Leadership and Treasury – Themes at AFP 2007


The AFP’s annual conference took place in Boston this year against the backdrop of the World Series baseball championship, which was eventually won by Boston’s Red Sox. While many in the finance community were crowding into Boston’s bars to watch the matches by night, by day they made time to attend the intensive discussion and learning sessions at the conference, where leadership and competition emerged as important themes.


In the conference’s opening session, Chairman of the AFP’s Board, Loren Starr, introduced one of the key themes for the conference. He articulated the message that financial professionals need to build stronger leadership skills, saying: “Companies are aggressively rethinking their business strategies and the treasurer is in a prime position to be part of this. There’s a lot we can all do to improve our leadership skills. CEOs want the type of financial professional who is always looking for ways to create value in the company, and treasurers need to enhance their value.”

Leadership was also the talking point when Elizabeth Vargas, the US news presenter and journalist, interviewed business guru and ex-chairman of GE, Jack Welch. When asked what makes a good leader, Welch replied that he identifies staff with leadership potential by checking that they have four qualities, known as the ‘four Es’: Energy, ability to Energise others, Edge and Execution skills. He continued by outlining his view that, as an individual rises in an organization, there are three additional qualities that distinguish a talented leader:

  • Authenticity (“be yourself, be real”).
  • Resilience (“if your career suffers a blow, get back on the horse straight away”).
  • Ability to see around corners (“what products, services or trends are coming?”).

According to Welch, the biggest mistake made by many managers is that they fail to realize that they are only as good as the people around them. Another failing he noted was lack of candour and poor communication of their views to employees. He said: “Leaders care about business, about people and, most importantly, about winning.” He also said that taking on the title of CEO should be the beginning of a new career, not a reward for corporate veterans just before they retire. “It is now seen as the start of another career and the focus of that career should be on building great people and training,” he insisted.

US Sub-prime Crisis

Several months into the sub-prime mortgage crisis, the problems facing global financial investors with exposure to repackaged sub-prime mortgage securities was a constant reference point in many of the discussions taking place during the conference. Barney Frank, congressman and Chairman of the Financial Services Committee, gave a speech at an Executive Institute breakfast meeting in which he addressed the subject. His take on the sub-prime mortgage crisis currently rocking financial markets was that it was “no surprise” that the issuance of “mortgages that should never have been granted, and the reselling of these repackaged mortgages in an unregulated market”, should have serious repercussions. This view was echoed by Ernie Humphrey, director of treasury services at the AFP, who told gtnews earlier this week: “The fact that mortgages were being granted without much (if any) information in regards to the financial strength of the borrower in and of itself makes no economic sense. Therefore, it should have come as no surprise that the sub-prime market collapsed at some point. The question in my mind was not if, but when the market would collapse as the result of such practices.”

During the breakfast meeting, Frank called into question the role of the US regulators and that of the government in the US sub-prime crisis. He added that a large part of the current crisis is due to lack of investor confidence, which also emphasizes the need for reasonable regulation. While a bill is set to come through in Spring 2008 that will facilitate mortgage agencies Fannie Mae and Freddie Mac’s ability to help mitigate the market, there are still many questions left unanswered as to the future of sub-prime mortgage regulation. According to Humphrey, at the AFP, regulation in the market is necessary to the extent that market participants need to understand the risks they are undertaking and those actually taking the risk should be the ones feeling the effects (both positive and negative). Humphrey says: “There should be no free pass for those unloading risk from their balance sheets to investors that do not understand the underlying risk they are taking on when buying certain securities. I agree that Fannie Mae and Freddie Mac should be able to help mitigate the current crisis, but we should not legislate the ability of an agency to protect those engaging in risky practices from the downside associated with this risk. This would begin to erode the effectiveness of the free market mechanism.”

Another aspect of the fallout of the sub-prime crisis is discussed in Secondary Market for Debt – An Answer to the Credit Crunch? by Kingsley Greenland, CEO of DebtX. He discusses the problem of non-performing loans as a result of the sub-prime crisis, and how these should be managed as part of a loans portfolio. Greenland advocates that bankers turn to the secondary markets to rebalance portfolios, saying: “Increasingly, the answer is to sell loans in the growing secondary market for debt. Powered by highly efficient electronic trading, the global secondary market is now sufficiently liquid on a day-to-day basis to efficiently dispose of non- or poorly-performing debt, as well as high-quality, high-performing loans as part of normal portfolio rebalancings.”

