Chapter Three

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Treasury Culture

THE CONCEPT OF TREASURY CULTURE as introduced in this book is a thought and action process essential to the path of Treasury Leadership. It involves creating the right mind-set and environment for the employees of the Treasury function to work together and with other functions to produce best possible results and service standards. Practically, doing this includes equipping the employees with the right knowledge, skills, tools, empowerment, atmosphere, and attitude to generate best results.

A good Treasury Culture can explain the difference between two high-performance treasuries: one, a high-speed, cutting-edge, and efficient Treasury where motivated employees make everything appear smooth and well-oiled, with zero defects, prompt service and turnarounds to other functions, and a fun environment at work, where a Treasury role is sought after; the other, a good well-organised Treasury where employees are stretched and work overtime under intense pressure to deliver the same results, where Treasury is perceived to be a silo support function that burns the midnight oil.

The steps to initiate and develop a Treasury Culture are relatively simple, and a few key qualities and skills inculcated into the Treasury team over the course of the development process. This is done through example, top down, through the actions and the approach of the Treasurer him- or herself, and through training, simulation, and coaching. Figure 3.1 summarises the different elements of a Treasury Culture.

FIGURE 3.1 Components of Treasury Culture

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It is important to note that these elements of Treasury Culture are enablers that work along with professional/job competence and skills to increase the effectiveness of the individuals and the team within Treasury.

QUALITIES

Certain generic qualities are required in any employee of any organisation. Of these, those critical in the Treasury function are mentioned here.

Proactiveness

The proactive nature of Treasury personnel comes into play when dealing with the dynamic situations and potential areas of problems and disconnects that occur on a day-to-day basis. Proactive resolution of issues and potential problem areas, as well as stepping up to preempt liquidity or situations for the internal clients, will increase the fluidity of business operations.

Control

A control orientation is critical, given the nature of work in a Treasury and access to funds. Owing to opportunities for errors, and for fraudulent misappropriation of company money internally and externally, Treasury staff members need to be trained and, more important, cognizant of these opportunities for losses and perform their duties accordingly.

An interesting case study of “the Insider” is one of the many possible situations where employees have chosen to go down the wrong path.

CASE STUDY: THE INSIDER
The use of company funds for social ends as part of the firm’s social responsibility is a given in today’s corporate world. Ever since the corporate world began, some employees have benefited from their company’s largesse apart from their official compensation. We’re talking about internal fraud, with or without complicity.
Many companies that issue dividend payments have a long list of investors or shareholders who do not redeem their warrants. The monies for this purpose are usually held in a separate escrow and remain there for a period of time. Typically, banks are instructed to flag any transactions on such accounts immediately as exceptions. As M, an employee of a company’s centralised Treasury who had direct responsibility for account management, had figured out, the dividend account of a few years’ past had not been monitored apart from his sign-offs on the bank accounts.
A test transaction followed—a forged funds transfer instruction from a particular dividend account was flagged in the bank’s system, but the bank’s operations manager called M, since he always handled all account-related clarifications. On M’s assurances that the transaction was genuine, the operations manager released the small payment. Since no one else in the organisation tracked these balances and since the amount was not large, the next audit thereafter caught no specific transaction.
Then the funds outflow took shape. Over the next 15 months, M transferred over USD 400,000, all in small amounts, to accounts with other banks, from where the money was siphoned off to further accounts in the names of A’s relatives.
Since the quarterly impact was not significant as a percentage of the company’s operations and the reconciliation process was not being followed for this account in the absence of reporting, the transfers did not set off any of the other control triggers.
When M was promoted to a more senior role, he insisted on retaining responsibility for account management, which his managers took to indicate his extreme dedication.
When his lifestyle began to improve quite a bit over time, another employee, Q, thought it fit to red flag the situation. Doing her utmost to review the process, she did a few quick investigations into M’s lifestyle and found that it was rather lavish—quite a change from when he had joined the firm.
When flagged, the report went through to the human resources (HR) head. When confronted with questions around recent developments in his life, M took offense and threatened to quit and also to show documents from his inheritance from a dead uncle. M promised to place some of the money in an escrow account with the company for the duration of his employment. The HR head was moved and went along, failing to call M’s bluff.
Another employee, F, had moved to the middle office and, oblivious to the goings-on, intercepted account statements sent by the bank to M’s attention. F became curious. A few investigations revealed that the accounts in question were not part of the recon process.
F, unclear of the company’s whistleblower policy, shot off two parallel sets of letters—one went to the chief financial officer (CFO) and Treasurer, and the other went to members of the board of directors. Both sides promptly raised this with the chief executive officer (CEO), who was then asked by the board to be involved in the ensuing investigations. M, who had become aware of the investigation when a bank staffer asked him for information required for the investigation, had made plans to leave the country and was caught at an immigration checkpoint.
The company’s control processes were strengthened after that, but the sense of control displayed by two employees showed that the individuals’ sense of responsibility, more than the company’s control culture, ultimately saved the day. The moral of the case is that while our instincts sometimes tell us what facts will later prove, the presence of a control culture can reduce instances of financial losses to a degree. The adage “trust, but verify” is certainly applicable in this context.

