Publication: gtnews.com
Latin America is a diverse region for treasury operations, with many different economic models, regulatory regimes and technology infrastructures spread over the continent. This commentary examines some recent developments in treasury issues here.
Treasury operations and processes in Latin America can differ wildly from country to country depending on a whole host of factors, such as economic integrity, local regulatory factors and technology infrastructure, to name a few. This week on gtnews we have published six new articles that examine a variety of Latin American treasury issues, covering regional and country-specific developments.
Latin America is one of the more complex places in the world in which to manage cash, liquidity and risk. However, strides are being made across the region to improve payment infrastructures. This topic is covered by Nancy Russell, from NLRussell Associates, in her article, Payment Systems in Latin America: Advances and Opportunities. She describes how advances in national payment systems have progressed since 2000, pointing out that central banks in more than half the countries in the region have now implemented real-time gross settlement (RTGS) systems. "These countries include: Argentina (1997), Bolivia (2003), Brazil (2002), Chile (2004), Colombia (1995), Costa Rica (1999), Ecuador (2004), Guatemala (2006), Mexico (1995 and 2004) and Peru (2000). Several other central banks in Central and South America are also planning to implement RTGS systems in the next few years," explains Russell.
Argentina, Brazil and Chile have also established private sector high-value clearing-houses: Interbanking in Argentina (1998), Camara de Pagamentos Interbancaria de Pagamentos (CIP-Sitraf) in Brazil (2002) and Camara de Compensacion Interbancaria (Combanc) in Chile (2005). These are supervised and regulated by their respective central banks and use a similar model to the Clearinghouse Interbank Payments System (CHIPS) in the US. As they use prefunding, bilateral and multilateral netting, banks are better able to manage their liquidity costs. End of day settlement of net positions is affected through participants' accounts at the central banks using their respective RTGS systems.
Many countries in Latin America have established automated clearing-house (ACH) systems, most of which are privately owned and operated but authorised and regulated by the central banks. The exceptions to this are Colombia, Costa Rica, Ecuador and Venezuela, where the central banks serve as operator of the ACH systems. In Colombia, besides the government-run ACH, there is a second privately operated system that is owned by the banks - ACH Colombia.
Countries that have implemented ACH systems for interbank electronic credit transfers and/or direct debits include: Argentina (2002), Bolivia (2006), Chile (1999), Colombia (1999), Costa Rica (2001), Ecuador (2002), Honduras (2007), Mexico (1996), Panama (1998), Peru (2001) and Venezuela (2007). "Guatemala's new ACH system is in the testing phase and expected to become operational during the second half of 2008," adds Russell.
While many Latin American countries have advanced their payments infrastructure, Russell also points out that additional opportunities still exist. Local governments and companies operating in the region, including multinational companies with subsidiary operations in the region, need to assess and review their in-country cash management operations on a regular basis to make sure that they are taking advantage of the most efficient payment and collection methods available. For multinational companies, for example, it is important to evaluate local country and regional cash management banking partners on a regular basis. "Despite the challenges and with all the positive changes in the region, there are almost always opportunities to increase the use of electronic payment methods and to reduce costs," notes Russell.
Collecting the Cash
As a corporate operating in Latin America, how can you actually get your hands on the cash a customer owes you? This subject is tackled by Fernando Lardiés, from Banco Santander, in his article, The Puzzle of Collections in Latin America. Lardiés argues that a practical collections approach to the region means that you need to look at other collections instruments beyond just electronic payment instruments. "The widespread use of cheques makes the automation of collection processes more complicated, when compared, for instance, with Europe (with honorable exceptions like France). In some countries digital cheque truncation is possible (Brazil, Mexico, Argentina), but in others (Chile, Venezuela, Colombia) this is not yet the case."
Many countries in Latin America have restrictions in their legal and regulatory environments, particularly in regard to credit/debit taxes and restrictions on the movement of funds. This makes it difficult to replicate the cash management practices that are seen in other regions, mainly cash pooling combined with collection processes conducted in parallel by different banks. Latin America also still has a high reliance on retail branch networks. Most people prefer to pay their debts in person at a bank branch, although they could just as easily use an electronic transfer or, in some countries, even have their accounts directly debited.
Banco Santander's Lardiés points out that banks with a local presence in a number of countries can offer corporates common communication interfaces and protocols, in case a corporate seeks centralised or standardised collection handling. "The underlying local collection instruments might have whatever specific features are needed in each country, but a common communication protocol can be designed jointly by the corporate and the bank based on open standards," suggests Lardiés. He uses the example of EDIFACT DIRDEB and CREMUL, which provide the flexibility to handle different local collection instruments under a standard umbrella solution.
