, I expect you to standardise cross-border and domestic payment flows into a single scheme.”
JB: “You’ll… you’ll never get away with!”
: “But it has already begun Mr Bond, mwhahahaha!!”

It should make for riveting viewing at cinemas around the world later this month.

The Emerging Markets Perspective

One of the highlights of the conference was an interview by Axel Threlfall, from Reuters and former CNBC and Market Watch presenter, with Dr Mark Mobius, managing director of Templeton Asset Management. Mobius began by demonstrating how bull markets have traditionally always lasted far longer than bear markets – a positive message for these times and certainly something to bear in mind when it may be more tempting to reach for the financial panic button. It was from this perspective that, when asked if he would vote for the US bailout plan, Mobius said that he would vote against it. (This was after the House of Representatives had rejected the initial bailout plan, but before the Senate had approved the amended plan.) The main argument from Mobius was that the market has to pull the figures down itself, whereas any bailout is artificial. “Investors will get over it,” he reasoned. “[Opposing the bailout] is the only way that the system will learn from it.” Mobius added that Templeton expected the ‘deadwood’ to be routed out quickly if the bailout was rejected – in this scenario he expected there may be six to 10 months of downturn or flat markets, followed by growth and recovery.

Turning to Europe, Mobius predicted that it could be the French who will lead Europe out of the financial crisis. France’s President Sarkozy is calling for change in accountancy rules regarding mark to market and, if he is successful with this legislative push, Mobius predicted that France could help European financial markets turnaround in one year. Eastern Europe will also help Europe as a whole, through its growth and productivity. Mobius used the example of Poland, which is now in a new phase of development and productivity as Polish migrant workers in the UK have begun returning home, something that is boosting their domestic economy. Mobius also suggested that there could be a better inter-relationship between Russia, eastern Europe and western Europe, mainly if the US is forced to focus on its internal financial fundamentals.

Has there been a knock-on effect from the US crisis into emerging markets? According to Mobius, there may have been but not in a negative way. He argued that China has been ready for this – for example it has been keeping exports ‘in-house’ while at the same time decreasing US imports. Income in the BRIC countries (Brazil Russia, India, China) is increasing at double the rate of the US/Europe. One of the main messages from Dr Mobius throughout his conversation with Threlfall was that now is the time to selectively invest in emerging markets, such as the BRICs. He also tipped Turkey and South Africa as good smaller markets to be involved with.

Emerging market funds were seen as risky places to invest, but people are having second thoughts now when looking at the turmoil in ‘emerged’ markets. Long-term returns can be good on emerging funds and Mobius argued that a diversified portfolio can reduce risk. The example he gave was to highlight how the BRICs countries are all very different. While individual countries can be volatile, a diversified emerging markets portfolio has a balance to it.

Is Centralised Treasury Versus Decentralised Treasury the Wrong Debate?

It is understandable that the ongoing seismic events in the global financial markets dominated conversation at the conference in Barcelona, but there was still time for a detailed discussion about the preferred organisational structure of treasury. Sebastian di Paola, a partner at PwC, spoke to Kristian Pullola, vice president and head of treasury of Nokia and Aidan Clare, head of corporate finance and treasury for Tetra Laval and examined how each treasury has approached the centralised versus decentralised debate.

A Tale of Two Treasuries


Nokia is a globally managed, integrated company. It also manages the infrastructure business within a 50/50 joint venture with Siemens.

Business units are responsible for their profit and loss up to an operating profit level.

Business units are the risk owners for all business risks.

Treasury is the risk owner for all financial risk.

One integrated logistics and finance ERP system.

80 people in the Nokia treasury organisation – one-third in Helsinki, one-third in Geneva and one-third at centres around the world.

Treasury groups breakdown into:

  • FX risk management – identification and validation.
  • Insurance and risk finance – hazard risk management.
  • Customer finance – sales support and credit risk management.
  • Corporate finance.
  • Cash management solutions.

Risk management not in siloes – Nokia try to take an integrated risk management approach.

Tetra Laval

The default mode for the Tetra Laval treasury is decentralised, unless there’s a strong rationale for centralisation. Treasury has sought to exert its mandate in this environment.