Teamwork

Earlier we discussed the various linkages and partnerships that Treasury needs to develop in order to add value to the business. Treasury will not be able to add value without a requisite amount of teamwork. Organisationally, joint cross-functional team goals in employee and team appraisals also enforces teamwork.

Transparency

The cost of capital and operations of Treasury get passed on to the business or operational units in many firms, since Treasury is mainly a support function. Given the cost of capital, returns on investment, gains or losses on marked-to-market (MTM) positions on hedging and targeted rates, apart from cost of operations and account maintenance, the cost and return parameters of Treasury will likely have an impact on the financial performance of various business units. Transparency with numbers, operations, and turnaround times will go a long way in reinforcing other units’ faith in the Treasury group.

GENERAL SKILLS

General skills involve interpersonal and basic technical skills that the treasurers have to look at from a development and training perspective.

Relationship Building

Treasury team members need good interpersonal skills given their dual responsibility of managing the Treasury and being service managers to support the business. Their interpersonal skill, specifically in relationship management, is key, given the various interfaces that Treasury has with external and internal entities. (See Figure 1.4 in Chapter 1 for a snapshot of these linkages.)

Culture Knowledge

Since interactions with people from different backgrounds, countries/nationalities and culture is a way of life in the Treasury function, being able to understand and appreciate other cultures would assist in smooth interactions and in gaining the most from meetings, conversations, and discussions with the other party. Working in a cross-cultural, multinational environment also requires an appreciation of the backgrounds, markets, and environments of the various team members. Team contributions and performance depends a great deal on how well the team members work together to create solid and efficient output.

Technology

Members of Treasury teams do not need very technical skills but definitely have to be very good users of technology. Those involved in system decision making and implementation/integration need a good, well-rounded understanding of system architecture and usage so they have the tools to make decisions on which systems to use.

Process Orientation

Tightness of processes and zero tolerance for errors help make a Treasury perform beyond expectations. Along with a control mind-set, process orientation of Treasury employees creates respect within Treasury for the sanctity of well-laid out processes, which in turn ensures that other functions and external service providers also participate to make the end-to-end financial supply chain work seamlessly and efficiently.

Written Communication

A global Treasury has a lot of interfaces with entities through email and, where required, letters and notifications. Given the increasing dependence on email for most forms of communication, and the corresponding increase in the volume of emails, Treasury emails need to be crisp and articulated well enough for readers to immediately grasp the situation and respond should immediate action be required. Information-related emails should be clear and unambiguous, ensuring that there is no further follow-up that could waste precious time for both parties. There is a corresponding danger of overcommunication—in order to reduce reverse queries, some information emails contain an overload and excess of information. In these cases, the receiver could well come back to Treasury asking for where the information could actually be found and how to read the mountain of data that was sent.

TECHNICAL AND WORK-RELATED SKILLS

The final category of Treasury Culture involves finance and job-specific items that are core to the functioning of a well-rounded Treasury team.

Business

Basic business skills and the understanding of the company’s business model, supply chain, dynamics, and industry and competitor backgrounds will serve in good stead to help Treasury employees understand the context of their roles. Many Treasury employees, especially at the junior level, struggle to understand the impact of their roles and how they are actually helping the organisation. Every Treasury role is critical, and the Treasurer and CFO would do well to ensure that each and every employee within the function has a good business understanding that will in turn help them add value to their roles instead of simply performing and executing tasks automatically.

