Changing Landscape

You are fairly new to the role of chief executive at the ACT – how have you seen the treasury role evolve since your days as the finance director of Amec plc?

I was a treasurer 20 years ago and then I was a career finance director at four companies, three of which were plcs. I went through treasury as my route to becoming a finance director. Without doing it this way, I don’t think that I could have functioned as a finance director as well as I have. If people go into operational management having come through a finance function like treasury it helps them to understand financial risk. If you work in isolation from the operational side I don’t think that you can help a board with the big decisions. Treasurers need to be plugged into that if they are going to make a real difference in these markets. In a benign market they could manage being slightly more remote from it – but not in this market.

Cash pooling, especially physical pooling (cash concentration) seems to be gaining momentum as a way to optimise liquidity. Why do you think that is?

Going back a year or two, if you were grossing up the balance sheet from one country to another or even from one company to another within the same group, the actual costs were quite low and you could argue that the costs of trying to bring the whole thing together wouldn’t have justified it.

Today of course the costs of grossing up the balance sheet, depositing on one hand and borrowing in another country, are enormous. The spreads are so much more. The spreads are going to remain – they are not going to narrow to anything like they were in the past, so economically you are going to have to ensure that you have done all the pooling you can, wherever you can. The good news there is that, mostly, exchange control will allow you to do that. The big impact is the change in spreads.

Aside from pooling, what other innovative liquidity strategies should treasurers be considering in the current climate?

The market underestimated the importance of credit insurance. Woolworths was a good case in point. As credit insurance for Woolworths was pulled, their whole working capital credit cycle became intolerable and the knock-on effects for them and their suppliers became impossible. However, there are other systems. You can take a large company that can borrow more cheaply than a smaller company that supplies them and if they can structure the trade in a way that enables the smaller company to effectively fund its receivables then that is going to be useful.

There are also large companies that have looked at how they can help their supply chain. The funding within supply chains, where large companies can use their balance sheet to work with their suppliers is going to be a route through the current crisis and certainly where smaller companies can benefit from working either through their big suppliers or their customers.

In this type of economy should treasurers outsource short-term investing to fund managers instead of going directly to the market themselves, i.e. to invest in commercial paper?

I think that one of the treasurer’s roles is securing the capital value of the company’s cash and I don’t think that should be outsourced. I think it’s perfectly legitimate for a larger company to consider investing in corporate paper instead of bank paper, if they use the usual criteria of ratings and look at the liquidity of the instruments themselves. Clearly, commercial paper is fairly liquid. I would not think for the short-term management of funds and capitals that treasurers should be outsourcing.

In terms of accounting for derivatives and accounting standards, what is your personal opinion on something like IAS 39?

I have to confess that I am in favour of mark-to-market as a concept. I think that there are occasions where you are definitely holding an investment and a derivative to maturity and mark-to-market may not be appropriate. There are others ways of going about it that can be done through disclosure. But generally I’m in favour of it, certainly where there is a speculative product – absolutely mark-to-market there. There are problems with that though; if there isn’t a deep market or an opportunity to go and test the value and it does move into subjective mode. But you have to deal with it as best as you can through disclosure.

IAS 39 is not the cause of today’s problems. It’s difficult to understand IAS 39 but suspending it is not the solution to the financial crisis. Transparency isn’t the only thing, but it will help in a complex world.

With accounting standards, there are good reasons why they have tried to bring uniformity across the piece and it will be a great day when we all use the same accounting standards. The IFRS concept of mark to market is absolutely right. Has it got over complicated? Yes it has and we have to simplify it. You just have to keep shouting about it.

Is it the ACT’s role to convey a message of positivity to members?

I think members are reacting very proactively and I think that they’ve proved it. In a recent ACT survey earlier this year, the bigger companies all demonstrated that they can weather the financial credit crisis quite well. They can access different markets, they have good, robust banking relationships and they have sound documentation. I think that the issue is actually reaching the smaller companies. We have got a senior member in 89% of the FTSE 100 companies. When you get to the FTSE 250 that drops to 60%. If big companies have been finding it tough in today’s markets I worry about the smaller ones not getting enough treasury and financial risk knowledge. That’s one of the challenges for us – to try and reach out and deal with that via non-executive directors and also to the directors of the smaller companies. That’s right at the top of my agenda. The ACT is nearly 30 years old and when it started it needed large companies to help it develop. Today, we are in a position to help smaller companies too.