2013 Year in Review

Since 1994 The NeuGroup has advocated knowledge exchange for treasurers, giving them an unrivaled breadth and depth of information via publications, peer groups and websites. In 2013 The NeuGroup facilitated more than 25 meetings, across 15 different groups, the most in our history of leading NeuGroups. What follows are the best takeaways of 2013 from those meetings, as selected by each group’s leader. 

Senior Executive NeuGroups

The Assistant Treasurers’ Group of Thirty (AT30)

• Bank strategic partnership goes both ways. Banks have been sending the message for a few years that the regulatory squeeze on their capital will be forcing them to focus much more on their “strategic relationships” and if you are not in that category you will receive less attention and capital allocation and may even be fired as a customer. But members are turning up the dial also by being more selective in who they choose as a strategic bank. Share of wallet analysis and bank scorecards are among the tools companies use to evaluate who they partner with and how business is allocated. Given the posturing of banks which they attribute to regulatory squeezing, it is all the more important for companies to be proactive on this front.
• The balkanization of the international banking system. The input on Basel III is voluminous in both content and origin. “Everyone is jumping into this discussion and it is not cohesive,” noted a banker at a 2013 AT30 meeting. “Everyone” includes bankers and regulators in every country. Consequently, its forward progress is moving at a snail’s pace. It was also noted that there is a lot of discretion at the national level for interpretation, which can lead to conflict between local country regulations and specific US regulations. Yet, banks are moving forward with implementing the regulations as best they can based on their understanding.

The Bank Treasurers’ Peer Group (BTPG)

• Not trickle down, but more like a fire hose. If liquidity and capital requirements are tending to trickle down from the largest banks to the smaller ones, the stress testing requirements are coming at the smaller banks more like a fire hose, noted Jeff Brown from Promontory Financial Group.
• Have a challenger model. One member has made presentation and refinement of a challenger model (challenging the assumption of its base model) a regular part of its stress-testing process. This is something regulators not only like, but are pressuring to see, since it shows that banks are considering all potential impacts and loss factors in their loss estimates. Regulators want banks to drill down as well as tell a story about how the B/S will evolve under all scenarios.

Engineering & Construction Treasurers’ Peer Group (E&CTPG)

• Using dashboards to inform and drive behavior. Dashboards are great tools for discussion and treasurers can use them to their advantage focusing in on certain metrics and data points that drive messages home and lead to desirable actions. As an interesting illustration, one member explained that her company is very cyclical with remarkable consistency and at certain times of the year the company is flush with cash. Dashboard readers are tempted by this to recommend ways to use that cash. However, until she began showing historical cash-flow patterns, she had to continually remind her readers that this well gets pretty dry later in the year. Finally, if the culture of the company is to ask a lot of questions, a targeted dashboard can steer those questions to items where treasury has good answers or is seeking resources to better address them.

While dashboards are good for providing key information to stakeholders and management, they are also an effective way to showcase the great work that treasury does for the finance department and company. Topics such as return on investments, progress on key projects, efficiency on cash deployment and FX hedges are good examples.

• Common sense is the best protection against fraud. Limiting login ability into web browsers (e.g. Firefox, Chrome) and social media sites such as Facebook is one example of a common sense measure that can go a long way in securing company systems because access to public sites leaves your systems more vulnerable to hacker attacks. Others include not mixing work and personal e-mails, approving payments only with company-approved devices and using a VPN to ensure security of data at public locations. He also noted that the weakest link in fraud protection is typically companies, not the banks. Why? Inadequate controls. Having robust controls to prevent fraud can stop most phishing, smishing and other similar hacker attacks. Companies need to incorporate a “good model to prevent fraud.”

The Tech20 Treasurers’ Peer Group (Tech20)

• Have a plan to counter the activist threat. Since many activists are looking to benefit from targeted threats alone, firms that have a plan to respond to a threat and implement it quickly can force activists to do more work to accomplish their objective than they bargained for. By creating work for them, they may well choose to move on to the next target.
• Tell a more compelling story as to why you hold cash. A panel of investors suggested that tech companies still have not offered investors compelling enough stories as to why they need to hold so much cash. Complementing this story should be an assessment of opportunities to use the cash over the long run, rating opportunities from best to worst. Holding cash may suggest that better opportunities are expected in the future, for example.

the treasurers’ group of thirty (T30)

• Power to the people. As labor markets improve, members are taking time to re-evaluate their retention strategies to ensure they are offering continued growth opportunities for top talent. Top-notch talent management programs include a variety of monetary and non-monetary retention strategies, including rotational assignments, workplace flexibility, and increased development opportunities, along with the traditional strategies of promotion and salary increase.
• Liquidity management isn’t always easy. With the rapid growth of offshore cash, members are continuing to look for effective strategies to manage liquidity in regulated and volatile markets. Familiar structures like netting centers, procurement centers and re-invoicing centers are being reconsidered as viable solutions to further enhance liquidity models in many regulated and volatile markets.