Payments: Electronic and Cheques

The march towards elecronic B2B payments in the US and the decline in B2B cheque usage is irrevocable, as confirmed by research from the AFP in October 2007. The survey found that the use of paper cheques for B2B payments had dropped to 74%, from 81% just three years earlier. The benefits for businesses are clear: electronic B2B payments can reduce fraud, cost less and are more efficient. In her article How Banks Can Streamline Electronic Payments for Corporates Rosanna Salaris, senior vice president of The Clearing House Payments Company, responsible for the Electronic Payments Network (EPN), outlines the progress made in the US electronic payments industry in the past year. She underlines two ACH solutions that will accelerate the move toward electronic payments: one is the Universal Payment Identification Code (UPIC), which protects the confidentiality of the customer’s account and routing number, thereby offering a more secure payment. The other solution is the STP 820 remittance standard for ACH transactions, which complements the UPIC by enabling invoices to be reconciled electronically. According to Salaris, the latest research shows that “there’s no turning back on electronic business-to-business payments,” and that “businesses will commit even more to electronic payments and less to cheques in the near future.”

Check 21, POP or BOC?

Although electronic payments were recognised as the future of the US payments industry, many payments are still made by cheque. One of the sessions, on the retail merchant’s customer payment options, was very well attended, showing the strength of interest in this subject. The session took the form of a contest between Check 21, Back-office Conversion (BOC) and Point-of-purchase Conversion (POP) – the question that was hotly debated was, which method is more suitable for the retail merchant? Three treasury managers from well known US retailers – Home Depot, CVS Caremark and Target – were on the panel to discuss the merits of each method of cheque conversion.

Peter Nash, director of treasury operations for CVS Caremark, the US drugs company, gave his vote to POP, citing the quality of the cheque image and the need to train employees in dealing with point-of-sale cheque truncation as being two very large obstacles. He commented that, for some companies, Check 21 is more expensive than cheques themselves. He said: “POP is the best opportunity to reduce cheque processing costs.”

The second panellist, Charles Labassi, senior treasury manager at Home Depot, the second largest US retailer, highlighted his preference for BOC. One of the reasons for this is the company’s emphasis on not confusing customers and not making queues any longer than they need to be. He also gave the reliability of cheque processing machines as one reason that cheque conversion is better done in the back office. Home depot stores tend to be dusty, which makes the machines break down.

The third panellist, Delores Ratliff, manager of bank negotiation initiatives at Target Corporation, also chose BOC rather than POP. Part of her motivation was the necessity of accepting cheques even for the smallest amount and POP would potentially slow the payment process down.

The session raised some interesting issues and real-life examples of cheque truncation in practice. The risks of centralised back-office processing and the logistical problem of sending all cheques to one location were also discussed.

Trade Finance

One of the much talked of elements of the trade finance industry is the increase of business done on open account and the perceived demise of the letter of credit (LC). While it is true that big US firms are increasingly negotiating business with their foreign suppliers based on open account, there are some disadvantages to this arrangement, particularly for the supplier. Business done on open account means that payment has to be made based on the terms of the invoice, rather than on the pre-agreed and bank-guaranteed LC. Typically the buyer controls the invoice terms. According to Michael Bellardine, director, Global Trade Services at KeyBank, some of the large US buyers have been looking for an open account solution that provides some of the benefits and security that their manufacturers used to get with LCs. Some manufacturers used LCs to gain financing from their local bank, but open account only provides a receivable. Bellardine says: “What’s shaking up the whole industry now is the ability for buyers and sellers to talk directly; through the web and because of the lowering of trade barriers, it’s easier to do an offshore purchase. The problem is that the traditional financing and settlement processes offered by the LC is not offered on some of the open account terms that are now available.” While larger companies are seeking their own solution to improve payment terms for their manufacturers, the industry regulatory body has also moved to simplify and improve the efficiency of the LC.

