Treasury Practices around the world

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Page 1

I

T is often only when a

company starts to grow

by means of a series of

mergers or acquisitions that

the need for more appropriate

structures and procedures

becomes evident. Companies

which are active in more than

one sector have experienced

external growth through mega-

acquisitions. They soon realise

the need to set up structures

that are more appropriate to

their new size. Treasury is just

one of the areas where new

procedures and codification

are needed.

Before reorganisations, com-

panies often find that either

they have no procedures in

place or those that they do have

are insufficiently detailed or

unsuited to some new aspects

of their industrial and financial

activities resulting from the

merger or the acquisition.

Why a specific

treasury procedure

is needed

Newly created mega-compa-

nies or groups which undergo

mergers or grow in size, soon

discover the need to modify

and clarify existing procedures.

This often flows from a

desire for greater coherence

in the treasury management

approach.

Moreover, if a company is

listed on a US or UK stock

exchange, or wishes to be

listed, the market authorities

and financial analysts will

require it to submit to best

practices in the field of finan-

cial management, or at least

make an attempt to do so. For

example, documents submitted

to the UK and US market

authorities require companies

to specify the procedures in

force, including treasury and

corporate finance procedures.

This need for adjustment

sometimes comes about as a

result of new tasks. The new

standards, such as the famous

IAS 39 and FAS 133, require

adjustments to existing proce-

dures at the very least. For

instance, IAS 39 requires

companies to communicate

very specific financial infor-

mation and precise records of

the link between the cover and

its underlying value in the

case of hedge accounting.

Companies must define those

products, which their treasurer

can handle and re-evaluate

mark-to-market.

Recent developments in

e-treasury and e-trading also

mean that procedures need

to be modified. The role of

the treasurer has undergone

fundamental changes in the

past two years in view of

major technological progress,

and procedures must reflect

this. Fraud prevention is

essential because of the new

Internet-based technology.

New risks have been created,

24

January 2002

Strategic

Treasury

IN BRIEF

Treasury procedures need to

be constantly monitored in

the light of corporate

development. The President

and CEO of the Luxembourg

Association of Corporate

Treasurers spells out some

of the factors which may

necessitate a general

re-think of treasury policy,

including growth by merger

or acquisition, the demands

of new accounting

standards, Internet and

e-treasury development, and

of corporate governance

and shareholder activism.

He shows how to

approach drawing up new

processes and procedures –

usually via the mission laid

down for the treasury

department and the group’s

objectives. The vital role of

a treasury committee is also

detailed, and the benefits

of a redefinition of treasury

policy to the department and

to the company as a whole

are identified.

On 7 April 2000, Bertelsmann,

GBL/Electrafina and Pearson

announced that they had agreed

to merge CLT-UFA and Pearson

Television into Audiofina. After

the approval of the merger by

the European Commission on

30 June 2000 and the admission

by the UK listing authority, the

new group was renamed RTL

Group. An interest of 10.3% has been listed on the London Stock

Exchange as of 26 July 2000, while Bertelsmann together with the

German publishing company WAZ have an interest of 67% and

Pearson holds 22% after the contribution of its Spanish assets in

Antena 3 and via Digital.

CLT-UFA and Pearson Television created an integrated pan-

European company with successful business operations spanning

television and radio broadcasting, content and online activities.

Year end

2000

1999

1998

US$m

US$m

US$m

Turnover

3,518

3,079

–

Total debt

688

342

–

Liquid assets

260

1,386

–

Number of

employees

6,930

4,937

–

TREASURY POLICY FOR

INTERNATIONAL GROUPS

by François Masquelier, President & CEO of the Luxembourg Association of Corporate

Treasurers (A.T.E.L.) and Head of Corporate Finance and Treasury at RTL Group

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Page 2

Strategic

Treasury

and companies must adopt a

rigorous approach, appropriate

rules and relevant internal

audits to combat them.

More broadly, the complexi-

ty of new accounting rules

or the move from local GAAP

to international GAAP often

introduce very complex finan-

cial tools and derivative prod-

ucts in the broadest sense; the

effect of increasing complexity

is to require a fundamental

review of procedures.

Corporate governance and

shareholder activism, triggered

by pension funds, is spreading

to continental Europe. This

trend is another argument

for very clear and transparent

procedures in a company’s

dealings with its executive

committee, its board of dir-

ectors and its shareholders’

assembly (cf. the Turnbull

guidance on internal control

disclosures, the Cadbury

report and the Hampel

Combined Code).

