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Received: 22nd May, 2009
Francois Masquelier ¸
has been Head of Corporate Finance and Treasury with RTL Group since 1997. He is a graduate in law and has a degree in tax law, as well ` as in economy and administration from the University and Business School of Liege. He also has a post degree in management. He is Honorary Chairman of the International Group of Treasury of Associations, Chairman of the Association of Corporate Treasurers of Luxembourg, and Honorary Chairman and Founder Member of the European Association of Corporate Treasurers, for which he was Chairman 2002–04. Francois is a member of the IASB Working Group on Financial Instruments. He is Editorial Director of the Magazine du ¸ ´ Tresorier, and has written books on IAS 32 & 39 and on the new technical and ﬁnancial challenges for corporate treasurers. In 2007, the Euroﬁnance Editorial Committee nominated him as one of the 50 most inﬂuential treasury professionals. Francois Masquelier, RTL Group, 45, bld Pierre Frieden, L-1543 Luxembourg ¸ E-mail: email@example.com
Abstract This paper looks at how and why the role of treasurer has recently evolved in a positive way thanks to the international ﬁnancial crisis. The position of treasurer has been reinforced by the consequences of the credit crisis and banking problems (eg bankruptcies, under-capitalisation, losses). The job of corporate treasurer has become more analytical and signiﬁcantly more strategic. It has continued its transformation. This global recession has marked a return to the fundamental principles of ﬁnance, to the great beneﬁt of those in the role of treasurer. KEYWORDS: ﬁnancial crisis, strategic role of treasury, evolving role of corporate treasurer, new opportunities
FIRST WORLDWIDE CRISIS
For a few months, many people were in a situation that none had experienced before and, it is hoped, never will again. For the ﬁrst time in human history, the economic crisis is truly global. In the coming years, one can be sure that economic historians will be recounting what is currently happening and why. Is it a butterﬂy eﬀect or a more global problem? Is it a conﬁdence crisis or are there real ﬁnancial problems? Are these the limits and excesses of capitalism or a normal side eﬀect, exacerbated into a serious economic crisis? Who can say exactly? It does not matter, pragmatics will say, so there is no point in worrying about the reasons. The G20 in London took care of that, as well as all the world’s regulators. So then, as all the very pragmatic European treasurers say to each other, let us not worry about the causes, but rather, let us deal with the consequences. At this stage, it seems useful to ask what has changed or will change for
treasurers and to think about the treasurer’s role in these troubled times.
CONSEQUENCES OF A SYSTEMIC RISK
The real problems started with the failure of the investment bank Lehman Brothers, which exposed the vulnerability of the world’s economy to systemic risk. Can the bankruptcy of a ﬁnancial institution shake the entire ﬁnancial system, and as a result aﬀect the treasurer’s daily work? Evidently, it can. One can only be pleased with the ﬁrst drafts of measures taken in London by the leading nations of the world, especially the decisions to reform the calculation rules for bank capital adequacy and to extend prudential supervision to include speculative funds and ﬁnancial derivatives markets. In addition, reinforcing the role of the Financial Stability Forum, as partner of the International Monetary Fund in the ﬁnetuning of indicators that could detect the
Journal of Corporate Treasury Management
Vol. 3, 1 16–21
# Henry Stewart Publications 1753-2574 (2009)
aﬀecting everyone. commodities and equity). . . . possibly IAS 39). The Brealey & Meyers1 was # Henry Stewart Publications 1753-2574 (2009) Vol. even companies with no major risk. what has aﬀected it and why it was again placed in the spotlight. Unfortunately. Yet this does not mean there is a need to start calling for the repeal of the International Financial Reporting Standards (IFRS). . stuck between ﬁghting to ensure the stability of the banking system. less banking product dumping (loss of opportunities and cost-surge for the treasurer). . . banking relations — complete overhaul and return to fundamental principles in order to make them sustainable. This paper will attempt to develop these points and explain what has changed in the treasurer’s role. exhaustive mapping of the ﬁnancial system will take time. Moreover. 3. THE TREASURER’S ROLE IN TROUBLED TIMES This crisis has had and continues to have a profound impact on the role of the treasurer on a daily basis. reinforcement of policies and internal procedures. . . The main impacts can be summarised as follows: .Corporate treasury’s role in troubled times emergence of major macroeconomic and ﬁnancial risks is also a sound idea. use of sensitivity analysis tools (prevention) and stress-testing. increased focus on enterprise risk management (ERM). Such complete. while maintaining private stock ownership of publicly traded banks (to avoid other nationalisations) and applying the ‘fair value’ principle to increase the value of banking assets. . . . toxic and badly managed products. restructuring the ﬁscal debt and impact to be managed (waivers). major increase in credit spreads and the cost of guarantees. irrationality of behaviours on markets and of the markets themselves. increased role in merger and acquisition transactions and portfolio restructuring. . . as it is these bubbles that feed the systemic risk. risk of increased banking controls imposed by regulators (with a direct impact on clients). bank