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Warren Davey, Executive Vice President, GTreasury
Okay, contestants. Time for the two-part Final Jeopardy answer…or the 14th “Who Wants to be a Millionaire” question…or, if you’re really ancient, the $64,000 Question:
Q. What do Hammurabi, Moses, Gouverneur Morris, and a 2017 Corporate Treasurer have in common?
Q. What does the 2017 Corporate Treasurer have that those three giants of human history did not have” (Hint: It would have made their jobs a while lot easier.)
You didn’t win? Sorry, better luck next time. Now Alex (Trebek), Meredith (Viera), or Hal (March), will explain.
Hammurabi, ruler of ancient Mesopotamia, drew up the Code of Hammurabi, mankind’s first written compilation of laws and regulations, around 1750 BC. Some 500 years later, Moses came down from the mountain with the Ten Commandments. Move forward a little less than three millennia, and you’ll meet Morris, the “Penman of the United States Constitution.” He put the final editorial touches on the free world’s shortest yet most durable document that sets out the principles and practices of national governance.
The Code, the Commandments, and the Constitution all fit rather nicely with the definition of a Corporate Policy, which www.businessdictionary.com defines in part as
“a documented set of broad guidelines, formulated after an analysis of all internal and external factors that can affect a firm's objectives, operations, and plans. Formulated by the firm's board of directors, corporate policy lays down the firm's response to known and knowable situations and circumstances. It also determines the formulation and implementation of strategy, and directs and restricts the plans, decisions, and actions of the firm's officers in achievement of its objectives.”
Policies incorporate, explicitly or implicitly, the principles that underlie strategic and tactical decisions. They also provide the basis for ensuring accountability and measuring performance.
Although corporate policies ultimately originate at the board level, it’s the corporate treasury that is the policy hotbed and nerve center. Why? Because the treasury is such a high-risk environment, and treasurers bear a disproportionate level of the burden in controlling and mitigating the risks that swirl about the company.
That is to be expected. Treasurers are entrusted with the financial well-being of the company. They “see” so much more than most other company officials – particularly the income and outgo of cash. Treasurers also deal with banks, the portals for transfer of that cash to and from the outside world; the very existence of such a portal means that it’s the locus of potential risk and fraudulent events. Once cash is gone, it’s gone.
The world of the treasurer is also one of complexity and ambiguity. Government regulations, both at home and abroad, make for a climate of uncertainty. The more successful a company is – entering new markets or increasing existing sales – the more financial assets it must safeguard. Safeguarding these assets – working capital, earnings, profits, and financial instruments -- falls to treasurers. They have to take the lead in developing and executing the policies for the many functions that their teams perform.
If this sounds daunting, never fear. Unlike Hammurabi, Moses, and Morris, treasurers can call upon the latest in Treasury Management technology to control those risks and ensure compliance. The tools now at Treasury’s disposal make it a de facto strategic partner for risk-mitigation policies within the company.
We have written before that the mere availability of automation has removed much of the time-consuming tasks – the manual, spreadsheet-driven bean counting -- that used to take up the bulk of treasury’s work time. The question then became what to do with the opportunity for taking on higher-level duties.
One such duty, broadly defined, is treasury risk management. This entails, first, a documented set of policies that spells out what risks are to be managed, and who is responsible for managing them. Then it calls for having technology with the capacity and flexibility to implement the policies in day-to-day operations.
Technology is indispensable. It keeps and drives the databases, the information flows, the calculations, the reports, the processes, and the workflow schedules that are all essential to risk management.
Take, for instance, the management of liquidity risk. Complete, accurate visibility of all cash is the essence of this aspect of risk management. But visibility of what’s on hand at any given moment is only a start. Liquidity-risk management is also concerned with future funds flows and requirements.
Modern treasury technology relies on instantaneous communication with all of the company’s banks in order to make available current balances and transaction information. But the technology also combines those bank positions with future cash flows from payables, receivables, foreign-exchange contracts, interest-rate swaps, and anything else that can have a bearing on future funding requirements.
Every one of these founding sources has its own risk profile. It’s well-nigh impossible to track and manage them, and therefore to make timely decisions about them, all through the use of manual spreadsheets.
Astute liquidity management, therefore, addresses and mitigates those risks. Doing so would fill the requirement for policy compliance. How it’s done is through the use of treasury technology.
Liquidity risk is the one we immediately, almost reflexively, associate with the corporate treasury. But there are many other types and flavors of risk that treasurers must address though policy and technology-enforced practice. They include:
- Fraud prevention thorough controlling access to banks and bank accounts and by limiting and monitoring transfers and transfer authorizations
- Segregation of duties that split transactions into recording, dealing, confirming and settling.
- Accurate, real-time reporting of financial information, without which any decision carries additional and needless risk.
- Managing counterparty risk through setting and applying counterparty limits and exposure analysis that includes FX hedges, time deposits, and derivative positions.
- Managing operational risk through a technologically controlled environment that follows policy specifics on matters such as access control, lockdown of workflows, and data encryption.
- Security risk management, which is a natural corollary to operational risk management, and which includes: data validation; exception reporting; access-rights restriction; tracking of intrusion attempts and tries for unauthorized access; and flagging of potential violations to the attention of responsible individuals who are empowered to take remedial action.
There is almost no limit to the possible uses of technology for the mitigation of risks, although at some point the investment in the most advanced tools and techniques might call for some detailed cost-benefit analysis. Still, for larger, well-funded corporations there’s the possibility of scenario analysis and Monte Carlo simulation to assess possible future outcomes and financial risks posed by market shifts and interest-rate variances.
The implementation, the actual doing of what the policy guidelines call for, can be the hard part. Think, for a minute, about our government and legal system. Laws and regulations get passed by people sitting in offices in Washington and elsewhere. But they’re not the ones who have to put the laws into effect in the real world.
So it can be with corporate policies. The board may speak from on high, but the managers and employees are the ones who march to those marching orders.
For guys like Hammurabi and Moses, their power was absolute and their word was law. Their kind of policy enforcement was easy to accomplish, even though they had no technology to wield.
In the case of Gouverneur Morris and compatriots, their power was diffused and divided. However, they did have a modicum of advanced technology to help them: the printing press.
Corporate executives and treasurers of the present day have it tougher than all of them, in one sense, because the business world is so complex. Their policies must be much more detailed, specific, voluminous and nuanced than the Code of Hammurabi, the Ten Commandments, and the United States Constitution. But treasurers are more than up to the task of fulfilling those policies, and therefore of managing the risks to their companies, thanks to the miracle of modern treasury technology.
Keep that in mind if you’re ever invited to appear on “Jeopardy” or “Who Wants to be a Millionaire.”
About the Author
Warren Davey is Executive Vice President of GTreasury, a leading provider of treasury management systems. Davey currently oversees GTreasury’s strategy, marketing and business development operations. He has over 15 years of experience in the technology and treasury markets, previously holding positions with Selkirk Financial and Thomson Reuters.
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