On 1 July 2007, the International Chamber of Commerce brought in its revised version of the Uniform Customs and Practice for Documentary Credits, known as the UCP 600. The updated standard seeks to simplify, clarify and speed up the payments process under letters of credit. Read more about the highlights of the UCP 600 in Bellardine’s article The New UCP 600: Rules to Better Facilitate International Trade. In his article, he concludes by saying: “The long term impact is the new UCP 600 is likely to increase the use of letters of credit and, in turn, better facilitate international trade growth as new global markets and suppliers emerge.”

Global Cash Management

Several themes around cash management emerged during panel discussions at the conference. The sub-prime crisis has brought to the fore liquidity concerns for corporate treasurers, not only in terms of ensuring they have access to funds to run their business, but also in terms of the ability to ‘liquidate’ assets held on the company balance sheet, according to Humphrey, treasury services at the AFP. He says: “Treasury professionals are becoming more concerned with the asset allocation in their short-term investment portfolios, as investments once thought to have zero principal risk (auction rates) can now have a real risk of default.”

One of the foremost cash management concerns of corporate treasurers is online cash management security. One AFP survey on fraud found that 72% of conference attendees had at some point been a victim of fraud and that 93% of those cases had been cheque fraud. Payee Positive Pay was found to be an effective deterrent to cheque fraud and it is now beginning to be introduced in the reconciliation of ACH payments as well. Security and technology were dominant themes throughout the conference, while managing cash online or through mobile instruments was also discussed.

“Another significant challenge treasury professionals must deal with is technology systems that don’t communicate seamlessly – a lack of systems integration which is often a result of corporate acquisitions and disparate tracking systems.” That is the view of Michelle Young, senior product manager in the wholesale Internet and treasury solutions group at Wells Fargo. In her article, The New Wave of Workstations Moves Cash Management Online, Young looks at the challenges of moving cash management online. One of the problems that she highlights is the expansion of treasury responsibilities without investment in additional staff or other resources, while continuing to use time-consuming manual processes to manage treasury operations. The article touches on the importance of cash positioning and forecasting in decision-making, and also gives guidance to companies on the best approach for their organization: whether it be spreadsheets, software-based treasury workstations or online workstations.

The increasing levels of excess cash on company balance sheets is due in part to unprecedented corporate profits and continued expansion in developed and emerging markets. It means that cash management is assuming an increasingly strategic role within the company and cash assets, while they have gained an increased importance, are now posing new challenges for corporate treasurers in terms of minimising risks and optimising returns. In his article Managing Cash as a Strategic Asset – Implications and Solutions Tom Schickler, senior vice president, Liquidity and Investments Product Executiveof JPMorgan Chase Treasury Services, examines the implications of managing cash as a strategic asset for corporations and their treasurers, including managing risk, paying more attention to returns and improved delineation of cash components through working capital management. Schickler says: “This sea change in how cash assets are viewed and treated has implications for corporate treasurers, who are looking to minimize risks, optimize returns, get the most from their cash portfolios and make the most of their own valuable time.”

In light of the pressure to manage excess liquidity as effectively as possible, there is more competition among deposit managers to distinguish themselves by providing products with better returns. In his article Becoming a Grand Master in Cash Management Chris Nichols, president and CEO at the Banc Investment Group, discusses how one product, the dynamic business sweep for business checking accounts, can improve deposit management by optimising deposit rate sensitivities. The method allows the movement of funds, above a peg balance from a non-interest earning checking account, to an interest earning money market account. Nichols says of the dynamic business sweep: “This is a dramatic departure from the traditional methodology of treating all customers within a product class as having the same interest rate sensitivity. By utilizing a dynamic business sweep, banks can now leverage the cheapest available funds instead of the average cost of available funds.”

Accounting Update for Treasurers

In one of the sessions at the conference, the AFP’s director of financial accounting and reporting, John Rieger, spoke about some of the developments in US accounting standards and legislation. His educational session included information on FASB, Fair Value and SEC activity.

Financial Accounting Standards Board (FASB) Long-term Projects

  • Conceptual framework to align EU standards with the US.
  • Codification project to organise standards.
  • Convergence project.

“Accounting remains an important issue for treasurers,” Rieger affirmed. Under FASB, cash equivalents will be dropped and become cash currency and demand deposits at financial institutions and everything else will be classified as short-term investments. This will require additional disclosure of terms, liquidity and risk in notes.

