How can the treasurer add value?

Good morning, Ladies and Gentlemen.

At times like these, I am reminded of a quote from Sir Winston Churchill, who said:

“However beautiful the strategy, you should occasionally look at the results”.

Today, within financial markets, we are starting to live with the results of past strategy. And we currently are in a time of transition - one where the future is uncertain and the solutions uncertain as well.

Churchill also said, and I quote:

“It is a mistake to try to look too far ahead. The chain of destiny can only be grasped one link at a time”.

So today I would like to add my own small links that may help us look prospectively.

I would like to cover three themes today.

The first is the management of financial risk. What does this mean for a treasurer of today, and what should a treasurer be focusing on to help navigate through these turbulent times?
The second is the opportunities that this environment brings. It is not all gloom. These times do present opportunities for companies and treasurers in support of a company. Grasping of these opportunities will determine the shape of our success when we return to less turbulent times.
And finally, I will leave you some personal thoughts on the future; the key trends and issues that a treasurer needs to be aware of in considering the immediate and near term.

But first, I would like to add my own thoughts on recent events in financial markets. I should add that these reflect my personal views and not necessarily BP’s position.

It has been widely recognised that there has been a systemic shift in the market. This has been fundamentally characterised by the ‘re-pricing of risk’; the premium for risk-taking is now higher. Some would assert that this re-pricing is returning the financial system to a more ‘normal’ pricing level, and that it was, for a number of years, at an artificially low level. However, others are redefining what ‘normal’ means in this environment.

Irrespective of which is the correct point of view – and only time will tell – it is clear that, for some time to come, the cost of risk will be higher and may, to some extent and at certain times, be disconnected with underlying fundamentals. This future is therefore difficult to model and we all need to learn new techniques to deal with this uncertainty – perhaps one link at a time.

This re-pricing of risk has led many companies to ‘de-leverage their balance sheets’; lowering both the overall levels of debt and risk. For some, this is certainly helping them to reduce the immediate risk of financial stress. The risk here is that this de-leveraging may be adding to the larger global economic slow down.

There are also those that have weathered this process without major de-leveraging, perhaps taking the view that the re-pricing of risk is more than compensated by the returns they are seeing.

What is true for all is that a strong balance sheet in a company is usually its most valuable asset. While prudence is paramount, using the company’s balance sheet to maximum effect in support of delivering the company’s strategy is as important today as it was before the current financial turmoil.

So how can the treasurer add value?

Here we must consider the unique proposition of being a treasurer. For me that is being accountable for the management of a company’s financial risks.

In BP Treasury we cover a very broad remit of risk. We have a strong centralised organisation which gives us the ability to see the totality of financial risks faced by the corporation, but at the same time we are small enough to allow us to react quickly to threats and opportunities.

We manage the investment and risk of the Group’s main pension funds, some $30bn in total. We manage BP’s overall liquidity risk by raising, distributing and investing all of BP’s cash flows. We access directly debt capital markets obtaining competitive cost of funds. We set, implement and optimise BP’s insurable risks by focusing on risk identification and risk management optimisation. We measure and manage the Group FX exposures. And we manage BP’s counterparty risks to financial institutions, which not only covers activities of treasury, but also those of our oil and gas trading activities.

This unique insight into the markets and the totality of a company’s financial risks is where, I think, a treasurer can add the most value.

Let me give you two examples:

Firstly, is the broad area of Financial Risk.

A treasurer is usually the company’s interface with financial markets. One key insight into today’s global economic recession is that where the financial markets head, then soon follow the wider economies which they support.

Our interface with the financial markets gives the treasurer a clear line of sight into the changing dynamics of financial risks. In today’s environment, the realisation and understanding of these risks is changing rapidly; sometimes it is changing on a daily basis.

Two years ago, the issue of liquidity and counterparty risk was a mere issue of good governance processes and regular check-ins. Six months ago, counterparty risk was a daily concern requiring constant attention. And only three months ago, the bond market was severely constrained.

This early insight into the changing dynamic of financial risks is critical in supporting the company steer a safe path through these turbulent times, and where the treasurer can add material value.

Let’s consider counterparty risk as a component of financial risk.

Counterparty risk and good credit analysis have now become more critical than they were for a number of years.

The unique position of a treasurer can help mitigate what has become one of the material risks in the current environment. He or she can do this by:

having a clear line of sight to exposures, summing those from across the company. This total understanding enables sound and appropriate judgements to be made.
actively managing these exposures. Gone are the days when plenty of time was available for interventions. To use an oil industry expression, we need to steer a super-tanker like a speed boat – missing many of the dangers we face.
and finally, by netting risks and exposures at a central company level. The nature of our industry and business model makes us both a customer and supplier to financial counterparties. Many of these relationships do not naturally net off at times of counterparty stress. The use of netting arrangements and the understanding of holistic counterparty risk, and their offsets, can actually help to sustain business activity while reducing absolute risk. In BP, we have ensured that we have appropriate netting arrangements with counterparties. Business volume is maintained, while absolute risk is largely, and in some cases totally, mitigated. Having less credit capacity does not have to mean having less business.

As another example, let’s take liquidity risk as a component of financial risk.

Systemic liquidity risk is perhaps the single largest issue facing treasurers of today. For some, this is an issue of liquidity leading to insolvency. For others, this is a risk to growth and flexibility. So how can we, as treasurers, deal with this risk?