Corporate Cards Evolving in Mexico
Corporate card schemes and programmes are evolving all over the world from different levels of sophistication and this is particularly the case in Latin America. As a payment instrument, the corporate card has had difficulties breaking into a market that is so dominated by cash and cheques. However, as David Chevrel from Aconite reports in his article, The Corporate Payment Cards Market in Mexico, this is changing in Mexico.
There are four bank issuers in Mexico, three of which offer corporate credit cards, one that offers debit cards and one financial services company, which markets several corporate products, including gasoline, purchases and meeting cards. In order to qualify for these services, companies must have an impeccable record and hold accounts with these institutions in order to benefit from these services.
The problem that corporate card programmes were faced with was that, until a couple of years ago, credit and debit cards were not accepted by many vendors, such as petrol stations. This influenced companies against giving cards to their executives and meant that they had to provide them with paper bonds or other means of payment. Today, however, cards are accepted in most of the stations, which has been an important catalyst in the spread of corporate payment cards. The cost of petrol is tax deductible and corporate cards have simplified the process of calculating these deductions, saving management time in administrative and financial departments. "The opportunity to reduce costs related to calculating tax deductions should help drive corporate card growth in Mexico," explains Aconite's Chevrel, pointing out that access to a tool that simplifies this process is important to corporates of all sizes.
Chevrel also uses the results of the Aberdeen Group's study to show how further growth in the use of corporate cards will come from outside of the travel and entertainment area. The study showed that, in Latin America, 83% of companies plan to use cards for advertising and marketing services and 53% are looking to expand commercial card use to non-travel categories as a means of driving growth.
Do Argentina's Numbers Add Up?
While the corporate card market in Mexico appears to be looking up, another article issues a warning for the economic health of another Latin American country. In his article, Back to the Future for Argentina's Economy, Martin Krause from ESEADE Graduate School, argues that the current commodities export boom is overshadowing deep-rooted problems in the economy of Argentina. The country is now enjoying the benefits of high prices for the commodities it exports - it shows twin surpluses and US$50bn in reserves at the Central Bank. "This has led many to believe the country is immune to an international crisis… though probably not one of its own making," says Krause.
The bad economic indicators that Krause points to start with inflation. It is only three years since Argentina went through the largest debt restructuring in its history, yet price inflation seems to be running out of control and debt concerns have returned. Price and debt are also related through the new bonds the country issued after the default. They are adjusted to a price index, but one that ultimately relies on the consumer price index (CPI). "The government has found no better way to deal with increasing inflation than cheating on the index. No wonder the country risk has been going up since February 2007, the time when it started to become evident that the government was tampering with the statistical process and removing independent officials at the statistical agency," comments Krause.
So what are the numbers behind this bad economic position? During the last year of de la Rúa's government in 2001, foreign debt was 54% of GDP (US$144.2bn). Today it is over 56% of GDP (US$144.7bn). Why is this the case if the economy has been growing at an average rate of 8% during the last few years? "The answer lies in the deep devaluation that reduced GDP in dollars, a figure that it is now only recovering in dollar terms. If we also include the amount of debt due to holdouts, the number goes to US$170bn, 67% of GDP," states Krause.
ESEADE's Krause goes on to suggest that Argentina is paying the price for its close ties with the Chavez government in Venezuela and its failure to access the international capital markets, which could particularly help in solving the holdouts issue. He uses Argentina's neighbour, Brazil, as an example of what could be achieved by following a different economic model: "Brazil has achieved investment grade, receives more than US$30bn of foreign direct investment (FDI) every year and has just placed a 10-year bond for US$500m at a rate of 5.3%."
Soy Source of Optimism
As ESEADE's Krause has mentioned, if it were not for the rising prices of Argentina's commodity exports, the country's economy would be looking ill. Ana Belluscio takes an in-depth look at one of the unlikely economic heroes in her article, Secure Profits For Argentina's Soy Investment Funds. By using its roots as an agricultural country, Argentina has found a new way to use an old practice for profit. The catalyst behind this has been the growth of soybean sowing pools. These are headed by experts (who usually have fields themselves) who organise procedures, seek tenants to rent fields and prepare planting, spraying, harvesting and sales plans. Once the business plan is defined, they seek external investors (private capital, whether from individuals or corporations) that agree to invest in return for a percentage share in the profits. These small number of large soybean sowing pools now own over 80% of the soy market's share. "Since they handle large planting areas and production volumes, these pools can negotiate better prices with suppliers of raw materials and services, thereby increasing the profit margin for investors," points out Belluscio.
