How to Optimise Treasury Strategy and Your Career

From 19 – 21 May, the Association for Financial Professionals (AFP) hosted its annual Global Corporate Treasurers Forum in Chicago. The event, which is limited to treasurers, chief financial officers, controllers, VPs of finance and assistant treasurers, provides attendees with the chance to learn strategy and techniques from industry experts and offers the opportunity to network with treasury peers.

This was the first Global Corporate Treasurers Forum since the sub-prime market crash in August 2007, so the after effects of this event naturally had an influence on the discussions and presentations in Chicago. However, the overall tone of the three days reflected broader treasury issues, concerns and best practice. The main sessions covered a wide variety of topics, such as managing a global treasury with an eye on strategy, how treasury can drive a reduction of global effective tax rates, what treasurers should be doing to make the leap to CFO, as well as a look at risks in investing liquidity.

Global Treasury Strategy

Michael Richard, senior vice president and treasurer at McDonalds, got session proceedings underway with a whistle-stop tour of how he believes McDonalds manages its global treasury with an eye on strategy. He explained how the treasury at McDonalds believes in three key strategies for success:

  • Constant change.
  • Creating competitive advantages.
  • Building relationships.

These ideals are goals that most companies try to apply in their business plan, but the challenge McDonalds faces in implementing these strategies comes from its business structure. The McDonalds structure is made up of the corporation, suppliers, and franchisees, or “three legs of the stool,” as Richard described them. For the company to be successful, all three need to be strong. It is the job of Richard and his treasury colleagues to provide liquidity to all legs of the stool, not just the corporate leg and Richard explained how the treasury works strongly with franchisees.

While McDonalds is a mostly decentralised company (summed up by their catchy phrase, ‘glo-cal’), the treasury department itself is still centralised. From this position, the role of the treasury includes funding, risk management, franchisee and supplier finance, cash management and the sale of non-core assets. With this range of activities, Richard stressed the importance of strategic planning in order to meet the treasury and business objectives. The McDonalds strategy here revolves around five ‘Ps’ that are included in their ‘plan to win’:

  • People.
  • Product.
  • Place.
  • Price.
  • Promotion.

Focussing on these core areas has seen McDonalds bottom-line results increase in the US and even faster globally. However, Richard did point out that there are still many challenges that the company currently faces. These include credit and funding; rising commodity prices; shareholder relations; accounting rule changes; continuing expansion and internal relationships with other departments, to name but a few. The vast majority of treasurers around the world will have these concerns, so maybe they can draw some comfort from the knowledge that one of the world’s most iconic brand names shares these headaches.

Career Progression

One of the most popular sessions at the Global Corporate Treasurers Forum was the chance to hear from three CFOs about their current roles and how they had arrived at this position after a career in treasury. The three CFOs in question were Chris Kreidler from C&S Wholesale Grocers, Ira Birns from World Fuel Services Corporation and Don Mulligan from General Mills. Andrew Busch from BMO Capital Markets was the lively moderator for this session.

In keeping with one of the major themes of the event, Busch asked how it is possible to balance the treasury function with strategy. Kreidler referred to strategy as a full-time job in itself and that he dedicates a set amount of time for this in his working week as he knows his CEO will want to talk about strategy. This was seconded by Birns, who looked slightly pained to add that his CEO is in the office every day and all he usually wants to talk about is strategy. It clearly came across from this part of the discussion that strategic experience is crucial if you want to make the leap from treasurer to CFO. Mulligan, at General Mills, added that smaller is better in terms of the size of your strategy team and that the execution of your strategy is key. He tied this in with the role of treasury, that capital strategy has to be aligned with commercial strategy.

When asked about the key factors in progressing from treasurer to CFO, all of the CFOs present agreed that it is crucial to build up a broad portfolio of skills. Kreidler described how, when working for Yum! Brands, he took a lot of different jobs and, in his case, marketing experience and field jobs were what the board were looking for. He had line management and international experience and so he ticked all of their boxes for this specific job. While he was thought of as a strategist, he confessed he was really the ‘deal man’, which involved executing a small part of the strategy. Birns, from World Fuel Services Corporation, also said that it was his deal making that stood out for his first CFO appointment, but he again underlined how important it is to build up a broad portfolio of skills. He pointed to a time he spent working in investor relations, which gave him a whole new insight into the business.