counterparty risk to be considered (new). THE BERMUDA TRIANGLE Some say that banks are crossing the ‘Bermuda Triangle’. . interest rate (IR). experts agree that these objectives seem somewhat at odds with one another. pervasive nervousness and gloom aﬀecting all transactions in general/pervasive stress and tensions. reinforcement of IFRS rules (notably IFRS 7 and IFRIC 16 & 18. Companies have had to resign themselves to going back to the fundamental principles of ﬁnance and to their ﬁnance manuals. . credit risk aﬀects everyone. . internal veriﬁcations reinforced or to be reinforced/segregation of duties. . required by boards of directors. There is a need to identify and include within the scope of the new rules those markets that had previously been exempt. returning to a banker (end of the US ‘single global bank’ approach. none of them will admit that there remain many challenges before an eﬀective defence system against systemic risk can be established. monetary policies must be revised to avoid creating new ﬁnancial bubbles. . which has become too risky). greater correlation between ﬁnancial factors and increased globalisation. However. fundamentals called into question (eg reliable charts analysis). increased volatility of ﬁnancial markets and a greater amplitude of movements (notably foreign exchange. more reliability of cash-ﬂow forecasts. as these have led to more virtue and have also indirectly revealed the latent risks associated with certain hazardous. . major liquidity risk. as their responsibilities have increased. 1 16–21 Journal of Corporate Treasury Management 17 .
Access to credit has become a sensitive issue for treasurers. more precisely. despairing bankers. They have had to adapt their management and be more vigilant about hedging and exposure to ﬁnancial risks (eg sensitivity analyses and increased stress scenarios. investors. One of the consequences for treasurers was surely being placed at the centre of discussions.Masquelier checked out of the libraries of CFOs. and the conjunction and combination of diﬀerent factors has plunged the world economy into a deep state of helplessness. The pendulum has not yet swung back to centre. but the prices have skyrocketed. which implies a much heavier workload. However. market volatility and greater variations in the value of underlying securities has made it more important than ever to ensure ad hoc hedging instruments. Its sphere of responsibility has become extremely critical and even vital sometimes. and quantitative management tools). Even discussing hedging management has become a sensitive issue. For example. have now become real. quality banking relationship. 18 Journal of Corporate Treasury Management Vol. Many parties are responsible. 1 16–21 # Henry Stewart Publications 1753-2574 (2009) . it is not in the middle of a crisis when we should question everything as an excuse to adapt. However. There has been a simpliﬁcation of the products used and a general increase in quantities covered. Clients realise that the durability and robustness of a banker is an advantage that comes at a price. It has become necessary to manage a larger number of banks than in the past. Sometimes there is a need for a ‘good crisis’ to make people aware and bring ﬁnanciers (as it turned out. The era of deadlines and rock-bottom prices has indeed passed. What seemed unthinkable a few months ago has unfortunately become a sad reality for every company. other stakeholders have also requested their input (eg ratings agencies worried about ratings. such as broader margins. Some banks are getting out of the corporate loans market. No one wants to divulge their approach to hedging. as they master and control the ﬁnancial risks that have become critical. WHAT HAS CHANGED FOR THE TREASURER? The treasurer is undoubtedly in a more powerful position. the world will recover. Bank counterparty risks. They assess the importance of a monitored. These major changes have also cast doubt on hedging policies and strategy. The movement that had begun ﬁve years ago was restarted by this crisis — a second chance or. and loans are being granted. but those that remain have reduced the number of loans granted by a factor of two or even four. which were once theoretical. treasurers must manage new or increased risks. or they remain as laconic as possible. As always. a new opportunity to strengthen further the role of the treasurer within the entire ﬁnancial organisation. but were not applied at all or not enough. The role of the treasurer has not changed. but also inheriting an obvious additional workload. credit insurance companies and suppliers). Bankers must now make their margins on products and not rely on hypothetical gains in dealing ‘GET THE TREASURER ON THE PHONE!’ Boards of directors. The goal here is not to look for who is responsible for this crisis. oil commodity hedgers have been burned and do not know where to go for help. As mentioned above. 3. with all the additional work this entails. However. audit committees and other shareholders were so worried that the treasurer returned to centre stage. but it will be very diﬃcult this time. Management requested the help of their treasurer to comfort them. but has become more important in these troubled times. mostly bankers and insurers) back to this sad reality. The veriﬁcations existed. A glimmer of light has become visible at the end of the tunnel. Businesses are lining up to work with loan syndications in order to obtain the amounts they need. For instance. when the cost of ﬁnancing increases to the point of penalising debt service or when bank loans default. the company is in danger. Treasurers have become indispensable in modern ﬁnance.