One important development

consists of outsourcing treasury

functions (especially back-office

tasks, mark-to-market re-evalua-

tion, etc.) and ASP solutions (on

the web). These new working

practices require strict definition

of operating methods.

On top of all this, as we

have already indicated, Internet

tools allow companies to use

facilities such as on-line trading

or transfer instructions. Security

and reliability in authentication

of signatures, for example, is

crucial. Here again, limits need

to be set.

The need and desire for more

effective treasury control has

been in place for some years

now. Let us think back to

the financial catastrophes asso-

ciated with risky treasury

operations in the 1990s and

even more recently. These

transactions dealt with deriva-

tive products that were not

properly understood. It is there-

fore not surprising to see that

boards of directors and execu-

tive committees want to be

certain that appropriate checks

and disciplinary measures are

in place and are effective.

One of the major problems

is the technical jargon used.

In addition, the great complex-

ity and innovative nature of

the financial products handled

make the need for rigour and

control even more pressing.

Communication and under-

standing are therefore among

the top priorities. There is a

true community of interest

between the board and the

treasury department for all

matters relating to financial

risks in general.

The board and/or the execu-

tive committee must define the

treasury department’s scope of

action. As many board members

are ignorant of the ins and outs

of treasury activities, they rely

on their chief financial officer

to manage financial risks.

Starting point for a

new procedure

The basic idea is to start from

the mission laid down for the

treasury department and to

specify the group’s objectives.

It is on this foundation that

the entire procedure will be

built up. This treasury policy

must define and underline the

approach to treasury activities

and risk management selected

by the company. It will also

define and clearly describe the

limits to the tasks, the authority

and responsibilities in the con-

text of treasury activities.

This is also a good opportu-

nity for revising the treasury

procedures manual, spelling

out in greater detail the

way the department operates,

including IT tools it uses

(TMS), cash pooling, netting,

reports it is required to issue,

tasks it has to perform and

information it has to supply.

Reporting

obligations

in

respect of financial risk man-

agement must also be clearly

defined or modified.

It is a good idea to ensure

that the aim and purpose of the

treasurer’s role is clearly

defined. Broadly speaking, the

treasury and corporate finance

department is a service centre

providing technical support to

the whole of the group and its

affiliates or holdings. The gen-

eral attitude should naturally be

risk-averse. The aim is to cover

open trading positions and

avoid taking up new positions

without real or estimated

underlying. The department

will be pro-active in seeking

the cheapest and most appropri-

ate financing and hedging. It

also gives advice to other

departments and subsidiary

companies.

New organisation –

new procedure

The treasury committee can

therefore act as the official

collective body for communi-

cating with the board. The best

way for a board of directors

to be sure that the company

is handling financial risk man-

agement properly, unless it

is able to act independently, is

to define a clear and complete

procedure that subjects the rele-

vant department to the rules it

has laid down.

The board of directors usual-

ly asks the CFO to establish the

treasury procedure. The new

treasury procedure must be

in line with the overall policy

and strategy of the financial

department. For example, the

procedure must take into

account the dividend policy, the

debt policy (or debt ratio) as

well as credit rating. It must

therefore incorporate and

respect the senior procedures

applicable within the group.

For the sake of consistency

the new procedure must apply

to the whole of the group, or

January 2002

25

1 – Mission and objectives of the

treasury function

l

The function of treasury activities within international

groups is to support operational activities. The treasury

and corporate finance department is therefore a service

centre. It is not normally a profit centre or trading centre.

l

Another function of treasury activities is to ensure that

sufficient liquidity is maintained so that payments are made

on time.

l

It is responsible for pro-active and effective monitoring of

financial risk management in the light of market volatility.

l

The treasury department works to optimise the use of

financial resources and to supply finance to the group at

the lowest possible cost.

l

It aims to raise funds at the most competitive rates,

bearing in mind tax-efficiency considerations (working

in conjunction with the tax department).

l

Finally, it provides the group’s departments and

subsidiaries with support and advice on financing and

financial risk management and on handling mergers

and acquisitions.

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Page 3

Strategic

Treasury

at least to all the companies

‘controlled’ by the parent com-

pany. In the case of subsidiaries

that are not controlled by the

parent company, or companies

in which its stake represents

less than 50 per cent, the

company will only be able

to recommend and advise the

procedure.

Current practice among

major groups is to revise and

amend the treasury policy every

two years, or whenever signifi-

cant operational or industrial

changes occur.

