Treasury is looking to take on more risk and responsibility when it comes to investments.
Worries over recent indications of an economic slowdown aside, companies are beginning to regain comfort with risk again and are modifying their investment policies (IP) accordingly. Further, with treasury departments having had their processes and policies severely stress tested through the financial crisis (and withstood the strains), they have learned much about the functional and philosophical strengths and limitations of their IP’s.
Many treasuries also benefitted from the crisis by showing their value to the company and building credibility. These factors have led to a dual trend of loosening up the IP regarding risk and looking for more responsibility by lobbying Boards to drop authority levels lower to, say, the CFO level. According to a pre-meeting survey of the NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG), nearly half of respondents said they had to “always” go to the board for changes to the IP.
An overhaul. During the TIMPG meeting itself, several members presented on the mechanics of their investment policies. One presentation by a director of investment management at a large US multinational tech company explained how he recently overhauled the company’s investment policy. The director began his presentation by saying that a key motivator in his company’s initiative was simply frustration with outdated language and requirements that were operationally inefficient, redundant with other policies, and ambiguous. Simply stated, the policies were not longer applicable, having not been updated since 1999. The director walked TIMPG members through the process, outlining four key objectives for this effort:
- Reduce board involvement in investment strategy while preserving oversight role
- More decision making authority with CFO and Treasurer
- More flexibility to add or delete security types
- Easier to understand & interpret
Beyond these fours objectives, the changes in the company’s IP centered on six key elements: scope, responsibilities, objectives, risk tolerance, performance & reporting, controls & compliance. Examples of practical changes included lowering asset-manager approval authority from the board down to the CFO and changing the maximum allocation to an individual manager from a fixed amount to a percent of the total.
But perhaps the most significant improvement, however, was the reduction in size of the policy from 4200 words to 1700, making it a much more manageable document.