The sowing pools usually offer investors closed operating systems, meaning that they can only withdraw their invested capital (plus earnings) once the crop is sold. The open system, where investors can withdraw their capital at any given time of the process, is not common in Argentina. This method obviously helps to add certainty to the financial process for investors in this commodity and can prevent a 'run' on soybeans.
"The cultivation of soybeans produces statistically a net profit of approximately US$2.15 per US$1 invested (2006 statistics) whereas, comparatively, the net profit of corn culture is US$0.45 per US$1 invested," explains Belluscio, which shows why soybeans are such a popular commodity to invest in. And the soybean is set to become even more popular - as alternative fuel sources become highly soughtafter, the development of soy biodiesel from soybean oil is sure to lead to an escalating soy demand for the future. As soy demand increases around the world, from the European Union to China, and international prices for soybeans continue to rise, there will be greater gains for soybean sowing pool investors.
Trade Finance in Latin America
In his article, Factoring and Trade Finance Services Continue to Increase in Latin America, Jack Villacis, from Surecomp, casts an eye over trade finance services in the region. Villacis talks about how he has seen an evolution in trade financing requirements in Latin America where local companies are no longer producing exclusively for their own markets but are now fighting for global presence and market share. Surecomp's Villacis describes how, in terms of trade finance banking products and practices, Latin American corporates still depend heavily on letters of credit (LCs). "This is a result of the need to mitigate risk, as well as the need for immediate access to funds, explains Villacis. For many years, exporters as well as importers relied heavily on trade-related loans to finance their working capital needs and it still is a common practice in Latin America for most LCs and collections to be converted into trade-related loans.
Other improvements in the Latin American trade finance market include greater automation, compliance, anti-money laundering (AML) initiatives and Internet banking. Many regional banks have started the process of either improving or implementing automated trade finance departments and factoring. Currently, banks are investing heavily in technology thanks to the fall of import and export barriers and the need to enhance systems comparatively with their North American and European counterparts. Villacis says that countries including Argentina, Panama and Costa Rica are beginning to catch up with the rest of the world in terms of Internet-based trade finance technology. In contrast, he states that Bolivia, Uruguay, Paraguay and El Salvador remain slow in offering these products, with banks and corporates appearing to be reluctant to undertake the required changes.
Conclusion
One point that is clear from all six of the Latin America articles published on gtnews this week is that, if you don't recognise the differences that exist between individual countries in terms of economy, cash management processes, regulatory regimes and legal requirements, you will struggle to do business here. Entering the Latin America 'market' is not the same as entering western Europe or north America, for example, where there has been greater harmonisation of systems and practice. Individual countries here are at radically different stages of development and maturity so it is sensible to have a country-by-country strategy built into your more general regional business plans.
Tuesday, 10 June 2008
Tuesday, 3 June 2008
How to Optimise Treasury Strategy and Your Career
Publication: gtnews.com
At the AFP's recent Global Corporate Treasurers Forum in Chicago, topics such as treasury strategy, organisational structure and career progression took centre stage, against the backdrop of the liquidity crisis.
From 19-21 May, the Association for Financial Professionals (AFP) hosted its annual Global Corporate Treasurers Forum in Chicago. The event, which is limited to treasurers, chief financial officers, controllers, VPs of finance and assistant treasurers, provides attendees with the chance to learn strategy and techniques from industry experts and offers the opportunity to network with treasury peers.
This was the first Global Corporate Treasurers Forum since the sub-prime market crash in August 2007, so the after effects of this event naturally had an influence on the discussions and presentations in Chicago. However, the overall tone of the three days reflected broader treasury issues, concerns and best practice. The main sessions covered a wide variety of topics, such as managing a global treasury with an eye on strategy, how treasury can drive a reduction of global effective tax rates, what treasurers should be doing to make the leap to CFO, as well as a look at risks in investing liquidity.
Global Treasury Strategy
Michael Richard, senior vice president and treasurer at McDonalds, got session proceedings underway with a whistle-stop tour of how he believes McDonalds manages its global treasury with an eye on strategy. He explained how the treasury at McDonalds believes in three key strategies for success:
These ideals are goals that most companies try to apply in their business plan, but the challenge McDonalds faces in implementing these strategies comes from its business structure. The McDonalds structure is made up of the corporation, suppliers, and franchisees, or "three legs of the stool," as Richard described them. For the company to be successful, all three need to be strong. It is the job of Richard and his treasury colleagues to provide liquidity to all legs of the stool, not just the corporate leg and Richard explained how the treasury works strongly with franchisees.