the treasurers’ group of thirty 2 (T30-2)

• Improving risk intelligence. By raising the level of risk intelligence throughout the company, treasurers can ensure that everyone is on the same page with regard to risk mitigation strategies. Treasury is becoming a strategic partner in the feedback loop, as opposed to taking the traditional role of “cleaning up” after important decisions are made without treasury’s involvement. This means risk models are becoming more robust and all-encompassing, allowing treasurers a more accurate global view of their financial risks with real time decision-making ability.
• Is your Board bored? Many members expressed a growing interest from Boards to consider a variety of shareholder-friendly activities including share repurchase and stock dividends as ways to use excess cash. Upshot: many Boards have become bored with debt reduction as the primary way to use excess cash and are now looking at a variety of shareholder-friendly activities like share repurchase and stock dividend programs as appealing alternatives.

Functional NeuGroups

the corporate erm group (erm)

• The art of the risk committee. Members indicate that many of them have risk committees at different levels of the company including the board, executive management and the business units. Those positions within the organizations most often on the executive or BU committee include the head of internal audit, general counsel, business unit executives and the treasurer. But formal credentials are not required. Members agree that it is unusual to have a formal vetting process to determine if potential committee members are qualified. Rather, it is presumed that if they are qualified for their position they are qualified for committee membership. However, informally, the preferred top characteristics considered for committee members include: experience, leadership, role in the organization, and being a stakeholder in the process. The job of these leads in a risk committee function is to “connect the dots across BUs,” noted one member. But some companies have deliberately foregone the notion of a risk committee believing their ERM programs are robust enough as is.
• The art of risk reporting. Much attention has been given to how risks should be effectively reported. One member received accolades from peers for an annual white paper that is presented to the board in advance of meetings. This paper contains one or two paragraphs about every risk and what is being done to mitigate it. It includes the owners and any new developments. The board likes it because it’s a concise summary of what is going on with key risks in the company. And since it is updated yearly, it also serves as a record of what has been done in the past. Another member has developed a way of tracking “risk relationships” in its summary risk reports. The top risks are summarized in one sheet each that includes impact analysis, key risk indicators, key controls and a map of risk relationships. While all of these components are forward-looking, the risk relationship map also includes information on how developments of the featured risk will affect other risks, and how other risks can affect the featured risk. Also included is a list of key risk indicators that are trending red in a stoplight-colored red-yellow-green scale, indicating both current color and any movement from a previous color status. Macro risks that might not be at the enterprise level but have potential to disrupt the business model are also reported.

FX Managers’ peer groups (FXMPG1&2)

• Quality information leads to better decisions; “rent an option” increases hedge coverage cost-effectively. Co-sponsors of the 2013 FX Summit, Deutsche Bank and FiREapps, highlighted how information, technology and analytics should be improving the hedging practices of multinational corporates. FiREapps, with a mission to build confidence around exposure data, provides users the ability to perform analysis on the exposure data and drill down by currency, reporting entity and more to both better understand the sources of FX exposure on company balance sheets, while also validating the data itself. From there, treasury can calculate the net exposure with more precision and hedge it more effectively. This will give FX managers greater confidence to boost hedge ratios above the current 50 percent norm without fear of ending up over- hedged. This is particularly important in an environment of high volatility but also one in which future accounting standards might take a stricter view on under-hedging as well as over-hedging.

Higher confidence in the exposure forecast, according to Deutsche Bank, opens the doors to a framework for FX managers to hedge a higher percentage of their exposures and reduce the earnings volatility impact of FX at a lower cost. Rather than just upping the hedge ratio in the forward program, Deutsche Bank advocated buying options with the intent to roll them into a forward prior to maturity (6 months prior in this case). While still being eligible for hedge accounting (a barrier for most public MNCs), this increases the hedge ratio, provides a worst-case rate, and reduces the option-premium cost by allowing treasury to monetize some of the time value.

global cash and banking group (GCbg)

• Continuing to move SWIFT-ly. SWIFT continues to be a topic of great interest among members as the world of banking moves to a more standardized XML format. This standardization helps strengthen the case for corporates to seek approval to engage in technology upgrades of their internal systems to allow for the new technology. Both SEPA and SWIFT are seen as ways to “future-proof” treasury as technology continues to develop more efficient treasury tools. As such, Corporates who engage in SWIFT implementation projects will enjoy the benefits of a strong business foundation for future-proofing treasury, allowing them to be ready for e-Everything as automated processing of payments and treasury data continues.
• Plan for the unexpected. Contingency planning should be thorough in the identification of possible scenarios and should be tested periodically to ensure things go according to plan. Imagine yourself not having access to the business tools you have at your disposal today. How would you accomplish the most critical aspects of your job? Don’t wait until knee-deep in a crisis to begin planning.

