VideoCash-flow traffic cop, investment expert, in-house banker, judge of capital-investment decisions, financial risk manager — treasury departments wear all these hats and more. Yet treasury doesn't get much respect. It's often the leanest department in finance, with relatively few resources at its disposal. In 2007, only 14 percent of new CFOs came from treasury, according to one study. There's little standardization across companies — no common set of metrics or even a commonly accepted description of treasury's functions. The CEO and management team are typically disconnected from the department, says Brad Buss, CFO of Cypress Semiconductor. "Treasury is like taxes: people don't really get it and they don't want to get involved," he says.
At least, they didn't. Today, with the economy in a shambles, CFOs are rediscovering the potency of the treasury function.
The need for tight cash management is greater than ever, while the banking crisis has elevated financial-counterparty risk. As a result, expert treasury departments are more highly valued, by finance departments and by boards and business units. "Treasurers have always played a pivotal role in industrial companies," says Ed Liebert, chairman of the National Association of Corporate Treasurers (NACT) and treasurer at Rohm and Haas. "But with the financial crisis coming to center stage, the role of treasury in protecting a company's financial assets is becoming more widely recognized."
As a result, CFOs are revisiting the priorities of the treasury function. Is it focusing on the right tasks among its jumble of responsibilities? And are those tasks delivering value to the company? The consensus is that treasury can play a more strategic role by concentrating on three areas: the care and feeding of banking relationships, the management of working capital, and the screening of capital investments.
Monitoring the Banks
Treasury departments now spend a significant amount of time and energy probing for land mines in the financial markets. "The number-one thing is to protect the assets you do have under your control," says Dennis Hoyt of Hoyt Treasury Services, an outsourcing provider. That's essential because CFOs are relying just as much on commercial banks for executing treasury functions (82 percent) and borrowing (72 percent) as they were before the blowup of Lehman Brothers, according to CFO Research. In the past, says Melissa Cameron, a principal in treasury consulting at Deloitte & Touche, treasury departments would have simply stuck the credit-rating reports of their banking partners in a file drawer and forgotten about them; now they continuously scrutinize those institutions using leading indicators such as changes in credit default swap (CDS) spreads and market capitalization.
CFOs, in fact, want daily reporting on their banks' health. The performance of a bank's CDSs — "a leading indicator of how the markets perceive financial institutions," says Cameron — and bond spreads are of particular interest. "CFOs and treasurers are now more likely to devise dashboards that monitor key metrics," she notes, "because ratings-agency actions are lagging indicators."
At education-software provider Blackboard, senior vice president of global treasury Michael J. Stanton tracks the financial viability of the two banks that provide the company's cash-management services. "It's an issue that's top of mind at the board and audit-committee level — we have regular conversations about it on audit-committee calls," he says. Stanton presents the audit committee with data on bank credit ratings, CDS performance, strength of assets, and adequacy of core capital. "Anywhere there is financial risk, we're diving a lot deeper."
While Blackboard has not switched banks, Stanton decided not to present a request for proposal for a new "operating bank." Explains Stanton: "The managing directors we talked to said they would love to have our business but they had unprofitable account relationships that they were trying to clean up. Normally we would have had 20 banks pitching." In the end, Blackboard stayed put, deciding there was greater risk in moving its accounts.
Ultimately, treasurers want what consumers want: an ironclad guarantee for their cash accounts, says Scott Horan, a senior vice president in liquidity management at PNC Bank. "Businesses are looking for some kind of government guarantee for their short-term cash — they want safety and liquidity but no one considers yield as a criterion," he says. Enter the Federal Deposit Insurance Corp. In addition to the U.S. Treasury Department backing money-market funds, the FDIC is guaranteeing non-interest-bearing transaction accounts at U.S. banks through 2009. Given that guarantee, the earnings credits that companies can apply toward bank fees, and the low yield on Treasuries, Horan says that for some companies it makes sense to park cash in a checking account.
Monitoring banks has value to corporations beyond just guarding cash. Zurich Financial Services, for example, relies on bank letters of credit and trusts to mitigate customer and other third-party credit risk. "Treasury has to actively manage that in light of some of the weekly changes in the health of some banks," says Vibhu Sharma, CFO of the North American commercial business of Zurich Financial. "We have to have the ability to change out the collateral if a bank heads toward insolvency." Thus far Zurich has avoided what Sharma calls "double jeopardy" — when a customer and the bank that posts its collateral go into simultaneous tailspins.
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