While McDonalds is a mostly decentralised company (summed up by their catchy phrase, 'glo-cal'), the treasury department itself is still centralised. From this position, the role of the treasury includes funding, risk management, franchisee and supplier finance, cash management and the sale of non-core assets. With this range of activities, Richard stressed the importance of strategic planning in order to meet the treasury and business objectives. The McDonalds strategy here revolves around five 'Ps' that are included in their 'plan to win':
Focussing on these core areas has seen McDonalds bottom-line results increase in the US and even faster globally. However, Richard did point out that there are still many challenges that the company currently faces. These include credit and funding; rising commodity prices; shareholder relations; accounting rule changes; continuing expansion and internal relationships with other departments, to name but a few. The vast majority of treasurers around the world will have these concerns, so maybe they can draw some comfort from the knowledge that one of the world's most iconic brand names shares these headaches.
Career Progression
One of the most popular sessions at the Global Corporate Treasurers Forum was the chance to hear from three CFOs about their current roles and how they had arrived at this position after a career in treasury. The three CFOs in question were Chris Kreidler from C&S Wholesale Grocers, Ira Birns from World Fuel Services Corporation and Don Mulligan from General Mills. Andrew Busch from BMO Capital Markets was the lively moderator for this session.
In keeping with one of the major themes of the event, Busch asked how it is possible to balance the treasury function with strategy. Kreidler referred to strategy as a full-time job in itself and that he dedicates a set amount of time for this in his working week as he knows his CEO will want to talk about strategy. This was seconded by Birns, who looked slightly pained to add that his CEO is in the office every day and all he usually wants to talk about is strategy. It clearly came across from this part of the discussion that strategic experience is crucial if you want to make the leap from treasurer to CFO. Mulligan, at General Mills, added that smaller is better in terms of the size of your strategy team and that the execution of your strategy is key. He tied this in with the role of treasury, that capital strategy has to be aligned with commercial strategy.
When asked about the key factors in progressing from treasurer to CFO, all of the CFOs present agreed that it is crucial to build up a broad portfolio of skills. Kreidler described how, when working for Yum! Brands, he took a lot of different jobs and, in his case, marketing experience and field jobs were what the board were looking for. He had line management and international experience and so he ticked all of their boxes for this specific job. While he was thought of as a strategist, he confessed he was really the 'deal man', which involved executing a small part of the strategy. Birns, from World Fuel Services Corporation, also said that it was his deal making that stood out for his first CFO appointment, but he again underlined how important it is to build up a broad portfolio of skills. He pointed to a time he spent working in investor relations, which gave him a whole new insight into the business.
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Don Mulligan, CFO at General Mills, pointed to five attributes treasurers need to have in order to make the step up to CFO:
The issue of character also came across as vitally important in making the step up to CFO. If you have a strong character, your reputation will precede you with the board. C&S's Kreidler described this as an important measuring stick, while Birns made a good case of how you can add value to your department by being a 'straight shooter'. Underlining the importance of having and maintaining an unimpeachable character, General Mills' Mulligan simply stated that if you don't have character and integrity, you won't make it as a CFO, there is zero tolerance in this regard.
The Q&A session between the three CFOs and the delegates offered the audience a valuable chance to pick the brains of those who have successfully made the leap from treasurer to CFO. In response to a question about the importance of accounting skills when becoming a CFO, C&S's Kreidler noted that there has recently been a swing away from accounting CFOs to strategic CFOs. Accounting is not a prerequisite to being a strong CFO, but if you don't have this background then make sure you have a strong controller. World Fuel Services Corporation's Birns added the caveat that, even though he agreed that the tide is turning, he thinks that accountancy skills are still probably preferred at the moment.
Possibly eager to enhance their career upon returning to the office, one delegate asked about the qualities that CFOs look for in their treasurer. Mulligan from General Mills explained that he likes to see an understanding of capital markets and how these fit with the overall business plan. He also encouraged the treasury department to communicate directly with the board, not to just speak to them through the CFO. By taking an active role in the company in this way, the treasurer will aid their future career prospects.
Finally, a question about the inter-company relationship with IT provoked a useful suggestion from Birns. While none of the CFOs had responsibility for their IT departments, he noted that you have got to watch the expense coming out of IT, which can make a big dent in your profit and loss. You need to find out what the returns are on the products that IT may buy. Birns' suggestion was to place someone from treasury into the IT department who, knowing the business strategy, would be able to make sure that IT sees the bigger picture.
