What CFOs Don't Know About Their Treasurers

As founder and CEO of treasury solutions advisory AKTREA Capital, Rajiv Rajendra has met many corporate treasurers and their staff across Asia. “Basically they are all extremely good people,” he says. “But orientating and training them, equipping and providing them with the knowledge of where they are in the organization, those are strangely lacking.”
 
He adds: “I’d look at CFOs putting this in focus because it is important to ensure that your treasury employees know where they stand in the organization and what value they are adding, and to equip them with the right skills.”
 
Rajendra, who has just published The Handbook of Global Corporate Treasury, spoke to CFO Innovation’s Cesar Bacani about treasury trends and gaps in Asia, from recruitment to treasury management systems to risk management. Excerpts:
 
You’ve met so many treasurers, managers and other treasury staff across Asia. What do you think of them?  
I think the base material in the recruiting is generally very high as they come in. But I think the second step, which is orientating and training them, equipping them and providing them with the knowledge of where they are in the organization is strangely lacking.
 
Practically speaking, there is so much pressure on headcount. The moment people join, as soon as they show up, they are already starting to process transactions and really getting into execution. It’s like a soccer match; you’re expected to score a goal from the first minute.
 
That’s where I’d look at CFOs putting this in focus because it is important to ensure that your treasury employees know where they stand in the organization and what value they are adding, and to equip them with the right skills.
 
So where should treasury stand in the organization?
If you look at treasury in many companies in Asia, it seems to be a function that you just go to when you have a problem. It’s thankless in many ways. There is no reward for getting things right; that’s supposed to be the job. But if things go wrong, treasury gets the blame.
  
If you need to procure, if you need to make your invoice in a different currency, who books and pays? The treasurer does. If you’re making your sales in different parts of the world and you’re consolidating your cash in one place, who does it? The treasurer does. Who knows first if you’re doing an M&A and need huge leverage? Who is the one who goes to the bank? It’s the treasurer.
 
The good thing is that things are changing, and one of the reasons is that global companies are moving their focus to Asia. They’re coming in with best practices. The importance of the treasury function is becoming more and more [appreciated].
 
I’ve met some CFOs who also function as the treasurer. Is that a good thing?
That’s a bit dangerous. There is a lot to be done on a day-to-day basis; there is a lot of execution to be done, and the CFO also has huge strategic responsibilities . . . Ideally you would like to have a specialist who’s there, who’s concentrating on different parts of it, leaving the CFO enough room.
 
This is one of the trends that have been changing as well. There is more realization that there needs to be a separate human being running this whole thing [finance function], because it does require execution and strategy. The CFO’s job is really overseeing treasury and being the go-to guy in resolutions of issues.
 
It would help to have a separate person as a treasurer . . . It’s very interesting, because in many companies, you also find that the treasurer, because of the various dynamics of the job, is also a top seed, as it were, to succeed and get into the CFO’s shoes when the CFO moves on.
 
Let me step back a bit and ask what qualifications CFOs should look for in recruiting the ideal treasurer. Would you need to be an accountant?
If I just look at the technical skills, you will need some degree of accounting skill, but not a lot because there is an accounting function that specializes in doing that. You’ll need to be very well aware of finance and the markets, so you’ll need to have some degree of specialization in finance and understand the way markets work.
 
More importantly, you need to understand how the business runs. That’s something that can be learned once you’ve joined the company, but you need to have some degree of business awareness and awareness of [business and banking] regulations as well.
 
The input would obviously be an orientation towards numbers; you can’t have someone who doesn’t have that. But really there is no education criterion. For me, educational attainment is not a very key determinant because we’ve seen great treasury guys coming from different parts.
 
You will need to be a great relationship person. You would need to be able to use technology very well. You need to have a very strong process orientation; your ability to follow processes, have control, has to be very strong
 
From your perspective, what would be the typical gaps in treasury functions in Asia?
A few years ago, definitely before the crisis, there were very few companies that created [comprehensive] treasury policies. Most had short notes, small ones, which were reasonably watertight, but were just not comprehensive enough.
 
After 2008, one of the good things was that people felt there was a gap in terms of getting their treasury policy up to curve, so now we’re seeing stronger policies than before. But compared to global companies, the treasury policies of Asian companies have still not gotten, on average, to the degree of rigour and tightness that I would like to see in a treasury policy.
 
CFO Innovation did a survey a couple of years ago, and we found that less than 20% of companies in Asia have a treasury management system in place. The majority use Excel spreadsheets. Is a formal management system not that important?  
I think it’s very important. Even I continue to be surprised. I was quite shocked when I moved out from the banking world into the advisory world. It was hugely eye-opening for me four years ago when I found that even some of the largest names in Asia were actually working on Excel.
 
This is again part of the legacy of treasury being perceived as not a particular function. Treasury is considered not important enough to spend money on.
 
You have to invest in technology because there are a lot of related things like controls and processes that will become more efficient as a result of centralization. Some of the smaller companies that we work with don’t have a budget, but there are solution providers out there that provide quality solutions for reduced budgets. So you may not use the most cutting-edge system, but you must use something.
 
I would very strongly advocate using a TMS because it has multiple things you could interface with really well: bank systems, ERP… I would very strongly advocate moving out of Excel. I’m a fan of Excel, but not especially for running a treasury book.
 
I’ve seen a number of vendors touting cloud-based treasury management solutions. Are cloud-based systems, which may be simpler to implement and more affordable, potentially one way for companies in Asia to leapfrog to a TMS?
Sure, I would say that a majority [of companies in Asia] are definitely talking about it. A small percentage is converting that talk into action, but I think there is more talk than action that’s happened in this space. Still, it’s a good thing that people are talking about it because then it will result in action over time.
 