Key areas of treasury responsibility:

  • Financing.
  • FX and IR management.
  • Cash management.
  • Projects.
  • Middle- and back office, and accounting.
Tetra Laval Organisational Structure

Treasury activity Need Structure Execution
Financing Decentralised Centralised, with local input Decentralised (to policy)
FX & IR Centrally driven, with local responsibility Centralised, with local input Depends. Always controlled centrally
Cash management Centralised Centralised, with local input Both
Projects Centrally driven, to date Both Both

For projects, Tetra leverage local talent, yet ensure effective control.

After hearing the organisational structure for both the Nokia and Tetra Laval treasuries, delegates were invited to describe their company’s level of centralisation in treasury activities, and how this may evolve. The results were as follows:

  • Centralised and happy: 38%
  • Centralised, but trying to get closer to the business: 34%
  • Decentralised and trying to centralise more: 23%
  • Decentralised and happy: 5%

Clearly there is a very mixed picture out there, something recognised by the speakers. The main message from the session was that treasurers should try to look for ways to make a ‘distributed’ treasury, one that is not 100% centralised or decentralised but rather one that is best suited to the specifics of the treasury’s responsibilities and the individual business strategy. As Nokia’s Pullola explained, it doesn’t matter whether your company is organised in a centralised or decentralised manner, as long as it fits with the corporate structure. Certainly companies that grow through acquisition can find centralisation a challenge, but as Nokia is integrated it is easier to be centralised.

So what is the right level of centralisation? According to Tetra Laval’s Clare, it depends on scale (for example, Tetra is smaller than Nokia), on culture and strategy of the overall business, and on how the current crisis evolves. It is not something that you should be evangelical about – be pragmatic and don’t lose touch with the business.

Pullola from Nokia made the point that, whatever the balance of centralised and decentralised functions, it is vital that you recruit the right type of people. Treasurers need to think critically about the challenges of having a distributed team – how can they work together as part of one team. “Go out there and work with the business,” he summarised, “but watch out when they see how much value you could add!”

How Treasury Can Underpin the Business

Finally for this review of the EuroFinance conference in Barcelona, a discussion based on the results of the company’s Business Unit Survey put the boot on the other foot and showed what business units think of treasury. Martin Giles, managing director and EVP of The Economist Group North America, moderated the extended results conversation between Scott Hogate, assistant treasurer at Advanced Medical Optics, Annette Owen, global cash and banking manager for British American Tobacco, Paul Jonckheere, treasury project coordinator with Carrefour, François Masquelier, SVP head of treasury and corporate finance at RTL Group and, last but by no means least, Hans van den Bosch, head of treasury operations for Unilever.

A summary of the survey results showed that treasury is not thought of as being in an ivory tower and that it is actually getting better at communicating with business units. The respondents also agreed that treasury adds value but, before anyone’s ego gets too carried away, business units also suggested that treasury may not be doing enough to mitigate financial risk. Finally, the omnipresent credit crisis may elevate the role of treasury, again.

When delegates in the auditorium were asked if they formally benchmark business unit satisfaction with treasury services by conducting regular customer surveys, over three-quarters (76%) said they did not. This is something that could be of benefit for treasury to do, as a way of aligning treasury targets with the strategic goals of the business for the overall benefit of the company. Unilever’s van den Bosch provided an example of a centralisation programme between treasury and business in his company that had featured:

  • Streamlined banking relationships.
  • Streamlined IT infrastructure.
  • Treasury centres established.

Implemented under the catchy working title ‘One Unilever’, the new structure is working well, but also provided an example of the friction that can be created as a change is made to the organisation structure of treasury – in this case a change towards centralisation. Change will never please everyone, so to make the journey as positive as possible it is important to make clear to every unit involved:

  • The goals of any change.
  • How you will achieve these goals.
  • What the overall benefits to the company will be.

In organisational structure, as in the global credit crisis, transparency is key to a successful future.

*These characters are entirely fictional, and any similarities to individuals past or present are completely coincidental.


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