Striving to be best in class
Just as it is misleading to judge a company’s financial performance on a single measure such as earnings per share, so is it misguided to attempt to reduce the performance of a treasury department to a bald set of key performance indicators (KPIs).
Non-treasurers might understandably think that treasurers can be objectively assessed on measures such as the cost of borrowings. But while treasurers may implicitly know that treasury is as much of an art as it is a science, that point needs to be explained coherently and frequently to others such as finance directors and non-executive directors.
Both for their own purposes as well as for others, treasurers casting around to see how they measure up in terms of best in class need to investigate a range of measures. Any treasury aiming to turn in a top-class performance has to have strong links and good two-way communication with the rest of the business.
Best-in-class treasury does not happen in an ivory tower. The treasury department needs to be driven by the strategic aims of the company. The key to setting the financial strategy is to understand the direction the business is moving in – and support it. All treasurers worth their salt need to have an eye for keeping costs down – funding costs and transaction costs. It is a tangible way of adding to shareholder value.
Perhaps the area where the treasurer’s role has grown most in recent years is in the business of no surprises. The list of risks appears to grow year on year. But whatever the risks that have been identified, treasurers need a coherent policy on measuring and on reporting. Treasury needs a dialogue with others in the business in a language that both parties can understand and which both can work on in managing the financial risks.
Looking beyond the corporation is a task that treasurers need to undertake effectively if they want to perform well. Maintaining good relationships with the capital and debt markets and the banking sector is all part of the treasurer’s duty of guarding the interests of equity and debt provider stakeholders.
While treasury has undoubtedly moved far in the last few years, those striving for best in class need to remember their roots. Best-in class treasury departments do the basics well. It would be foolish to get tied up with doing the advanced stuff only to get caught out by forgetting to do the day job. Every treasurer needs to make sure that best in class also means getting the fundamentals right.
PETER WILLIAMS
Editor
Basel II hits borrowing
With Basel II implementation on the horizon, there is growing speculation among borrowers and banks about the impact that the new accord will have on pricing and other elements of future borrowing.
New pre-emption principles
Pre-emption rights – whereby a new issue of shares must be made pro rata to existing shareholders – is a cornerstone of UK company law. Creating shares via a rights issue ensures that shareholders do not have to suffer a dilution of their investment.
The Treasurers’ Conference 2006 provided an opportunity for treasury professionals to discuss some of the major issues confronting the profession. David Blackwood, Group Treasurer at ICI, chaired the conference, which focused on the themes of risk, pensions, international accounting standards (IAS) and key developments in treasury.
In the first major cross-currency exchange since the introduction of the new international financial reporting standards (IFRS) accounting rules, insurance group Royal & Sun Alliance has converted $500m of so-called yankee bonds.
It is clear that much more needs to be done before the Single Euro Payments Area becomes a reality.
Global growth forecasts are robust, with share prices near to their historical highs. The markets are optimistic and the latest IMF global forecasts are unusually strong, but there are heightened tensions over Iran, new peaks in oil and commodity prices, and strong rises in bond yields. The global imbalances arising from the huge US deficit are unresolved. If central banks embark on aggressive tightening, global growth will be threatened.
Land Securities’ Corporate Finance Director Stephen Leung and its Treasurer Sean West talk to Julia Berris.
Now is the time to start to focus on the implications of Basel II. Basel II is due to be implemented in the UK from 2007. Although the new rules are not yet in force, loan agreements being signed now are starting to be affected. Three different models have been devised to provide banks with a choice of how to approach capital adequacy.
Corporate credit spreads have tightened this year to date. Corporate borrowers looking to stay with fixed bond yields need to give careful consideration to hedging. Innovative funding solutions are required to avoid overburdening the European markets. Capacity constraints can no longer be a credible rationale for ignoring a US private placement.
Cash conversion cycles require closely fitting financial supply chains if they are to work at their maximum level of efficiency. With corporate treasuries evolving fast, banks can no longer add competitive value just with new products. Instead, they must build multi-product solutions unique to the client. It takes time and resources but it is the only option.
Hedge accounting is a long, laborious process and time is needed both to ensure the document will satisfy the auditors and that the testing can be completed effectively. IAS 39 Financial Instruments: Recognition and Measurement is a mixed-model standard and as a result produces results which are contradictory. Treasurers are among a small band of people who actually understand IAS 39 accounting.
IFRS can be seen to pierce the corporate veil by requiring disclosure of information provided internally to key management personnel and which is used to drive the decision-making process.IFRS 7 disclosure requirements are designed to enable the user to evaluate the significance of financial instruments on the financial position and performance of an entity. The introduction of the standard reflects the fact that companies are involving themselves in activities more commonly associated with that of the banking world.
Sophisticated analytical techniques could help treasurers arrive at a sensible, effective and efficient risk management policy for hedging uncertain foreign exchange exposures.
The track record for currency-exchange forecasting is poor, as can be seen by the recent consensus view of the dollar’s prospect. Asset allocation to currency-exchange forecasting is likely to be a waste of time, or worse. Myths surround currency hedging. Companies need to assess how vulnerable assets and earnings are to exchange volatility.
Enterprise resource planning systems are management information systems that integrate and automate many of the business practices. ERP suppliers claim that systems are beginning to emerge with a performance to rival that of established treasury management systems. But doubts remain.
For many treasurers their career path’s ultimate goal is to make finance director. This is not a slur on the years spent fulfilling the treasurer’s role; rather, it is a recognition that the skills and experience acquired and refined in the treasury department can be put to good use on a wider stage. But while treasurers may see themselves as occupying a broad role of strategic importance within an organisation, it seems that those who appoint finance directors don’t always appreciate the attributes of the treasurer in quite the same way.