Taxing Times
The relationship that treasury has with the tax side of business has come under increasing scrutiny over the past 12 months, as companies target wholesale efficiencies in response to the tightening of liquidity. A straw poll of the delegates in a main session looking at treasury and tax showed that around one-sixth of the audience had a tax background, so most attendees were keen to learn more about this side of treasury relations. Dan Munger, partner in international tax services at Deloitte, began the proceedings with an examination of how treasury can be a driver of global effective tax rate (ETR) reduction. Sustained ETR reduction requires a balancing of tax and treasury objectives. Without an appropriate level of continuous co-ordination between tax and treasury, it is impossible to have an effective ETR strategy. Munger pointed out that tax and treasury will always be linked by tax traits, capital structure and the operating model of the business.
When questioned, a number of treasurers in the audience said that they carry out long-term cash planning on a geographical basis. This important issue for treasury today includes the optimisation of offshore cash and also ensuring the efficient repatriation of this cash. International sales are growing exponentially for US companies (as was mentioned in the talk given by McDonalds' Richard), so US treasurers have to look at their structure to ensure that they are maximising their tax savings. These tax savings can pay for other items that are on the tax department's wish list, so practical steps such as setting up a structure that repatriates overseas cash can provide real value to the company. Deloitte's Munger advised that to build an effective strategy for this, treasurers should forget ideas and 'what ifs' and instead really get into the practical details of the planning.
One member of the panel for this tax talk, R. Davis Maxey, treasurer and vice president of tax at Ion Geophysical, explained how his company had actually moved US activity outside of the US to Luxembourg for tax reasons. The factors behind this switch were that it led to rapid growth, minimal leverage, while 80% of Ion's customers are international. The savings that this change of location gave the company could then be ploughed back into annual investments in research and development and data libraries - an example of the use of savings that was mentioned earlier.
The final speaker at this session was George Zinn, corporate vice president and treasurer at Microsoft. His presentation looked at how to simplify treasury management by looking at the lifecycle of the dollar and trying to make flow more efficient. Zinn described how the Worldwide Credit Services Group is the largest Microsoft treasury group. They receive the dollar and need to pass it on to the cash management and treasury operations departments, using SWIFT to provide electronic transparency to all accounts.
Zinn explained how he thinks that it is critical to have a capital markets long-term portfolio going forward, but that it is important to take the right approach in managing these portfolios. One challenging area that Microsoft has identified is incremental risk, which goes hand in hand with the incremental yield in investment instruments such as money market funds (MMFs). With MMFs, there is a regulatory subtlety that exists between the markets in the US and, for example, Europe. The Securities and Exchange Commission (SEC) strictly regulates which funds can be named and traded as MMFs in the US, under SEC regulation 2a-7. In Europe, the regulations are not defined so strictly and, consequently, some funds that have been trading here as MMFs would not be able to in the US under the same title. When the liquidity crisis hit last year, some of these less-regulated funds failed, while in the words of Zinn, the "somewhat innocuous" US funds held up. Therefore a visibility to risk is crucial when you are heading into more diversified investments.
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What elements do you need in your investment strategy in order to manage risk while maximising yield? George Zinn, corporate vice president and treasurer at Microsoft, identified four key areas that he suggested treasurers must include in this strategy:
Risks in Liquidity Investing
To round off proceedings at the Global Corporate Treasurers Forum, Simon Mendelson, managing director at BlackRock, gave a presentation summing up what has gone so wrong in the markets since last August and what treasury should look out for when investing in liquidity products today. The initial credit crisis became a confidence problem in structured products, with Mendelson choosing to use 'liquidity crisis' as a more appropriate phrase for the market turmoil. In his opinion, we are mostly through this crisis, judging the volatility to be in "the seventh or eighth innings." (For those of you not in North America or Japan, this is baseball terminology - there are nine innings in a regulation game. So, we're nearly there, providing no extra hits are required!)
Mendelson described how, in the search for yield, securitisation and leverage were encouraged by Wall Street and that the ratings agencies may have played their part in this encouragement. The domino effect this started led to the housing market changing from being an engine of the economy to being a drag on growth. This led to the sub-prime spread - people went to re-price mortgage securities, which was easier said than done. Hedge funds pulled their liquidity out from anywhere, such as enhanced cash funds and, as explained earlier, many of these collapsed. However, MMFs held up, something that Mendelson made clear everyone should be grateful for - if MMFs had not halted the dominoes collapsing then who knows where the economy would have ended up. Would there have been a new 'Great Depression'? He rightly pointed out that it is probably best not to speculate too wildly on this given the uncertainty still apparent in the markets today, but it was not beyond the realms of possibility at the time. However, as the MMFs passed the initial test, people ran to invest in them. However, Mendelson noted how we're not back to normal yet, citing the fact that the asset-backed securities market is still struggling.
So, going forward, how should treasury behave? Mendelson said that classifying pools of cash is important and noted the three pillars of the treasury cash position: working capital (unpredictable daily liquidity); strategic cash (hoarding, i.e. for an acquisition in the long-term); and core cash (for six months plus).