I think that treasurers are putting up their hands and saying, ‘You don’t have to start with a state-of-the-art system on Day One.’ Start with a smaller system and then you could get on and become more advanced. You don’t have to invest US$2 million on Day One. Invest a small amount but get started. I think the most important thing is to get started.
 
For all this talk about treasury being taken for granted, I would think that there would be some realization now of how important it really is because of the global financial crisis. Aren’t companies more conscious today of the risks of suffering through a cash crunch and trapped cash, and of the need for cash visibility and optimizing what you have?
Prior to 2008, you had very diverse set of risk management happening in Asia.
 
The first was a huge cowboy approach of doing leveraged transactions. Across the region in Korea, Indonesia, Singapore, Hong Kong, in different parts of Asia, there were a lot of transactions done with the right intent of ensuring higher profits. Even though the transactions were done with the right intent, when things [turned sour], the impact was really severe.
 
Then you had another set of companies who were not doing anything at all They were thinking: ‘We’re very conservative; we don’t do anything.’ My view on that is: ‘You’re being very aggressive by not doing anything.’ Because by having a very passive risk management approach, what you’re doing is opening yourself to the mercy of the market.
 
Fortunately the realization has come down. Even the very high risk-takers have become more streamlined in terms of what kind of products they’re doing out. The ones who were not doing anything also have started doing something. So we’re seeing a bit of a convergence across the spectrum.
 
Which risks are now seen as best addressed by the treasury function?
Anything typically related to the markets. Foreign exchange would be the most obvious one because most multinationals have transactions across different currencies. Anything else to do with the markets – interest rate risk, commodity risk, all of these would really be what the treasurer will definitely cover.
 
The other one would be liquidity, because remember, as a treasurer, your primary function is to make sure that the firm is liquid. That liquidity should reach out to various subsidiaries in different countries when they need the money in the form that they need it in.
 
We all know what happened in 2008, when some companies needed money and the banks didn’t have as much liquidity as they had before. The cost of borrowings went up and, in some cases, companies really didn’t have external sources to borrow from.
 
That is a primary treasury responsibility: to ensure liquidity – a critical life-blood thing. In some cases, some treasurers also take on credit responsibility, if there is no holistic risk management function.
 
You write about the importance of treasury leadership in your book.
That’s one of the things we’ve been championing for a while now. Treasury leadership is the core to successful treasury, which really means the degree to which a treasury positively influences the results of a firm, whether it be more predictability, whether it’s lower cost, whether it’s higher revenues, whether it’s smoother flow of cash.
 
Treasury leadership has three components. The first is treasury design, which is building the whole infrastructure and putting in places the systems, the processes, the account structure and everything.
 
The second one is treasury culture, because however good your systems are, however good your processes are, human beings are required to drive [success]. And motivating human beings requires a certain skill set. You can’t really just take someone and plug them into your new treasury; you need to make sure they have the right skills, the right training.
 
You also need to create the right culture because in a regional treasury centre, you have to work across countries in Pacific Asia. You need to be able to understand people from, say, Dubai to Japan, Hong Kong, China, India. With a global treasury centre, it is even more so.
 
The third component is what I call ‘treasury fitness.’ This is akin to a human fitness test, which identifies the pain points and tells you how fit the person is.
 
The first component, treasury design, covers the issue of whether your treasury function is decentralized, where each country treasury is autonomous, or centralized, where treasury policy, strategy and important transactions are done out of a regional treasury centre (RTC) or a global treasury centre (GTC). Are you seeing many companies creating RTCs in Asia or even GTCs?
There’s actually been a lot of RTCs earlier. What’s happening is that now companies are thinking, ‘Why can’t we move our global treasury into Asia as well?’
 
They see the different strengths that Asia brings in, as in people, as in connectivity, structure and lifestyle. It’s also where a lot of the business growth is coming for global companies. The winds are moving towards Asia.
 
Where are global companies typically establishing their GTC?
The bulk is between Singapore, Shanghai and Hong Kong, depending on where their areas of focus are. There are a few that are looking at Malaysia; a few in Australia.
 
There are three things that you look at. One is the people, where the people are sitting. The second one is where the accounts themselves are sitting, where the money is. And the third one is where the system’s technology is residing.
 
We’ve seen companies that host all three parts in different critical locations. So you could have your accounts sitting in London, your people sitting in Singapore and your system sitting in Hong Kong. The key thing is to identify what works best in terms of where each of these three [are located].
 
If you are in Shanghai, though, isn’t there a problem with currency restrictions and other regulations in China?
That’s why I said that the location of the accounts is different; the location of the people is different. So I could be sitting in Shanghai, I could be sitting in Mumbai, but I could be transacting on behalf of another company.
 
The location of the accounts is determined by regulations and the amount of capital available and what you can do with the money. The location of the system depends on which country has the most bandwidth or the most up-time, and the lesser issues around outages, earthquakes and whatever. Take that to be your system location.
 
Is it best practice to have all these three elements in just one place?
It depends on what your size is and whether or not you have the scale. If you have enough scale to be in Singapore or in Hong Kong, you could do that.
 
Ideally you would like to keep your people and your accounts in the same place because if there is a problem, you can go across to the bank and sort it out. Remote management of the account can become a problem; ideally I would like to collocate them.
 

But if I didn’t have the scale – not every multinational has the scale to be physically located in every place – typically you tend to gravitate towards the country where you’re headquartered.  

 

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