First, by recognising the fundamental importance of cash. Holding cash on your balance sheet has moved from being economically inefficient, losing the spread between debt and investment, to being a vital element in the battle to maintain liquidity at times of capital market disruptions. As well as helping to ensure liquidity, holding a cash buffer gives flexibility. Being nimble and flexible must be a high priority of treasurers in the current environment.
Second, by being market agnostic and price evangelical. That is, to position our companies to take funding opportunities whenever they arise, and to try not to be trapped in a market window out of short term need. The pricing of debt is extremely difficult in today’s environment and there are few meaningful historical benchmarks. Current market benchmarks are the only pillars which investors can hold on to.
Finally, by thinking expansively. The availability of funds is global. That we have known for a while. However, markets are moving faster and more unpredictably than before which means that treasurers now need to look harder at a broader range of funding alternatives. Market windows are opening, not through the usually predictable global movements of cash, but through highly particular and local events. One day the best alternative might be to borrow in Francs in the Swiss market while another could be to borrow in Yen in Japan. Being flexible and nimble in location, as well as timing, is a key area of value that we add as treasurers.

The second area of risk that I would like to explore is that of operational risk. Here I mean the risk to the operationalising of a company’s strategy.

There are two facets of a treasurer’s role in managing operational risk that I will explore.

First, that a treasurer is at the heart of the company’s financial decision making processes.

At times of great uncertainty, the value of certainty is ever higher. The need for stability: stability in understanding, stability in organisation and stability in policies becomes paramount. This does not mean not responding to events. What it does mean is that a company’s response has to have a solid foundation, which, for treasurers, means to ensure that the company has the right set of financial policies. Such robust financial policies can provide clear and simple guidance for the company and the operating units within it. It ‘protects’ them from having to individually interpret all the changes in the world financial markets and the natural inclination to constantly respond to events.

At times like these, it is important to re-emphasise your company’s financial policies, ensuring that they are based on fundamental principles, that they are applicable in today’s market, and checking that they are strong enough to steer through a volatile environment. In the same way that the financial sector is focusing on its basic banking activities, we, as treasurers, have to ensure that the company delivers ‘basic financial governance and control’.

The second facet is that a treasurer is in the unique position of seeing the totality of a company’s cash flows. We see daily the health of the company, areas that are declining, areas – perhaps - that are growing, but most importantly, the early indications of the pace of change.

Managing this is, after all, what the treasury department is there for. However, now the insight that a treasurer can give back to the company from this unique oversight is at a much more elevated pitch.

This does not only refer to cash movements, but also to builds in working capital - perhaps caused by supplier or customer pressures, changes in financial terms which impact the economic proposition of a business, and even the rapid decline in cash flows that may trigger the need for more focused executive intervention.

Insights, born out of central cash oversight, can materially add value to the company’s strategy, its understanding of the strategy’s execution risk and its ability to make well judged and appropriate strategic interventions.

So, now turning to the opportunities that have arisen from this financial crisis.

There are many things that we can all do to see ourselves through these difficult times. We can reduce our cost base, try to retain critical talent, look at increasing revenues, but for me, as a treasurer, I see opportunities to add distinctive value falling into four buckets:

First – by creating flexibility. The greater the level of uncertainty, the greater the need for flexibility. By managing the company’s financial exposures, mitigating risks and creating flexible funding options, the treasurer can materially add value. Managing through volatility, being nimble, acting quickly, but above all, being flexible – while being anchored on concrete foundations – is what is required.
Second - delivering performance. There will be many companies that can and will weather uncertainty. But it is only the fit and efficient that will come out of this strong enough to capture the opportunities that will emerge. The differential between a top performance and an ‘also ran’ will be far more pronounced. Performance delivery in a growing market is important, but in a shrinking one it is paramount.
Third - building capability. It is strange, perhaps, at times like these to be talking of building or growing. However, now is the time to improve or build the capabilities of the future, not those of the past. Investing in talent now will pay dividends in the long term. Loyalty gained now will see the company through many years ahead.
And fourth - driving efficiency. Now is the time to invest in future efficiency. Becoming fitter will create better chances to live through the turmoil but, just as importantly, to be competitive when the economy emerges into a more sustained growth phase once again.

Flexibility, performance, capability and efficiency are the themes around which a treasurer can add distinctive value for a company. Their relative importance has certainly changed during recent times, but their necessity has not.

Turning now to the future. What are the key trends that a treasurer needs to think about? What are the key characteristics of the treasurer in the coming years?

For me there are four characteristics required to be a treasurer in the coming years.

First is to be an ambidextrous leader. Treasurers need to juggle the need for flexibility, while running the mantra of performance. They need to be at the heart of the company’s strategy formulation, while balancing the prudence of ensuring liquidity and perhaps even solvency. They need to be highly connected to the emerging trends in the external financial markets, while being highly connected to the internal business needs and the execution of company strategy. And they need to be steadfast and solid in their formation of financial governance and policy while being nimble in its application.
Second, is to be an insightful leader. Financial risks, both counterparty risks and liquidity risks, as well as operational risks are subject of boardroom discussions, irrespective of the strength of balance sheets. It is becoming the heart of a company’s strategic thinking. It will dictate the extent strategy can be implemented. It may even dictate the core strategy itself. A treasurer needs the insight to the market, the position of the company’s suppliers, partners and customers to inform this debate and to help conclude the strategy of the future.
The third is to be an active leader. The pace of change will not abate. Governance and intervention is now a daily activity for most treasurers. Processes need to be rigorous and continually tested to steer the company through the on-going financial storm.
And finally, a treasurer needs to be an optimistic leader. There will be many that flourish in this environment, many that grab the opportunities, that build capability and capture efficiency that will deliver performance and ultimately the company’s strategy.

I am an optimistic person: optimistic of the capability of business to emerge stronger and more focused.

I am also a golfer. The great French novelist Jean Giraudoux said about golf:

“A golf course is the epitome of all that is purely transitory in the universe; a space not to dwell in, but to get over as quickly as possible.”

There is much similarity to the position we are in today.

Thank you

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