When it comes to planning your cash position, the message from the BlackRock MD was to not be too conservative, that it is important for treasury to live for the future as well as living for the here and now. Nevertheless, he drew attention to the paradigm shift that has occurred in investment objectives, with the emphasis now on thinking about risk first, yield last.
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Simon Mendelson, managing director at BlackRock, signed off his presentation with a seven-point plan of items to remember going forward in any investment strategy:
A number of these items echo the thoughts and ideas mentioned in other sessions at the Global Corporate Treasurers Forum, from both the presentations and delegates that I spoke to. It feels like liquidity has never been a more important attribute to find and manage in treasury. However, it is crucial to remain vigilant of all risks while pursuing this goal. Next year the Global Corporate Treasurers Forum will be held in Dallas - it will be fascinating to see how the treasury agenda evolves in the 12 months until then.
At the AFP's recent Global Corporate Treasurers Forum in Chicago, topics such as treasury strategy, organisational structure and career progression took centre stage, against the backdrop of the liquidity crisis.
From 19-21 May, the Association for Financial Professionals (AFP) hosted its annual Global Corporate Treasurers Forum in Chicago. The event, which is limited to treasurers, chief financial officers, controllers, VPs of finance and assistant treasurers, provides attendees with the chance to learn strategy and techniques from industry experts and offers the opportunity to network with treasury peers.
This was the first Global Corporate Treasurers Forum since the sub-prime market crash in August 2007, so the after effects of this event naturally had an influence on the discussions and presentations in Chicago. However, the overall tone of the three days reflected broader treasury issues, concerns and best practice. The main sessions covered a wide variety of topics, such as managing a global treasury with an eye on strategy, how treasury can drive a reduction of global effective tax rates, what treasurers should be doing to make the leap to CFO, as well as a look at risks in investing liquidity.
Global Treasury Strategy
Michael Richard, senior vice president and treasurer at McDonalds, got session proceedings underway with a whistle-stop tour of how he believes McDonalds manages its global treasury with an eye on strategy. He explained how the treasury at McDonalds believes in three key strategies for success:
- Constant change.
- Creating competitive advantages.
- Building relationships.
These ideals are goals that most companies try to apply in their business plan, but the challenge McDonalds faces in implementing these strategies comes from its business structure. The McDonalds structure is made up of the corporation, suppliers, and franchisees, or "three legs of the stool," as Richard described them. For the company to be successful, all three need to be strong. It is the job of Richard and his treasury colleagues to provide liquidity to all legs of the stool, not just the corporate leg and Richard explained how the treasury works strongly with franchisees.
While McDonalds is a mostly decentralised company (summed up by their catchy phrase, 'glo-cal'), the treasury department itself is still centralised. From this position, the role of the treasury includes funding, risk management, franchisee and supplier finance, cash management and the sale of non-core assets. With this range of activities, Richard stressed the importance of strategic planning in order to meet the treasury and business objectives. The McDonalds strategy here revolves around five 'Ps' that are included in their 'plan to win':
- People.
- Product.
- Place.
- Price.
- Promotion.
Focussing on these core areas has seen McDonalds bottom-line results increase in the US and even faster globally. However, Richard did point out that there are still many challenges that the company currently faces. These include credit and funding; rising commodity prices; shareholder relations; accounting rule changes; continuing expansion and internal relationships with other departments, to name but a few. The vast majority of treasurers around the world will have these concerns, so maybe they can draw some comfort from the knowledge that one of the world's most iconic brand names shares these headaches.
Career Progression
One of the most popular sessions at the Global Corporate Treasurers Forum was the chance to hear from three CFOs about their current roles and how they had arrived at this position after a career in treasury. The three CFOs in question were Chris Kreidler from C&S Wholesale Grocers, Ira Birns from World Fuel Services Corporation and Don Mulligan from General Mills. Andrew Busch from BMO Capital Markets was the lively moderator for this session.
In keeping with one of the major themes of the event, Busch asked how it is possible to balance the treasury function with strategy. Kreidler referred to strategy as a full-time job in itself and that he dedicates a set amount of time for this in his working week as he knows his CEO will want to talk about strategy. This was seconded by Birns, who looked slightly pained to add that his CEO is in the office every day and all he usually wants to talk about is strategy. It clearly came across from this part of the discussion that strategic experience is crucial if you want to make the leap from treasurer to CFO. Mulligan, at General Mills, added that smaller is better in terms of the size of your strategy team and that the execution of your strategy is key. He tied this in with the role of treasury, that capital strategy has to be aligned with commercial strategy.