Don Mulligan, CFO at General Mills, pointed to five attributes treasurers need to have in order to make the step up to CFO:

  1. Make sure your functional expertise is up to scratch.
  2. People development – keep evolving to develop.
  3. Communication and influencing skills – treasury doesn’t have the final call on decisions, so use your influence. Explain your point of view to the board, don’t just show them the latest numbers.
  4. Be the voice of the shareholder.
  5. Know the business, become a business partner.

The issue of character also came across as vitally important in making the step up to CFO. If you have a strong character, your reputation will precede you with the board. C&S’s Kreidler described this as an important measuring stick, while Birns made a good case of how you can add value to your department by being a ‘straight shooter’. Underlining the importance of having and maintaining an unimpeachable character, General Mills’ Mulligan simply stated that if you don’t have character and integrity, you won’t make it as a CFO, there is zero tolerance in this regard.

The Q&A session between the three CFOs and the delegates offered the audience a valuable chance to pick the brains of those who have successfully made the leap from treasurer to CFO. In response to a question about the importance of accounting skills when becoming a CFO, C&S’s Kreidler noted that there has recently been a swing away from accounting CFOs to strategic CFOs. Accounting is not a prerequisite to being a strong CFO, but if you don’t have this background then make sure you have a strong controller. World Fuel Services Corporation’s Birns added the caveat that, even though he agreed that the tide is turning, he thinks that accountancy skills are still probably preferred at the moment.

Possibly eager to enhance their career upon returning to the office, one delegate asked about the qualities that CFOs look for in their treasurer. Mulligan from General Mills explained that he likes to see an understanding of capital markets and how these fit with the overall business plan. He also encouraged the treasury department to communicate directly with the board, not to just speak to them through the CFO. By taking an active role in the company in this way, the treasurer will aid their future career prospects.

Finally, a question about the inter-company relationship with IT provoked a useful suggestion from Birns. While none of the CFOs had responsibility for their IT departments, he noted that you have got to watch the expense coming out of IT, which can make a big dent in your profit and loss. You need to find out what the returns are on the products that IT may buy. Birns’ suggestion was to place someone from treasury into the IT department who, knowing the business strategy, would be able to make sure that IT sees the bigger picture.

Taxing Times

The relationship that treasury has with the tax side of business has come under increasing scrutiny over the past 12 months, as companies target wholesale efficiencies in response to the tightening of liquidity. A straw poll of the delegates in a main session looking at treasury and tax showed that around one-sixth of the audience had a tax background, so most attendees were keen to learn more about this side of treasury relations. Dan Munger, partner in international tax services at Deloitte, began the proceedings with an examination of how treasury can be a driver of global effective tax rate (ETR) reduction. Sustained ETR reduction requires a balancing of tax and treasury objectives. Without an appropriate level of continuous co-ordination between tax and treasury, it is impossible to have an effective ETR strategy. Munger pointed out that tax and treasury will always be linked by tax traits, capital structure and the operating model of the business.

When questioned, a number of treasurers in the audience said that they carry out long-term cash planning on a geographical basis. This important issue for treasury today includes the optimisation of offshore cash and also ensuring the efficient repatriation of this cash. International sales are growing exponentially for US companies (as was mentioned in the talk given by McDonalds’ Richard), so US treasurers have to look at their structure to ensure that they are maximising their tax savings. These tax savings can pay for other items that are on the tax department’s wish list, so practical steps such as setting up a structure that repatriates overseas cash can provide real value to the company. Deloitte’s Munger advised that to build an effective strategy for this, treasurers should forget ideas and ‘what ifs’ and instead really get into the practical details of the planning.

One member of the panel for this tax talk, R. Davis Maxey, treasurer and vice president of tax at Ion Geophysical, explained how his company had actually moved US activity outside of the US to Luxembourg for tax reasons. The factors behind this switch were that it led to rapid growth, minimal leverage, while 80% of Ion’s customers are international. The savings that this change of location gave the company could then be ploughed back into annual investments in research and development and data libraries – an example of the use of savings that was mentioned earlier.

The final speaker at this session was George Zinn, corporate vice president and treasurer at Microsoft. His presentation looked at how to simplify treasury management by looking at the lifecycle of the dollar and trying to make flow more efficient. Zinn described how the Worldwide Credit Services Group is the largest Microsoft treasury group. They receive the dollar and need to pass it on to the cash management and treasury operations departments, using SWIFT to provide electronic transparency to all accounts.

