How has the financial market meltdown and economic outlook affected treasury’s work?
Stock options or not, watching the market’s gyrations in recent weeks has taken the breath away from many corporate treasurers. Their reactions vary from wry humor to understated pessimism, to a new-found philosophical streak, with a focus on the value of integrity.
While some treasurers have seen the values of their firms (and personal portfolios) obliterated, others are merely watching from the sidelines. Still, everyone agrees that the current financial market crisis has both immediate and long-term implications for treasurers and their functions.
Increased visibility
“The biggest impact on us has been an immediate expansion of our workload,” reports the assistant treasurer at a high-tech firm. The reason: “We are spending a lot more time thoroughly engaging with senior management.” Going forward, “the process will entail a lot more communication, education and review.”
Of course, this new level of scrutiny means already-lean treasuries are strained yet further by the new demands.
“The result has been having to prioritize more brutally,” reports another treasurer. “The challenge is doing more with less,” she says.
Yet more communication with top management has its benefits. “Treasury,” says Kala Srinivasan, assistant treasurer at Intel, “is gaining more visibility.” She says operating managers too are now more likely to seek treasury’s advice, helping to increase its influence.
For treasuries, traditionally on the transaction execution/back-end of business, the contact with the strategy team is good news, says Susan Griffiths, principal with Global Cash Management Ltd. Indeed, several treasurers say that they are now a more critical part of the strategic-planning process, as top management seeks their views on M&A, divestiture and funding (see box ) as part of growth and/or survival discussions.
The ‘sign-off’ chain of command
Visibility brings accountability, of course. Treasurers will have to perhaps even sign their names to the financial reports ahead of the CFO and CEO. At one MNC, finance staff was recently asked to sign a new ethics code.
Don Lessard, a professor of international management at MIT, notes that many of the issues in the recent scandals have been close to treasury’s heart—if not at its core.
“Risk management, transaction execution and special entities are in treasury’s domain,” he says. While some treasurers argue that they execute the deals but are not involved in how the transactions are later booked, “this should serve as a real awakening of treasurers’ professional responsibilities as well as their corporate officer role,” Prof. Lessard says.
While treasury has not been directly implicated in many of the scandals, treasurers say that they are often intimately familiar with the accounting implications of the transactions that they execute; FAS 133 has certainly helped cross some of the old functional divides between treasury and accounting.
“We work very closely with accounting,” report one treasurer. “I always make sure that I am comfortable with the way the transactions are booked.” Basically, he says, “the recent scandals validate what we’ve been doing all along.”
Others agree. Some firms are even considering a greater involvement. One treasurer reports that her company may shift financial planning out of the controller office into treasury, to ensure accounting does not have an incentive to book transactions in a way that jives with the financial-planning process.
Indeed, says Stephen Piccininni, senior VP—Treasury at March Inc., “Treasurers need to rely more on their own judgement of what’s ethical, and less on the advice of experts and technicalities.” (This may even be true with regard to other internal departments.)
“Some of the outside institutions have let us down,” he says, noting that banks and accounting/tax advisors have been promoting some of the more aggressive structures, often complete with auditor’s pre-approval. “It’s important that treasurers apply a real ‘smell test’ and look at the substance of transactions.” If something does not look right, they should stay away from it. “You have to set higher standards,” Mr. Piccininni says.
Another good rule is to stay away from overly complex transactions. “The KISS principle matters now more than ever,” says Ms. Srinivasan. “If a transaction cannot be easily explained to people outside treasury within a few minutes, it’s likely to raise concerns.”
Further, treasurers should revise the assumptions that they use in evaluating transactions as well as overall worse-case scenarios, she says—i.e., include greater potential price moves, during shorter periods and with higher correlations to reflect recent events.
|
A focus on liquidity Another consequence of the external pressures is that treasurers’ role as “chief liquidity officers” has become critical. “There are more variables out there that can wash away the cash flow,” notes MIT’s Prof. Lessard. “All companies should be on a liquidity alert.” The equity market meltdown and still-tightening credit noose “are highlighting the importance of liquidity risk management and contingency planning,” says Jeff Wallace, managing partner at Greenwich Treasury Advisors. This affects access to internal and external funds and customer financing. Intel’s Ms. Srinivasan notes that long term, the market may change its perception of the ideal capital structure away from leverage. “I think that the pendulum will swing the other way,” she says. Certainly, she says, “treasury’s primary focus is on protecting the cash flow, adding value in negotiating terms with suppliers and customers and ensuring the best returns on working capital.” IT |