Informing the board about treasury policy | Barclays Corporate

How Treasurers and NEDs can inform the board regarding treasury policy

Creating the right balance between good treasury practices and policies.

Jason Macdonald discusses the opportunity for treasurers to support non-executive directors (NEDs) when informing board members about treasury practices. He looks at some of the main questions you could expect your NEDs to ask and points for consideration when providing the answers.

Nowadays, more than ever, there is an opportunity for thoughtful treasurers to help non-executive directors fulfil their fiduciary responsibilities and understand what good treasury practices and policies look like.

Jason Macdonald

Head of Liquidity Product at Barclays

A world of challenges

The recent rise in geopolitical uncertainty, macroeconomic challenges and some added focus on banking counterparties, caused by the news around Silicon Valley and Credit Suisse, has meant many boardrooms have been regularly reviewing their treasury policies. In particular, enquiries from NEDs can require careful explanation as they may not be as familiar with finance more generally. Indeed, some may be unsure of what questions they should be asking – the jargon that is often used can sound complex and difficult to understand.

Many of the questions that NEDs have are likely to boil down to understanding risk, and what is being done to manage and mitigate these risks. NEDs will be sophisticated enough to understand that risks cannot be eliminated, but they will want to understand how they are being managed.

So, what are the questions you could expect your NEDs to ask and what should help you provide suitable answers?

Liquidity - Do we have sufficient financial resources?

Liquidity and cash management are, of course, central to a treasury function and this becomes increasingly important during times of economic uncertainty. This is probably the most important challenge for the NEDs (and the board more generally). They need the confidence that there is enough financial resource to support the commitments of the business in the short and medium term. A key component of this is the quality of the cash forecasts and whether they are sufficiently accurate given the nature of the business.

The board is likely to ask how confident are you that the business has enough committed funds available to support it in the short and medium term? Also, what would need to happen for the company to be in financial trouble?

Points considered by the treasurer

Assessed the reliability of the cash forecasts.

Aware of how much contingency is applied to the cash forecasts for unexpected events.

Calculated how many months the business could survive in the absence of any income but with ongoing commitments (sometimes referred to as a liquidity risk appetite).

Identified what borrowing facilities and available cash could be accessed with immediate notice.

Undertaken scenarios modelling and any negative stress testing (i.e., under what circumstances could the company run out of money).

Security - do we have well-capitalised banking partners?

The collapse of a few banks earlier this year, in the US and Europe, will have raised concerns among NEDs over counterparty risk and the security of the company’s bank balances. But getting the right group of banking partners requires balancing a wide range of considerations such as:

  • The credit rating of the bank
  • How much credit the bank is providing
  • The strengths of the bank in offering different ancillary services
  • The reliability of the bank in times of difficulty
  • How well the bank understands the sector and the business.
Understanding how treasurers assess and monitor these counterparty risks is crucial for NEDs. The board could potentially ask which part of the business is most at risk if a bank counterparty fails? Also, what are the contingency plans if one of the company’s main bankers fail?

Points considered by the treasurer

Based counterparty risk on a range of measures (such as CDS, market capitalisation, etc.).

Incorporated credit risk assessments into the selection of banking partners.

Set counterparty limits that incorporate the nature of the relationship.

Reviewed counterparty limits and adherence frequently.

Applied credit limits to banking groups as well as individual banks.

Enabled real-time visibility of ALL of bank balances and which banks they are held with.

Yield - how can we benefit from the current higher interest rate environment?

NEDs will want to know whether the cash in the business is working for it rather than sitting idly in a low-interest bearing account. They will know that for the first time since 2008, interest rates in mature economies are now at levels where it is attractive to maximise cash across an organisation and to limit borrowing drawdown.

It’s likely that the board could seek information in terms of security and yield balanced to optimise corporate investments? Is the same policy applied across the group globally across all entities?

Points considered by the treasurer

Ensured that security is not being compromised to improve yields on surpluses.

Taken steps to concentrate our surpluses across subsidiaries, joint ventures and acquired businesses.

Treasury policy - is it still fit for purpose?

The treasury policy should be an articulation of the approach and risk appetite set by the board (or by a sub-group with the appropriate delegated authority).

But what does a risk appetite mean in practice other than stating that investments cannot be at risk? Does every board member have the same view of risk? In the absence of many banks with a AAA rating, what level of risk is acceptable?

Points considered by the treasurer

Reviewed your treasury policy at regular intervals and consider (in times of volatility) independent reviews.

Checked that the policy is still fit for purpose.

Taken steps to ensure that the policy is understood by the treasury team (including regional and outsourced teams) and the business more generally.

Ensured the policy is being complied with.

Challenged the board on what it understood the treasury-related risk appetite to be.

Key takeaways

Understanding treasury risks

The questions above are not an exhaustive list but hopefully will provide NEDs – and the rest of the board – with a better understanding of treasury risks and what they could be asking of the treasury team.

Articulate your actions

For treasurers, you should recognise some or all of the actions you would be expected to be taking, and to be able to articulate them in such a way so that your NEDs will have the confidence and assurances that will enable them to fulfil their governance roles.

Share the knowledge

Proactively sharing this with your NEDs now, either directly or through your committee structure, will help ensure a greater understanding of the treasury function at board level, foster greater insight and collaboration and provide valuable feedback. After all, NEDs will often sit on other boards, providing a good opportunity for wider knowledge sharing.

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