Financial and Markets Awareness

Awareness of the global environment, especially the political and economic situations of the world around and its impact on markets, including the ones in which the company is present or likely to enter, is an important aspect for a global Treasury. It is important for Treasury members to be generally aware of key market factors, how they work, and general market trends and levels. Reading economic and industry reports regularly will also help to hone this knowledge base. Basic understanding of economics and balance sheet is also required.

Accounting

Given the impact of treasury’s actions on the balance sheet through the accounting process, employees of Treasury must have at least a rudimentary knowledge of accounting and, more important, the basic accounting practices of the firm across its key locations. In particular, aspects of the cash conversion cycle (explained in Part Three), mark-to-markets or valuation of risk management transactions (explained in Part Four), and impact of translation of the balance sheet and related aspects should be well understood.

Regulatory

Treasury interfaces regularly with central banks, exchange commissions, foreign exchange regulators, and other regulatory and statutory bodies. The nature of Treasury work, especially cross-border and capital-related transactions, can sometimes create ambiguities around contravening regulations. It is critical to ensure that all activities and transactions follow appropriate regulations. In case of doubt, the compliance officer in charge must take the call, and unresolved or sensitive situations must be escalated to country or global management. While it is not in the realm of the Treasury employee to take the final regulatory call in sensitive or unclear situations, he or she must know the regulations well enough to recognise ambiguity or potential contravention.

An interesting example in the regulatory context is given below.

EXAMPLE: A PARALLEL CURRENCY
The nondeliverable forward market (NDF) is an often sensitive topic—the market exists, and certain central banks are concerned with trading on their currency outside of their purview, in locations where the notes are not legal tender.
We cover the NDF market in more detail in Part Four. Here we consider an example of a Treasurer who threw caution to the winds and decided to hedge a Latin American currency that was largely restricted on hedging, through the NDF market. The rationale was the time spent in getting approvals or documentation ready for onshore hedges. The local Treasurer would undertake these hedges with global banks outside the country, booking the deals on the parent’s books. The Treasurer then worked out a method to “reimburse” the local company through internal accounting adjustments.
When the local subsidiary suffered large losses owing to massive currency movement, the regulator was unimpressed. The parent had reported good figures, including profitable numbers from the local company. The disconnect was obviously the hedging of the local exposure through the NDF process. Furthermore, email communication from the local entity to overseas banks on the NDF transactions solidified the evidence.
The Treasurer and the local CEO were called in, and a few sensitive conversations later, the process was changed to hedge only onshore, with all efforts being made to ensure compliance on approvals and documentation.
In contrast, the regulator of another country who kept receiving annual request for approvals for overseas parent companies to hedge their capital onshore studied the market. A group of treasurers had gotten together to present the case to the central bank. Once aware that many other firms were instead routing their hedges through the NDF market and recognising the genuine need for such transactions, the central bank refused to provide case-by-case approvals. Sometime later, the entire transaction category itself was included under the heading of “Hedgeable Risks” that overseas entities could perform onshore with minimal documentation and no prior approval. This brought even the NDF flows into the country. Proactiveness is best when it is two way.

THE MANY HATS OF THE TREASURER

The Treasurer wears many hats to fulfill and excel in his or her duty. This is a part of Treasury Culture, to inculcate a multidimensional “DNA” among senior Treasury personnel and wear these hats to assist the Treasurer and CFO, and to create a second-line to replace the Treasurer when the time comes for the current incumbent to move on.

Some hats of the Treasurer, illustrated in Figure 3.2, are listed next.

FIGURE 3.2 The Many Hats of the Treasurer

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  • Marketer
  • Astute observer and analyst
  • Fund manager (securing the firm’s money)
  • Gatekeeper
  • Systems specialist
  • Innovator
  • Consultant and trusted advisor
  • Lobbyist and regulatory interface
  • Trainer
  • Process engineer
  • Economist and market expert

As we move through the various functions of Treasury, the relevance and applicability of these hats, and when the Treasurer wears them, will become more evident.

Putting in place a Treasury Culture is a process—it takes time to establish and requires effort to sustain. The effort will be worth every cent of time and money invested. History has proved it.

SUMMARY

In this chapter, we observed the importance of the Treasury Culture and how a Treasurer can, over time, create and sustain the culture that is an important determinant to achieving Treasury Leadership. We looked at the various hats that the Treasurer needs to wear, and aspects that would help the next generation of Treasury managers to try out and prepare for higher responsibility and empowerment.

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