A recent Deloitte survey found that nearly two thirds of companies have poor visibility into their foreign exchange (FX) exposures, and half of those with visibility use manual processes to identify and calculate their risk. These findings strongly suggest that corporate treasuries are providing inadequate information to their boards. This is happening in part because they lack certain tools, but perhaps also because their presentations miss the mark.
Finding the right message
Niklas Bergentoft, director of treasury advisory services at Deloitte Advisory, said the survey’s findings indicate that many corporate treasuries simply aren’t playing the role of strategic adviser to the board that they should be. Part of the reason is that treasury often continues to be seen as a cost rather than profit center, and so it receives insufficient funding to support the technology it requires to generate and analyze the necessary data. Another factor may be that treasury executives simply are not delivering their financial analysis clearly enough to board members, many or even most of whom do not have financial backgrounds.
If done correctly, however, that message should be a strong one. Bergentoft said many treasuries are missing the boat by not explaining FX risk in the context of commercial benchmarks such as gross margin and earnings per share (EPS). Indeed, explaining how properly hedging FX and other risks can impact those commercial measures may present a strong enough argument to persuade the board to fund the financial forecasting tools that many treasuries still lack—more than half, according to an earlier Deloitte survey.Getting face time
Part of treasury’s challenge can be simply getting in front of the board or board committees on a regular basis. Tom Deas, treasurer of FMC Corp., noted that the Dodd-Frank Act’s requirement for corporate boards to reauthorize their companies’ use of the end-user exemption from clearing swap transactions and margin requirements provides an annual opportunity to educate boards.
“It gives treasury the opportunity to review with the board the company’s whole derivatives program and the underlying financial strategy behind it to hedge the company’s results from unwanted fluctuations in FX rates, interest rates and commodity prices,” Deas said.
Regular meetings between treasury and board members, whether annually or at another interval, provide another important benefit. “If treasury is presenting every six months to the board, it provides an avenue to go into a bit more depth,” said Amol Dhargalkar, who heads up Chatham Financial’s global corporate sector.
Unlike one-off meetings, Dhargalkar said, regular presentations allow treasury executives to provide the essentials more efficiently and then add a layer of depth in areas of current concern or interest. He added that it is important for treasury to be proactive in getting before the board rather than reactive, to update the company’s risk exposures and why, for example, it may be choosing not to use financial hedges. Bridging the communication gap
A major hurdle at presentations, according to Dhargalkar, is that board members and treasury executives often “talk right past each other.” Treasury is well versed in the financial mechanics, but board members may have little financial background. In some instances, he said, Chatham has been hired to aid in presentations, to bridge that communication gap.
“It may sound a bit trite, but know your audience,” Dhargalkar said. “That’s probably the single most important piece of advice.”
It can also help for treasury to present issues in more digestible terms. By discussing how hedging risks can impact corporate departments such as procurement and sales in the context of measures such gross margin and EPS, treasury can frame its actions in more understandable language. It can also emphasize how it is able to add value by working more closely with those business areas, improving its stature and hopefully drawing board support to improve its cash forecasting tools and other important capabilities.
“Overall, shifting treasury to become more commercially focused will and should drive more value for the organization,” Bergentoft said, adding that treasury working more closely with supply chain or other business areas follows the current trend of companies seeking improved cooperation between business units.