they must protect company solvency at all costs. It is even more diﬃcult. as well as the strategic aspects of the job. 3. which also increase the purchase price. all while hunting down explanations for any deviations from forecasts. Short or long. The credit factor is now an integral part of exchange operations prices. The crisis has helped treasurers to cut themselves out of administrative problems to rise towards strategic management and general management. but they were often relatively theoretical.Corporate treasury’s role in troubled times rooms. The treasurer must now mitigate them and diversify the sources of investment and ﬁnancing (some of which have been completely exhausted). They keep an eye on its supply. a BBB+ company must pay 500 basis points on a ﬁve-year loan. The world is quite diﬀerent today. at the same time as tracking variances. For example. These heavy spreads force clients to ﬁx their interest rates out of fear of a sharp rise in prices that would then make the cost unaﬀordable. Figure 1: The pyramid of treasurers’ roles # Henry Stewart Publications 1753-2574 (2009) Vol. There will probably be margin call systems to cover the risk of non-delivery that has always been believed to be very theoretical. Automation has 2 positive consequences. Over the past months. this task has become more complicated. TREASURY: THE ROYAL GUARD If cash is king. The treasurer is the bodyguard of that which is the dearest and most precious today: liquidities. tax and amortisation. Every euro loaned is welcome. On the pyramid of treasurers’ roles (Figure 1). Treasurers must also anticipate the company’s future cash ﬂow and net situation. The banking relationship has changed considerably. 1 16–21 Journal of Corporate Treasury Management 19 . It could even be said that if anyone deserves • • • • • • • • • • Service customer role Board level accountability Reporting & information to audit committees Focus on bank relationship Refinancing Structured finance/back up facilities FX&IR Commodity finance Liquidity risk finance Mitigation of P&LFX/IR volatility Rating agencies • IFRS7 + amendments to hedge accounting rules • Sensitivity/stress test analysis • Involvement in ERM • Counterparty/credit risk • Additional « crisis » reporting • More involvement in M&A operations • Quantificative approaches of risk assessment • Liquidity risk management • Insurance + Pensions • Performance measurement (KPIs) Increased roles of treasurers in troubled times Strategic Analytical Executional By automating streamlining processes (STP -> TMS + payment factory). treasurers can free time for more added value tasks. It also mitigates operational risks and helps in segregating tasks. The low quality of one’s credit risk has a price that must be accepted. then treasurers are necessarily the royal guard. as one can no longer snub a bank. Counterparty and liquidity risks are not new. They monitor the cash conversion (ie free cash ﬂow) of earnings before interest. as the spreads were very tight. The crisis has modiﬁed their role by signiﬁcantly increasing the analytical aspects. treasurers have again progressed towards the top.
