Impact of New (and Old) Regulation

The European Treasurers’ Peer Groups’ discussions with the central banks’ management assist us in understanding how we must adjust for the future.

Here are some clues:

The window for change has disappeared with the improved economy, which opens up for less drama. Rigorous change basically does not make any political sense any longer and probably the far fetching regulation of the non regulated markets will therefore not happen. And I’m not sure that is a bad thing. It might even reduce to only fighting for global taxes on financial transactions and limiting bonus schemes. The former will definitely lead to higher costs of financing for consumers and corporates and I therefore suspect it will not happen. The latter is only populism and has no real impact.

It seems however likely that increased capital requirements will be implemented but slowly and not during present business cycle. We understand that capital requirements will be increased in periods of high economic activity and vice versa. This makes sense and could limit future bubbles.

There is no sign the central banks are paying any attention to the society outside the banking system. This is especially true in Europe where saving the banks means saving society from economic disasters. As us corporates know this is not true. We will unfortunately have to live with a financial regulation with main focus to avoid bank defaults (Basel II). This means that established trends will continue:

Banks continue exiting the market of balance sheet commitments to corporates and focus more on the private market. One of the cornerstones to avoid bank defaults in the Basel framework was making the banks less exposed to corporate risk introducing the credit markets as buffer and high capital requirements on corporate risk. Very little has been learnt from the crisis in this area and therefore the shift to arm’s-length from relationship banking and increased reliance on automated risk management will continue. The only major lessons learnt by central banks from the crisis is that banks and financial institutions will default despite of Basel II. Therefore they have implemented models to avoid another Lehman. That’s a good but not a sufficient improvement.

One area where the central banks do not take any responsibility is improving the global payment system. This could be an area where modern regulation could have provided substantial value for the non financial sector. The central banks expect the “markets” to improve payments infrastructure but it is obvious there are few incentives for the financial industry. Instead governments and central banks should assist by prohibiting float by law and breaching institutions would have to pay a severe “fine” to payer and payee. Then the incentives for change would be there. Actually I would expect that without this legislation payment systems would continue to be dysfunctional for many years to come. This would severely hurt the corporate sector having to continue raising liquidity to provide it to the financial sector, indeed an irrational setup.

Report from Survey on Corporate Plans 2010

The crisis imposed a paradigm shift on corporate planning and management. The pre-crisis stability of growing markets and following the trend strategies has vanished. The crisis changed the status quo; revenues decreased with 50% in some industries from one month to another; financial markets disappeared over night. The prior relative ease of forecasting was replaced with a sense of prepare for the unexpected. This situation put the limelight on:

• counterparty risk management
• liquidity and cash management
• risk management and hedging strategies

As a consequence corporates have been more adjusted to plan for any eventualities, focus on cash generation and not expect availability of credits at anytime. The rigid strategy of following the trend is being replaced by a more agile and flexible preparedness to adjust with changing conditions. Service levels and relationships with your banks can suddenly change, management information is crucial, economic statistics is not reliable and the trend is not necessarily your friend.

The actions treasuries take as a response:

• deleveraging
• develop bank relations and new strategies
• new hedging strategies
• improve technical integration
• improve reporting capabilities
• be agile and do not take anything for granted
• take advantage of the opportunities arising e.g. opportunistic financing

The actions corporate management takes as a response:

• improved market and sales focus
• flexible cost structures
• flexible capital expenditure schemes where projects can be postponed or accelerated depending on conditions
• take advantage of the opportunities arising e.g. acquisitions of corporates and markets

Treasury and corporate management monitor the macro economic development more closely; this includes generic parameters (growth rates, inflation etc) and company specific (key currency crosses, commodity prices etc). Cash generation metrics receive increased attention.

This report was sponsored by NFS Group. Please contact johanna.lenner@nfs-group.com if you want to receive the complete survey report.

How Treasurers Improve Careers

The crisis has changed the role of the treasurer and we are much more exposed to the board now. This means a new set of rules and expectations. On behalf of the European Treasurers’ Peer Group I have interviewed CEOs and board members and here is a list what they expect. Fulfilling these expectations is a career improving activity.

Understand the business model and the underlying need from the business areas. Business modeling has not before been on the agenda of the treasury but that’s changing. Already many treasurers have understood this by transferring distributor risk on to financial institutions or limiting the financial exposure of vendors as only two examples.

Broaden the scope of “markets”. It does not only mean financial markets any longer. The expectation is the treasury also understands the markets your corporate is operating in. Follow the business area managers visiting customers and adapt a commercial mindset in the relation. Find ways how treasury can improve the customer experience and how your company adds value.

Act from a group perspective, and be expert in your field. One typical area is working capital management. Do not blame the business units for not understanding and stating that they “own” the money. Just implement good working capital practices. That is the responsibility of treasury. Blaming others and limiting your area of responsibility is definitely a career limiting activity.

When communicating with the board and C-level give them the solutions not the problems. Do not overwhelm them with details. Do your home work and give them the conclusions and propose what they should decide. Prepare to substantiate with facts and analysis. Be precise. This means taking risks, but the opposite just creates confusion and an unfavorable impression.

Focus on activities leading to top line and bottom line growth – “earn your right to grow”. A treasurer who substantially assists bringing in business or reducing risk in the core business will be a star. Avoiding having Treasurer as a final position requires migrating to the core business and there has been no easier time than now.

Have your eyes on the future, not the past. There are few things CEOs and board members loath as to discuss past quarter figures. That’s already history. The finance/treasury joining the executive management in focusing on the future are the winners.

Trusting Your Bank

There are different strategies applied by corporate treasurers in the relationships with their banking partners. Some play with the cards close to the chest and reveal information on a need to know basis. Others are very open and share information in a sense of trust. I tend to prefer the latter strategy. Recently I met with a treasurer from a multinational with investment grade rating. He gave empirical evidence that complete openness is the best strategy. I have heard from treasurers all around the globe saying banks are retreating from credit line commitments particularly at roll-overs but he gave a very different picture. His company has had an open attitude sharing information freely with the banks for decades. They have provided banks C-level access on a regular basis and supplying them with highly confidential information to make them participate in the strategic development and understand the risks and funding needs more precisely. The objective is to avoid unpleasant surprises for the banks. This approach facilitates for the banks to package the offerings based on a full understanding of the business and its risks. His guiding principles for the banking relationships.

He gives the banks what they expect:

• Full transparency on strategy, risks and challenges
• Open discussions on issues, risks and opportunities
• Sharing same information to the whole banking group simultaneously
• Fair sharing of wallet between the banks according to credit commitments
• No shopping around of original ideas
• Access to senior management

He expects from the banks:

• Consistent commitment of balance sheet
• Creativity
• Integrity
• Access to senior management

These bank relationship practices have rendered in no bank retreating at roll-overs of facilities and he has a stabile banking group with several banks wanting in. I know some of you say it is easy to do while being investment graded but I would expect it to be true for most companies. The perception of risk is much different if you know the conditions than when you do not know them. If the banks feel secure they understand all the risks and have all information they will be more prone to commit balance sheet. That is only natural. Another reflection I make is that many companies have introduced C-level in the banking relationship only recently being triggered by the crisis. This is appreciated with the banks since it gives them the opportunity to address strategic risk management with those who manages them. Financial risk management is and has always been a C-level and a board issue. For many years even before the crisis. In his company, treasury has been a board and C-level function for ever. This now pays off, he has a stabile banking group and several banks wanting in. Treating your bank as a partner more than a vendor is a clever strategy.