When asked about the key factors in progressing from treasurer to CFO, all of the CFOs present agreed that it is crucial to build up a broad portfolio of skills. Kreidler described how, when working for Yum! Brands, he took a lot of different jobs and, in his case, marketing experience and field jobs were what the board were looking for. He had line management and international experience and so he ticked all of their boxes for this specific job. While he was thought of as a strategist, he confessed he was really the 'deal man', which involved executing a small part of the strategy. Birns, from World Fuel Services Corporation, also said that it was his deal making that stood out for his first CFO appointment, but he again underlined how important it is to build up a broad portfolio of skills. He pointed to a time he spent working in investor relations, which gave him a whole new insight into the business.
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Don Mulligan, CFO at General Mills, pointed to five attributes treasurers need to have in order to make the step up to CFO:
- Make sure your functional expertise is up to scratch.
- People development - keep evolving to develop.
- Communication and influencing skills - treasury doesn't have the final call on decisions, so use your influence. Explain your point of view to the board, don't just show them the latest numbers.
- Be the voice of the shareholder.
- Know the business, become a business partner.
The issue of character also came across as vitally important in making the step up to CFO. If you have a strong character, your reputation will precede you with the board. C&S's Kreidler described this as an important measuring stick, while Birns made a good case of how you can add value to your department by being a 'straight shooter'. Underlining the importance of having and maintaining an unimpeachable character, General Mills' Mulligan simply stated that if you don't have character and integrity, you won't make it as a CFO, there is zero tolerance in this regard.
The Q&A session between the three CFOs and the delegates offered the audience a valuable chance to pick the brains of those who have successfully made the leap from treasurer to CFO. In response to a question about the importance of accounting skills when becoming a CFO, C&S's Kreidler noted that there has recently been a swing away from accounting CFOs to strategic CFOs. Accounting is not a prerequisite to being a strong CFO, but if you don't have this background then make sure you have a strong controller. World Fuel Services Corporation's Birns added the caveat that, even though he agreed that the tide is turning, he thinks that accountancy skills are still probably preferred at the moment.
Possibly eager to enhance their career upon returning to the office, one delegate asked about the qualities that CFOs look for in their treasurer. Mulligan from General Mills explained that he likes to see an understanding of capital markets and how these fit with the overall business plan. He also encouraged the treasury department to communicate directly with the board, not to just speak to them through the CFO. By taking an active role in the company in this way, the treasurer will aid their future career prospects.
Finally, a question about the inter-company relationship with IT provoked a useful suggestion from Birns. While none of the CFOs had responsibility for their IT departments, he noted that you have got to watch the expense coming out of IT, which can make a big dent in your profit and loss. You need to find out what the returns are on the products that IT may buy. Birns' suggestion was to place someone from treasury into the IT department who, knowing the business strategy, would be able to make sure that IT sees the bigger picture.
Taxing Times
The relationship that treasury has with the tax side of business has come under increasing scrutiny over the past 12 months, as companies target wholesale efficiencies in response to the tightening of liquidity. A straw poll of the delegates in a main session looking at treasury and tax showed that around one-sixth of the audience had a tax background, so most attendees were keen to learn more about this side of treasury relations. Dan Munger, partner in international tax services at Deloitte, began the proceedings with an examination of how treasury can be a driver of global effective tax rate (ETR) reduction. Sustained ETR reduction requires a balancing of tax and treasury objectives. Without an appropriate level of continuous co-ordination between tax and treasury, it is impossible to have an effective ETR strategy. Munger pointed out that tax and treasury will always be linked by tax traits, capital structure and the operating model of the business.
When questioned, a number of treasurers in the audience said that they carry out long-term cash planning on a geographical basis. This important issue for treasury today includes the optimisation of offshore cash and also ensuring the efficient repatriation of this cash. International sales are growing exponentially for US companies (as was mentioned in the talk given by McDonalds' Richard), so US treasurers have to look at their structure to ensure that they are maximising their tax savings. These tax savings can pay for other items that are on the tax department's wish list, so practical steps such as setting up a structure that repatriates overseas cash can provide real value to the company. Deloitte's Munger advised that to build an effective strategy for this, treasurers should forget ideas and 'what ifs' and instead really get into the practical details of the planning.
One member of the panel for this tax talk, R. Davis Maxey, treasurer and vice president of tax at Ion Geophysical, explained how his company had actually moved US activity outside of the US to Luxembourg for tax reasons. The factors behind this switch were that it led to rapid growth, minimal leverage, while 80% of Ion's customers are international. The savings that this change of location gave the company could then be ploughed back into annual investments in research and development and data libraries - an example of the use of savings that was mentioned earlier.
