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With financial risk management a headline topic for regulators, shareholders and company Boards the treasury department must be ready to respond to increasing Board level interest in day-to-day risk managed by the Treasurer.

In this article, Anna Koritz, Head of UK, Nordics, Switzerland and Middle East, RBS, pinpoints some current issues and suggests some strategies to help simplify a complex environment.

In our regular conversations with corporate treasurers, we note that risk management is now high on the agenda of company Boards, who are looking for a new level of detail on financial and operational risks. This is hardly surprising given recent history, the current market environment and increasing corporate governance requirements. But it is increasing the complex demands on the treasury department.

The recovery underway is slow and patchy, and business conditions are testing. In a difficult credit environment, the gearing up for renewed growth will put increased pressure on cash flows, as new revenues will often lag the need for funding.

At the same time, economic conditions continue to be fragile, so that counterparty, country and market risks, for example, all demand a heightened level of monitoring at the treasury level. And there is also a strong demand for company Boards to understand and receive frequent updates on financial risks and strategies, including more detail on day-to-day financial operations and future cash flows. So treasurers are juggling an ever more demanding agenda to both manage and explain a very complex environment.

Stronger corporate governance

Board interest, and demand for information, is increasing for two reasons. Boards certainly share treasury concerns over the fragility of the recovery and the scarcity of funding and want to keep a firm hand on the tiller. At the same time, the trend to stronger corporate governance is also fuelling this increased Board demand for financial information across regions. This effect has been felt most strongly in the financial sector, but there have also been changes affecting corporations, in general. In the UK, for example, The Financial Reporting Council published a revised UK Corporate Governance Code in 2010. Reflecting the current environment, among changes to this principles-based code is a stronger emphasis on the Board’s responsibility for risk and a new supporting principle underlines the need for directors to have appropriate “knowledge of the company and access to its operations and staff.”

(UK Corporate Governance Code, June 2010, Supporting Principles, P 15.)

Changes to national accounting rules have also been introduced in some European countries to ensure increased transparency in reporting – in 2009, the German Government passed the BilMoG law modernising corporate reporting requirements and Spanish companies must now include the liquidity position for the last two years in their public accounts. Also in 2009, new and more stringent guidance came into force for directors of UK listed companies with regard to “going concern” reporting.

At an international level, the financial crisis has given added impetus to achieve a single method to compare accounts across borders via the work of the International Accounting Standards Board (IASB).

US companies were already used to stringent reporting under Sarbanes Oxley and were the first to move to quarterly reporting – our US treasury clients are also reporting an increase in Board enquiries.

Boards look to the Chief Financial Officer (CFO) to explain as well as deliver the increased formal reporting for which they are responsible. In meeting those needs, the CFO will draw heavily on treasury as well as audit. Treasurers confirm a significant increase in both the detail and frequency of reports they prepare for the Board, with the spotlight particularly on liquidity/debt funding and counterparty risks.

Not just box ticking

It can only be good news that Boards are now seeking a deeper first-hand understanding of treasury and of the complex risk environment that treasury must manage. In addition to formal reporting, treasurers say they are responding to an increasing frequency and range of ad hoc enquiries from the Board, such as questions about counterparties and other external risks; and greater detail on internal matters such as pension provisions, working capital or liquidity forecasts. Often, Board questions directly reflect topics in the media.

Treasury responses

How are treasurers responding to these increased risk management challenges at the operational level and meeting the additional corporate governance demands from their Boards that we have described? Our discussions with treasurers show they are most interested in pragmatic, transparent solutions that will help them cut through the complexity of the current environment in which they must operate.

More limited access to funding, together with market uncertainty, means treasuries are keeping a far greater proportion of their funding in short-term deposits and consequently, looking for flexible, good-value options. Where money market funds are used, treasurers are also seeking much more information about the underlying assets in those funds before investing and they are also tightening treasury policies and keeping a tighter rein on investments at subsidiary level. Online money market portals can be helpful here, because they allow the easy comparison of data and analyst reports about different funds. And when treasury investment policies change, those changes can be immediately applied and implemented via the portal.

Counterparty risk

There is no doubt that the drive to a few, deep banking relationships that has been prevalent for some years, has slowed since the events of 2008/9, as corporate treasuries look to spread their counterparty risk. We are seeing strong interest in bank-agnostic connectivity options, such as corporate access to SWIFT, which uses standard messages to connect to multiple counterparties. One way to get up and running quickly and cost effectively on SWIFT is via a bureau service, such as RBS’s SWIFT Service Bureau; it can receive and deliver data in the company’s own preferred format for integration into an enterprise resource planning or treasury management system. This approach can also provide useful off-site contingency, simplifying the systems environment and improving operational risk management. Reporting to the CFO and the Board is a task treasurers agree they would be ill-advised to delegate, but the requirement for detailed and accurate reporting is escalating.

There is always more work to be done to integrate external banking data into treasury management and Enterprise Resource Planning (ERP) systems. Banks can help by listening to corporate requirements and providing timely, rich data in standard formats. Flawless automation of processing is also invaluable. Every reduction in manual repetitive tasks frees time and focus for considering what needs to be managed and reported, from a risk perspective.

A rapid response capability for risk issues

To meet frequent, unexpected and wide-ranging enquiries from senior management and the Board, it may be helpful to establish a “rapid response capability” within the treasury team. Giving one or more team members part-time responsibility for managing external and internal information sources and looking regularly at longer-term external macroeconomic research and upcoming regulatory changes, in addition to the usual sources, can prove invaluable when a sudden need emerges.

The current environment is extremely challenging, and time is at a premium, making all new demands difficult to accommodate. And Board level enquiries are almost always strategic rather than tactical, requiring a balance of views as well as a supply of information. This obviously demands extra effort to understand complex scenarios and interpret them simply and clearly. But in spite of the increased demand on treasury time it seems to be fundamentally good news that treasury is increasingly called on to provide strategic advice to the Board, as well as managing financial and operational risk across the business.