The role of the treasury department varies between organizations and is typically defined in a board-approved treasury policy. AFP’s Asia-Pacific Treasury Management Handbook, sponsored by Kyriba, explores these policies, which are used by the board to delegate financial decision-making to treasury.
Policies grant treasury the authority to enter into agreements with external partners, so that it can open and operate bank accounts, make payments or implement technology solutions needed for efficient operations. Additionally, policies enable treasury to engage with other group functions and operating companies on treasury-related matters.
GAINING BOARD APPROVAL
When preparing a policy for board approval, treasury must consider the board’s priorities. Boards tend to be highly focused on several key areas, the first being structure. Boards today generally recognize treasury’s influence across the organization, and they expect policies to reflect that.
“The policy will typically specify a dedicated treasurer who reports directly to the CFO,” said Chin Shiang Tan, Pre-Sales Director at Kyriba in Singapore. “Sometimes it may even say that they’re allowed to set up global or even regional treasury centers. They will also specify roles and responsibility, maybe even reporting lines.”
As for specific items, the board tends to focus on areas with higher risk. “What are some of the key banks, credit lines and loans? Another item is FX risk management policy. I see this as a way for the board to control the risk of the company,” Chin Shiang said.
Treasury policies are designed to be flexible so that they can be operationalized and also updated over time. They need to have a fair share of leeway so that treasury departments can react when unexpected developments occur. However, there may be certain instances where the board needs to weigh in.
“Policies are generally framework and principle driven and also flexible, so that the treasury department doesn't have to go back to the board for all matters,” Chin Shiang said. “But there are some exceptions to that, where the board wants to control and manage certain risks.”
She added that the board is usually more concerned with corporate governance-related matters and typically doesn’t need to dictate every single aspect about treasury. The board generally leaves that responsibility to the CFO.
ENTERING NEW GEOGRAPHIES
When treasury departments enter new geographies, there are several key items that need to be prioritized. In APAC specifically, these factors carry particular weight.
The company’s core banks are a particular item of concern; treasury needs to determine how involved they will be in this new operation that is being set up. “Every corporate will have a certain numbers of core banks,” Chin Shiang said. “So, when you go into new geographies, you have to ask yourself about the types of services that they provide and the fees are involved. And does it make sense for the corporate to use all of these core banks? And that's where some of the local or maybe even regional banks come into play.”
Another key item to consider is tax. While this is technically not a treasury item, it affects in-house banking, which is being implemented by many treasury departments based in APAC. “Tax considerations, including income tax, withholding tax, as well as transfer pricing, are important because you need to understand what the company's going to go through when they enter into these new places,” she said.
Of course, along with tax considerations comes the regulatory landscape of the region. Regulations can differ greatly from country to country in APAC, and treasury must prepare accordingly. “What is permitted in those countries? What is not? One example is currency controls that are in place affecting payments,” Chin Shiang said.
But perhaps the most important factor in overall structure is liquidity reporting. Chin Shiang noted that the treasury departments will generally want more robust liquidity forecasting and reporting. “I think, as the company matures and probably stabilizes in this expansion, the regional treasury teams will tend to formalize liquidity forecasting and reporting. And if the overall organization is ready, they will look at treasury management systems to help them automate these processes too,” she said.
In the current COVID-19 environment, liquidity has become even more of a focal point as companies around the world are working to make sure they have enough cash and access to credit lines and funds. As such, many treasury organizations in APAC are stress-testing liquidity anywhere where they have operations—just in case. “Stress-testing liquidity is a little bit like business continuity planning for treasury,” Chin Shiang said. “I think the companies are preparing themselves in case something really drastic happens to those areas or countries that they operate in.”
For more insights, download the 2020 AFP Asia-Pacific Treasury Management Handbook.