 the treasury investment managers’ peer group

• Zero-bound rate world will continue. “Bond managers must adapt to a new world of near zero bound interest rates and the likelihood of lower total returns,” said PIMCO’s Bill Gross, who kicked off the Fall TIMPG meeting. His outlook for the Fed is that it will remain on hold for the foreseeable future and likely into 2016. To support this outlook he mentioned Fed nominee Janet Yellen’s stance as a “super dove” determined to maintain low rates.
• “Carry” out of the present. With zero-bound rates and upside uncertainty in the immediate future, reducing maturity in the investment portfolio is a strategy that he felt could be counterproductive. Instead Bill recommended investors focus on “carry,” which he describes as maturity extension, credit spreads, volatility and currency differences, to help protect downside risks.

---

Regional NeuGroups

Asia treasurers’ Peer group (ATPG)

• China has put a stake in the ground. The Chinese government has said publicly and repeatedly that they intend for Shanghai to be a global financial center by 2020. For this to happen much has to occur in the next six years, not the least of which is the full convertibility of the RMB. Leong Sing Chiong, Assistant Managing Director with the Monetary Authority of Singapore (MAS) says that China has two key objectives for the RMB. First is to provide capital. For this objective there remains a lot of questions and little progress. The second objective is for trade. Mr. Leong states that progress here is at a much faster pace. He believes over the next five years there is great potential for the RMB to significantly change the Asia financial landscape. And Singapore wants part of the action. Mr. Leong informed the group that the MAS has been working with the Chinese government for four years before recently reaching agreement with their central bank on a direct currency exchange arrangement between the two countries. The benefit Singapore brings to the table is its strengths in trade and financial flows. It also has considerable experience as a global financial center, a label China aspires to for Shanghai. Partnering closely with a major financial center aside from Hong Kong shows the world the country leaders are serious about their objectives.
• Talent acquisition and retention requires special handling. Is the treasury role a specialist job or just another stop in the finance area rotation? It is both, but often not the case in the same company. Some members shared how their companies viewed treasury as a “pass-through” finance resource, and that a treasury job was purely a transitional role and a pit-stop for high potential finance professionals. Yet other members shared that their organization viewed treasury as a highly specialized team and therefore develops staff with extensive training. Treasury being a far smaller team than most of finance will offer fewer leadership positions so particularly in small outpost locations, job rotation and job advancement are challenging to achieve. “Clustering” of treasury operations and treasury activities can provide some relief but it is important for leaders and line managers to scope out the job description and provide exposure to projects, particularly global ones, to facilitate some element of job rotation and job advancement, to meet the learning and development aspirations of their team members.

The european treasurers’ peer Group (EuroTPG)

• Effective liquidity management can be achieved in different ways. Cross-border notional cash pooling, especially if outsourced to a trusted partner (Autumn 2013 EUROTPG meeting sponsor Bank Mendes Gans is such a provider), ticks a lot of boxes in terms of treasury’s ability to effectively use and invest global cash balances of a far-flung enterprise. Through an offshore-account overlay, positive and negative local cash balances are notionally, not physically, pooled by translating them at an accounting FX rate to a net balance in the currency of a company’s choice; a positive balance can then be invested and a negative one can be funded in one go by the parent or a corporate finance entity. This structure lends itself particularly well to companies with decentralized operations. For a highly centralized organization, especially if it also has an in-house bank and treasury has strict control over bank accounts, and perhaps even a pay-on-behalf-of setup in a payment factory, much less can be gained from also having a pooling overlay.

Latin America treasury managers’ peer Group (LATMPG)

• Bank relationships are a matter of expectations and communication. LatAm banking structures are evolving toward a centralized, global-bank-with-local-bank-support model which may not be seen as entirely ideal but mostly works. However, companies’ mindsets are that they are in the region for the long haul and they don’t like to see their banking partners up sticks and leave, at least not without leaving their business in capable hands, and with reasonable notice of pending changes. As with any important relationships, communication matters. For example, no matter how siloed the bank organization is in the region, a company should send a clear and consistent message that certain people both on the bank side and the client side should always be kept in the loop on issues and developments and should be cc:d on all email communication.
• Base Venezuela imports on actual payments, not CADIVI approvals. With consistently long delays in CADIVI approvals and even denials to purchase hard currency to pay for imports, a member advises his business is to import only in line with actual payments effected instead of on approvals so cash does not build up excessively in the country. It’s bad enough that the outlook is bleak to ever repatriate any dollars from royalties and dividends; there is no need to exacerbate the situation on the operational/sales side. Also note: with Argentina increasingly taking a similar path to Venezuela as regards FX controls, treasury should consider applying the Venezuela playbook to Argentina as well.