General principles

and approach

All transactions must respect

local legislation in each coun-

try. No transactions or financing

activities undertaken by the

treasury department may under-

mine the group’s rating (or

implicit rating) or its financial

independence. Its approach will

generally be risk-averse.

It is also advisable to follow

the example of major groups in

setting up a code of conduct or

a code of ethics, circumscribing

and defining the partners with

which the group authorises its

treasury department to operate

(this should be aligned with its

policy on bank relationship).

For example, the code should

also stipulate that gifts and

abnormally generous benefits

must be refused or prohibited in

order to preserve the depart-

ment’s independence and objec-

tivity, the minimum number of

consecutive leave days to be

taken by each member of the

department, etc. The procedure

must give a detailed description

of the responsibilities of each

member of the department and

the chain of command.

It is essential to set up a trea-

sury committee, which should

meet once a quarter or at least

once every six months. This

committee will have the task

of specifying, accepting and

validating new strategies, and

also of supervising the activities

of the treasury department

and of the group as a whole.

It will act as a ‘guardian of

the temple’, but will also be

the interface or active relay

with management. At least

some of its members should be

independent in order to guaran-

tee effective, reliable and above

all objective management.

This committee should

ideally consist of one or two

external members (with exper-

tise in treasury and finance),

the Chief Financial Officer

(CFO), a treasury inspector

(normally from the manage-

ment inspection department)

and obviously the treasurer.

The treasury committee may

have the status of a board

sub-committee. It must approve

adoption of instruments in

accordance with the policy

laid down by the board. This

committee in no way prevents

or replaces either internal or

external auditing. It does

not therefore preclude other

forms of control. Bodies of

this kind are becoming recom-

mended normal practice since

two-thirds of European multi-

nationals use them.

The treasury procedure

could therefore be described as

the structural elements of a

building, made up of materials

such as the code of conduct

and ethics, banking relation-

ship policy, proxies and repre-

sentation powers, the treasury

manual etc. It will also include

a comprehensive glossary to

explain all the complex details.

The purpose of this procedure

is to lay down the basic rules

to protect the company against

abuse, excess and other expo-

sure to all types of financial

risk, to establish the limits of

signatures, to prohibit the use

of certain financial products

(both at head office and in the

subsidiaries), to codify the

segregation and separation of

powers particularly between

front and back-offices, to

define the department’s perfor-

mance criteria in terms of

results and the company’s

performance criteria in terms

of financial ratios, to establish

benchmarks, to detail the types

of control and security in place

and to specify the aims, mis-

sions and objectives of the

treasury department.

Conclusion

In conclusion we could say that

setting up formal treasury pro-

cedures is definitely common

practice among multinational

groups. Most groups organise

their treasury department as

a service centre responsible

for supporting operational

activities. There is a clear trend

towards setting up treasury

committees, and this example

is to be recommended. Treas-

ury activities are becoming

increasingly centralised and

need more appropriate organi-

sation. The profession as a

whole agrees that risk control

and separation of powers and

duties, just as with a state, is

vital for the proper running of

the department.

Moreover, precise treasury

procedures are the best way of

protecting the treasurer against

him or herself and against his or

her team, but also against the

company hierarchy, which will

no longer be able to complain

that it was not informed and did

not give its agreement.

In the light of corporate

governance regulations and

technical developments in both

finance and technology, comp-

anies must therefore arm

themselves with appropriate

codification.

As the financial environment

is extremely volatile, compa-

nies must protect themselves

properly by setting limits to

the activities of their treasury

departments and ensuring that

the department’s actions are in

complete harmony with the

company’s overall strategy.

26

January 2002

FRANÇOIS MASQUELIER

President & CEO of the Luxembourg

Association of Corporate Treasurers (A.T.E.L.)

and Head of Corporate Finance and Treasury

at RTL Group

François Masquelier has been

Head of Corporate Finance and

Treasury with RTL Group since

November 1997. Before joining

RTL Group he worked for Mitsui

Taiyo Kobe Bank (Sakura Bank) in

Brussels, Eridania Béghin-Say

Coordination Centre in Brussels and

ABN AMRO Bank in Belgium and

Luxembourg. He has degrees in

Law, Tax Law and Economy and

Administration from the University

and Business School of Liège, and

a degree in Management from the

Solvay Business School (Brussels).

A specialist in corporate and

structured financing, he is the

President of Association of Corporate

Treasurers of Luxembourg (ATEL).

He is also Founder Member of

E.A.C.T. (Eurozone Associations

of Corporate Treasurers) and very

active in the European Association.