The final speaker at this session was George Zinn, corporate vice president and treasurer at Microsoft. His presentation looked at how to simplify treasury management by looking at the lifecycle of the dollar and trying to make flow more efficient. Zinn described how the Worldwide Credit Services Group is the largest Microsoft treasury group. They receive the dollar and need to pass it on to the cash management and treasury operations departments, using SWIFT to provide electronic transparency to all accounts.
Zinn explained how he thinks that it is critical to have a capital markets long-term portfolio going forward, but that it is important to take the right approach in managing these portfolios. One challenging area that Microsoft has identified is incremental risk, which goes hand in hand with the incremental yield in investment instruments such as money market funds (MMFs). With MMFs, there is a regulatory subtlety that exists between the markets in the US and, for example, Europe. The Securities and Exchange Commission (SEC) strictly regulates which funds can be named and traded as MMFs in the US, under SEC regulation 2a-7. In Europe, the regulations are not defined so strictly and, consequently, some funds that have been trading here as MMFs would not be able to in the US under the same title. When the liquidity crisis hit last year, some of these less-regulated funds failed, while in the words of Zinn, the "somewhat innocuous" US funds held up. Therefore a visibility to risk is crucial when you are heading into more diversified investments.
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What elements do you need in your investment strategy in order to manage risk while maximising yield? George Zinn, corporate vice president and treasurer at Microsoft, identified four key areas that he suggested treasurers must include in this strategy:
- Value at risk (VaR).
- Stress testing - how would this investment hold up should the worst happen?
- Scenario analysis - test any number of 'what if' possibilities to see if it is an affordable investment.
- Counterparty risk - who else does this investment expose you to?
Risks in Liquidity Investing
To round off proceedings at the Global Corporate Treasurers Forum, Simon Mendelson, managing director at BlackRock, gave a presentation summing up what has gone so wrong in the markets since last August and what treasury should look out for when investing in liquidity products today. The initial credit crisis became a confidence problem in structured products, with Mendelson choosing to use 'liquidity crisis' as a more appropriate phrase for the market turmoil. In his opinion, we are mostly through this crisis, judging the volatility to be in "the seventh or eighth innings." (For those of you not in North America or Japan, this is baseball terminology - there are nine innings in a regulation game. So, we're nearly there, providing no extra hits are required!)
Mendelson described how, in the search for yield, securitisation and leverage were encouraged by Wall Street and that the ratings agencies may have played their part in this encouragement. The domino effect this started led to the housing market changing from being an engine of the economy to being a drag on growth. This led to the sub-prime spread - people went to re-price mortgage securities, which was easier said than done. Hedge funds pulled their liquidity out from anywhere, such as enhanced cash funds and, as explained earlier, many of these collapsed. However, MMFs held up, something that Mendelson made clear everyone should be grateful for - if MMFs had not halted the dominoes collapsing then who knows where the economy would have ended up. Would there have been a new 'Great Depression'? He rightly pointed out that it is probably best not to speculate too wildly on this given the uncertainty still apparent in the markets today, but it was not beyond the realms of possibility at the time. However, as the MMFs passed the initial test, people ran to invest in them. However, Mendelson noted how we're not back to normal yet, citing the fact that the asset-backed securities market is still struggling.
So, going forward, how should treasury behave? Mendelson said that classifying pools of cash is important and noted the three pillars of the treasury cash position: working capital (unpredictable daily liquidity); strategic cash (hoarding, i.e. for an acquisition in the long-term); and core cash (for six months plus).
When it comes to planning your cash position, the message from the BlackRock MD was to not be too conservative, that it is important for treasury to live for the future as well as living for the here and now. Nevertheless, he drew attention to the paradigm shift that has occurred in investment objectives, with the emphasis now on thinking about risk first, yield last.
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Simon Mendelson, managing director at BlackRock, signed off his presentation with a seven-point plan of items to remember going forward in any investment strategy:
- Incremental yield is accompanied by incremental risk.
- SEC 2a-7 - know what you are investing in.
- Ratings are not everything - AAA is not without risk.
- Liquidity matters.
- Access to information is important - disclosure.
- Cash investing is not a low risk activity.
- Remember the past, learn from it!
A number of these items echo the thoughts and ideas mentioned in other sessions at the Global Corporate Treasurers Forum, from both the presentations and delegates that I spoke to. It feels like liquidity has never been a more important attribute to find and manage in treasury. However, it is crucial to remain vigilant of all risks while pursuing this goal. Next year the Global Corporate Treasurers Forum will be held in Dallas - it will be fascinating to see how the treasury agenda evolves in the 12 months until then.
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