Risk and digestion
There was a full menu of meaty issues for delegates at the ACT Annual Conference to chew on, but risk management was the dish of the day at Edinburgh.
It’s a topic that has been steadily rising up boardroom agendas over many years. Risk management will mean different things to different people, as one of the conference’s keynote speakers, Johnny Cameron, Chairman, Global Markets, RBS, said. But there is a general recognition that its core function is to minimise the impact of financial risk.
The latter has certainly been evident in recent months, with the once mighty dollar regularly crashing to new lows, commodity prices going through the roof, and credit spreads widening from their previously low levels. This has publicly tested the risk management skills of the world’s central banks. Faced with hard choices, treasurers have struggled to balance their vigilance against resurgent inflation with pressure to administer an adrenalin shot of interest rate cuts to flagging economies.
Risk management rarely consists of a single right answer, but a range of options that must be assessed. In today’s environment, it means striking the right balance between risk and reward rather than simply guarding against the shocks that can hit the business.
Harder times also spell opportunity for treasurers. Effective risk management lies at the heart of treasury. So they should grasp the chance to move centre-stage in devising an effective risk management policy, enhancing both their personal and professional standing.
With many companies responding to the chillier economic winds – and protecting shareholder value – by stepping up their hedging activities, treasurers must evaluate their hedging policies. They must be robust enough to respond to the turbulence. Hedging simply because it has always been company policy is not a sufficient reason.
Does the hedge meet the key risk areas of pension liability, interest rates, foreign exchange and inflation? Is the balance of risk versus reward appropriate? Does it create shareholder value? And does it offer strong potential for reducing volatility and thereby keeping shareholders on your side?
Treasurers also need an effective capital structure to support their risk management policy. With lenders driving tighter terms and covenants, companies must keenly monitor the market to benefit from the best opportunities while accessing multiple means of liquidity.
As conference delegates were reminded, many of the messages they heard on effective risk management aren’t exactly new. But as the door firmly closes on the era of cheap and accessible finance, every corporate treasurer should have them at the top of their own to-do lists.
Graham Buck
Reporter
See page 18 for more on The ACT Annual Conference
Pensions Regulator’s powers beefed up; Experts divided over rally or ruin; UK businesses feel the crunch; Pension buyout market to quadruple this year; European money market funds hit new highs.
These days the problem with facts and information is that there is too much available. We hope through these pages to provide a filtered digest of recent news, particularly trying to think ahead as to what developments or thinking by the authorities may be affect the corporate treasurer.
From time to time the ACT takes the opportunity to delve into more depth on a topic. This month, for example, Technical Update outlines the new ACT briefing on the UK’s Faster Payments Service. while on page 40, there is a briefing on contingency planning for a downturn.
The global credit crisis is entering a new phase, less dramatic but still very dangerous. The financial markets are showing signs of stabilising, but oil prices have risen to unprecedented highs and the dangers remain acute.
The big stockmarket debut has returned to London, with overseas commodities giants identifying it as the world’s most important equity bourse for mining companies.
Astrazeneca’s director of treasury Sean Christie outlines how treasury supports the group’s strategy for success. Graham Buck reports.
The Gala Dinner of the ACT Annual Conference was held this year at the beautiful Prestonfield House Hotel in Edinburgh. The evening took place in an impressive marquee where guests enjoyed a champagne reception and some serious networking before the spectacular dinner.
To seize market opportunities, treasury processes require delegated authority, speed in execution, and a transparent and acknowledged mandate/execution policy with the company’s core banks.
Widespread panic, in fact, almost virtual hysteria was seen across the UK in September 2007 when it was officially announced that Northern Rock was in serious trouble. For months, the FSA despite its regulatory powers, sat back and watched, according to some commentators. In sharp contrast, the plight of Bear Stearns in the US was dealt with swiftly by the regulators. Jennifer Carruth reports from the ACT Annual Conference.
The members of well-funded pension schemes adopting a liability-driven investment strategy benefit from any increase in certainty in receiving their pensions, but does the sponsor also benefit? And what about the Pension Protection Fund, both now and when it changes its levy calculation rules? Financial models exist for answering these questions, but they are not widely known. This is the first of two articles that introduce and explain two such models.
Finance departments are facing tough times and an over-arching control framework is needed that allows businesses to see the wood from the trees. The integrity of the balance sheet is likely to be fundamental in that assessment as it captures the future
cash generation and funding requirements for the business. But how is that integrity achieved?
Phase I of SEPA, introduced at the end of January 2008, covers credit transfers and enables banks’ retail and corporate customers to transfer euros through identically structured payment orders with a guaranteed execution time. Phase II, under which other SEPA-related system upgrades are introduced, is scheduled to take place this year and next. Despite the enormous potential benefits there is a widespread feeling that things are not as ready as they should be and there is still a great deal of unfinished design and implementation.
One of the objectives of the Payment Services Directive is to bring Europe-wide competition to national payments markets, enabling non-bank payment institutions in the UK to passport their services. Entities with a large part of their business in payments may consider setting up a payment institution, while larger corporates may set up, and even passport, their own payment institutions.
Companies need to establish that they have the ability to protect against system downtime by installing a secondary system so operations can continue and they do not lose the most critical asset of all: information.
The treasurer has a key role to play within an organisation in contingency planning for an economic downturn. Even though a downturn may not happen, making preparations for challenging economic and business conditions is part of good risk management. Contingency planning involves looking at financial strategy, financial policy and risk management.
A recent ACT round-table, which took place under the Chatham House Rule (that all information divulged can be freely used but not attributed), gave a fascinating insight into how treasury departments and treasury professionals are working to achieve world-class treasury and the challenges they have to overcome.
Innovative treasurers are looking to work as partners with the business to move out of the treasury department and work alongside colleagues to manage risk, create value and boost an often pressurised bottom line.