sensitivity tests. operational processes must be computerised. They help to make ﬁnancial risk management and ad hoc reporting more sophisticated and professional. payment factory tools. The pressure exerted by management on the treasurer has again increased considerably. as this could be fatal. The volume of reports and their content is inversely proportional to the rate of inﬂation. as a technical response to this crisis. IT tools need to be more powerful and more integrated to provide straight-through processing (STP) to centralise and generate ﬁnancial information in real time (eg treasury management systems (TMS) solutions such as Software as a Service (SaaS) or Application Service Provider (ASP). it is the company treasurers — their role has clearly grown as a result of the crisis and they are now generating even more value than before the crisis. revaluation. these management tools oﬀer an arsenal that is completely integrated or that can be integrated. which is so often a result of a heavier workload. Stress and anxiety are pervasive. explanations (eg strengthening in 2009 with amended IFRS 7) and the number of recipients of their ﬁnancial reports have increased signiﬁcantly. CFOs are looking for high-quality. Securities and their scale have been profoundly modiﬁed. This includes a complete modernisation in order to improve internal veriﬁcations and segregate operational tasks that are risky and time-consuming. the internal expert on ﬁnancial risk. The role of the treasury has become more preventive. 3. the roles and attitudes of partners have changed. which at the very least requires strong input from the treasurer. highly experienced treasurers. Business intelligence has made modernisation easier thanks to such things as decision tables borrowed from treasury tools. which are often synonymous with new IT systems. It must anticipate and analyse hedging strategies. The treasurer also produces 15–18 per cent of the ﬁnancial information contained in the annual report (excluding reports related to ERM). One must also not forget ERM. Recent events have been not unlike a ﬁnancial pandemic. Now more than ever. Can one still speak of ‘credit establishments’ or of banks? Should one not say ‘ﬁnancial institutions’? Do they still lend money that in many cases they no longer even have? Moreover. However. the base of the treasury’s functional pyramid is in no way lacking. The treasurer must remain cool-headed in such changing times. The treasurer’s job description has radically changed. which have experienced very high levels and then very low ones. and the talent hunt has begun. particularly commodities. they must also be experts in ﬁnancial communication. It is necessary to provide proof of identifying and managing these risks. details. quantitative analysis and other highquality ﬁnancial information). It is important be able to show the added value of 20 Journal of Corporate Treasury Management Vol. However. Today. real-time information. for example in heavily indebted companies and/or companies exposed to foreign currencies or raw materials. Their management of fundamental matters has become vital. These IT products are precious tools for decision making. General management teams now demand reliability. due to the recession. cost-cutting hinders any attempt at investing and improving productivity. This requires time and intellectual resources.Masquelier to have their bonus reappraised. IT CREATES MORE VALUE To generate more value with the same means (due to cutting costs). CONCLUSIONS The world will never be the same as it was before. 1 16–21 # Henry Stewart Publications 1753-2574 (2009) . Top treasurers are not aﬀected by the crisis. and complete reports and ﬁnancial statements. The frequency. The treasurer will also be subject to regulatory reporting requirements that the EU and other regulatory agencies will impose locally (eg Loi de Modernisation de l’Economie (Modernisation of the Economy Act or LME in France) or internationally (eg the EU’s 8th Company Law Directive). and they must be sure not to give in to this stress. which in many cases have become major again.
The preservation of capital has become a leitmotiv. A. # Henry Stewart Publications 1753-2574 (2009) Vol. C. The prices are no longer and will never be the same in terms of ﬁnancial products and services. R. They are owed respect as the temple guardians they have become once again. tasks and responsibilities within the company’s ﬁnancial management structure. notably in matters of communication and negotiation. The treasurer is therefore faced with many challenges in these diﬃcult times. Key activity/performance indicators are absolutely necessary to better manage one’s treasury in times of scarcity. Treasurers’ have taken on more responsibilities and must be remunerated accordingly. Yet. and Myers. it is in these troubled times that investments in terms of increased productivity would be most welcome.’ (Jean Monnet) Reference 1 Brealey. New York. Treasurers have become a kind of ﬁnancial celebrity at their companies and will no longer be regarded in the same way. Treasurers must develop their soft skills. 1 16–21 Journal of Corporate Treasury Management 21 . Good for them if they can beneﬁt from this well-deserved ephemeral glory. McGraw-Hill. (2003) ‘Principles of Corporate Finance’. The art of proactive treasury practice is in knowing how to take advantage of this crisis to reassert the treasurer’s roles. It is indeed a great opportunity to become indispensable and respectable in the eyes of the general management. S. In this extremely diﬃcult environment. as the growth risk could be aﬀected for quite some time. Threats and crises are often excellent opportunities to review the role and operation of a ﬁnancial position. 7th edn. Ratios and other ﬁnancial covenants have obviously been altered and consequently increase the cost of ﬁnancing by lowering the credit ratings given by rating agencies or by a failure to maintain ﬁnancial ratios. ‘Man only accepts change in times of need and only feels the need when there is a crisis. It is the end of a frenzied dumping period and ﬁnancial product superstores.Corporate treasury’s role in troubled times any investment. 3. one must ﬁnally reduce debt (‘deleveraging’).
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