Fair Value

Fair Value Option FAS 159 (Phase I) creates a fair value option where a company may irrevocably elect fair value as the initial and subsequent measurement for certain financial assets and financial liabilities on a contract-by-contract basis. Any changes to the fair value of these assets would be included in the company earnings statement. Any changes in the issuer’s creditworthiness would also be included as gains or losses in earnings. The objective of this is to provide fair value matching of derivatives and to simplify FAS 133. As a result, extensive disclosure will be required.

Fair Value Option (phase I) is effective as of the beginning of an entity’s first fiscal year that begins after 15 November 2007. Early adoption is permitted as of the beginning of the fiscal year that begins on or before 15 November 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. Phase II will address non-financial assets and liabilities.

FAS 157 – Fair Value Measurements

This standard defines fair value and established the framework for measuring fair value. It expands disclosures and is effective for fiscal years beginning after 15 November 2007. The problem with fair value, however, is that it shifts the burden from the user to the preparer, which requires a significant amount of interpretation and judgement and therefore creates a litigation minefield.

Valuation Guidance for Financial Reporting

On 16 January 2007, FASB issued an invitation to comment on issues such as whether there is a need for valuation guidance for financial reporting and whether to include conceptual guidance, implementation guidance or both?

A new FASB Valuation Resource Group has been created to provide guidance on issues relating to the application of the principles of FASB Statement No. 157, Fair Value Measurements. The input will also include alternative views and practical solutions to issues. FASB expects to hold the first resource group meeting in the third quarter of 2007 to assist the Board in evaluating any known implementation issues.

The information that auditors and valuation consultants will use in determining fair value will come from corporate management, therefore it is important that management and treasury develop, document and justify the information.

SEC Activity

SOX 404 revisions include identification of risks to reliable financial reporting and the related controls that management has implemented to address those risks; evaluation of the operating effectiveness controls; and reporting the overall results of management’s evaluation.

There is relief from Section 404 requirements for companies that are new to Exchange Act reporting. For instance, all new public companies will have a transition period that will prevent them from having to comply with Section 404 requirements in the first annual report filed after becoming an Exchange Act reporting company. This also applies to foreign private issuers that list on a US exchange for the first time.

Rieger did offer some tips on how corporate treasurers could save money when working with auditors. “Focus on real areas of risk and avoid any duplication by integrating internal controls within the audit,” he advised. “Decide what areas are not material to SOX 404 and it is worth bearing in mind that companies that have centralised their business systems will benefit the most from SOX 404.

US Fiscal Policy

The closing speech at the conference was giving by David Walker, Comptroller General of the US and head of the government accountability office. It was a speech that kept the main hall of Boston’s Convention and Exhibition Centre in silence and awe, with phrases such as ‘tsunami of spending’ and ‘unsustainable fiscal policy’ holding every corporate treasurer’s, CFO’s and banker’s attention. Walker began by asserting that “the US’s fiscal condition is worse than advertised and we are going to have to start making some tough decisions.” He supported his assertion with figures showing that, between 2000 and 2006, the US’s major fiscal exposures increased from US$20.4 trillion to US$50.5 trillion – which is a rise of US$2-3 trillion a year. He also pointed out that in 2001, the US had surpluses and was projected to be debt-free. However, 75% of the US’s new debt in the past five years has been borrowed from foreign investors, and the US is now deeply beholden to foreign financial players.

“The first rule of getting out of holes, is to stop digging”

So how can the US fight its way out of its current crippling financial situation? Walker had several suggestions including improving financial reporting and reimposing touch budgetary controls. He also called for the need to re-engineer the tax system, which he described as ‘mind-numbingly complex’. In addition, he emphasised the need to encourage people to save rather than borrow. And finally, picking up on a theme that was championed in the conference’s opening interview between Elizabeth Vargas and Jack Welch, Walker highlighted the current leadership deficit, and called for more leaders in the business community.

Looking ahead to next year’s conference, scheduled to take place in Los Angeles in October 2008, it will be interesting to see whether the sub-prime mortgage crisis will be just a dim though painful memory, whether the US government will have found a way to resolve its fiscal problems, and whether the business community will be on its way to establishing the leadership that has been called for at Boston.


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