Zinn explained how he thinks that it is critical to have a capital markets long-term portfolio going forward, but that it is important to take the right approach in managing these portfolios. One challenging area that Microsoft has identified is incremental risk, which goes hand in hand with the incremental yield in investment instruments such as money market funds (MMFs). With MMFs, there is a regulatory subtlety that exists between the markets in the US and, for example, Europe. The Securities and Exchange Commission (SEC) strictly regulates which funds can be named and traded as MMFs in the US, under SEC regulation 2a-7. In Europe, the regulations are not defined so strictly and, consequently, some funds that have been trading here as MMFs would not be able to in the US under the same title. When the liquidity crisis hit last year, some of these less-regulated funds failed, while in the words of Zinn, the “somewhat innocuous” US funds held up. Therefore a visibility to risk is crucial when you are heading into more diversified investments.

What elements do you need in your investment strategy in order to manage risk while maximising yield? George Zinn, corporate vice president and treasurer at Microsoft, identified four key areas that he suggested treasurers must include in this strategy:

  1. Value at risk (VaR).
  2. Stress testing – how would this investment hold up should the worst happen?
  3. Scenario analysis – test any number of ‘what if’ possibilities to see if it is an affordable investment.
  4. Counterparty risk – who else does this investment expose you to?

Risks in Liquidity Investing

To round off proceedings at the Global Corporate Treasurers Forum, Simon Mendelson, managing director at BlackRock, gave a presentation summing up what has gone so wrong in the markets since last August and what treasury should look out for when investing in liquidity products today. The initial credit crisis became a confidence problem in structured products, with Mendelson choosing to use ‘liquidity crisis’ as a more appropriate phrase for the market turmoil. In his opinion, we are mostly through this crisis, judging the volatility to be in “the seventh or eighth innings.” (For those of you not in North America or Japan, this is baseball terminology – there are nine innings in a regulation game. So, we’re nearly there, providing no extra hits are required!)

Mendelson described how, in the search for yield, securitisation and leverage were encouraged by Wall Street and that the ratings agencies may have played their part in this encouragement. The domino effect this started led to the housing market changing from being an engine of the economy to being a drag on growth. This led to the sub-prime spread – people went to re-price mortgage securities, which was easier said than done. Hedge funds pulled their liquidity out from anywhere, such as enhanced cash funds and, as explained earlier, many of these collapsed. However, MMFs held up, something that Mendelson made clear everyone should be grateful for – if MMFs had not halted the dominoes collapsing then who knows where the economy would have ended up. Would there have been a new ‘Great Depression’? He rightly pointed out that it is probably best not to speculate too wildly on this given the uncertainty still apparent in the markets today, but it was not beyond the realms of possibility at the time. However, as the MMFs passed the initial test, people ran to invest in them. However, Mendelson noted how we’re not back to normal yet, citing the fact that the asset-backed securities market is still struggling.

So, going forward, how should treasury behave? Mendelson said that classifying pools of cash is important and noted the three pillars of the treasury cash position: working capital (unpredictable daily liquidity); strategic cash (hoarding, i.e. for an acquisition in the long-term); and core cash (for six months plus).

When it comes to planning your cash position, the message from the BlackRock MD was to not be too conservative, that it is important for treasury to live for the future as well as living for the here and now. Nevertheless, he drew attention to the paradigm shift that has occurred in investment objectives, with the emphasis now on thinking about risk first, yield last.

Simon Mendelson, managing director at BlackRock, signed off his presentation with a seven-point plan of items to remember going forward in any investment strategy:

  • Incremental yield is accompanied by incremental risk.
  • SEC 2a-7 – know what you are investing in.
  • Ratings are not everything – AAA is not without risk.
  • Liquidity matters.
  • Access to information is important – disclosure.
  • Cash investing is not a low risk activity.
  • Remember the past, learn from it!

A number of these items echo the thoughts and ideas mentioned in other sessions at the Global Corporate Treasurers Forum, from both the presentations and delegates that I spoke to. It feels like liquidity has never been a more important attribute to find and manage in treasury. However, it is crucial to remain vigilant of all risks while pursuing this goal. Next year the Global Corporate Treasurers Forum will be held in Dallas – it will be fascinating to see how the treasury agenda evolves in the 12 months until then.

The AFP will be hosting its Annual Conference, focusing on treasury and finance, in Los Angeles this October. Click here for more details: www.afponline.org/annual

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