How treasurers and NEDs can inform the board on treasury policy

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Treasurers can play a useful role in helping non-executive directors understand good treasury practice and policies

The recent rise in geopolitical uncertainty, macroeconomic challenges and some added focus on banking counterparties, caused by the news around Silicon Valley Bank and Credit Suisse, has meant many boardrooms have been reviewing their treasury policies. In particular, enquiries from non-executive directors 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.

As a result, there is now an opportunity for thoughtful treasurers to help non-executives fulfil their fiduciary responsibilities and understand what good treasury practices and policies look like.

Many of the questions that non-executives have are likely to boil down to understanding risk, and what is being done to manage and mitigate these risks. Non-executives 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 non-executives to ask and what should help you provide suitable answers?

 

1.  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 non-executives (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.

Questions from the board Actions taken by the treasurer
  • How confident are you that the business has enough committed funds available to support it in the short and medium term?
  • What would need to happen for the company to be in financial trouble?
  1. Assessed the reliability of the cash forecasts.
  2. Aware of how much contingency is applied to the cash forecasts for unexpected events.
  3. 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).
  4. Identified what borrowing facilities and available cash could be accessed with immediate notice.
  5. Undertaken scenarios modelling and any negative stress testing (i.e., under what circumstances could the company run out of money).

 

2. Security: do we have well-capitalised banking partners? 

The collapse of a number of banks earlier this year, in the US and Europe, will have raised concerns among non-executives over counterparty risk and the security of the business’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.

The collapses served as a reminder of the risks associated with banking partners. However, a new risk became apparent – the speed with which deposits can leave a bank and the impact this could have on traditional views of counterparty credit risk. Understanding how treasurers assess and monitor these counterparty risks is crucial for non-execs. 

Proportionality is a key consideration as many organisations will have limited resources to devote to ongoing counterparty risk monitoring. In addition, the choice of banks may be limited – especially for smaller businesses that may have only one main partner. In addition, whilst a good treasurer can take steps to mitigate risks, it may not be possible to fully eliminate them and non-execs and boards more widely should understand and accept these. 

Questions from the board Actions taken by the treasurer
  • Which part of the business is most at risk if a bank counterparty fails?
  • What are the contingency plans if one of the company’s main bankers fail?
  1. Based counterparty risk on a range of measures (such as CDS, market capitalisation, etc.).
  2. Incorporated credit risk assessments into the selection of banking partners.
  3. Considered the different regulatory frameworks applied to banks in the same jurisdiction, and the consequences of existing macro-economic environment that includes the ending of quantitative easing and significant higher interest rates when setting counterparty limits. 
  4. Set counterparty limits that incorporate the nature of the relationship. 
  5. Reviewed counterparty limits and adherence frequently. 
  6. Applied credit limits to banking groups as well as individual banks. 
  7. Updated the counterparty risk policy to acknowledge the reputational risks associated with social media and how it could affect different institutions (such as ring-fenced vs. non-ring-fenced banks) whilst recognising the limited mitigants generally available 
  8. Enabled real-time visibility of ALL of bank balances and which banks they are held with.

 

3.  Yield: how can we benefit from the current higher interest rate environment? 

Non-executives 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.

Questions from the board Actions taken by the treasurer
  • How is security and yield balanced to optimise corporate investments? 
  • Is the same policy applied across the group globally across all entities?
  1. Ensured that security is not being compromised to improve yields on surpluses.
  2. Taken steps to concentrate surpluses across subsidiaries, joint ventures and acquired businesses.

 

4.  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? 

Questions from the board Actions taken by the treasurer
  • Is the treasury policy still relevant to our business and the business environment?
  • How often is it reviewed, and when was it last reviewed?
  • Is the policy embedded across the business?
  1. Had the policy reviewed at regular intervals and consider, especially in times of volatility, independent reviews.
  2. Checked that the policy is still fit for purpose.
  3. Taken steps to ensure that the policy is understood by the treasury team (including regional and outsourced teams) and the business more generally.
  4. Ensured the policy is being complied with.
  5. Challenged the board on what it understood the treasury-related risk appetite to be.

 

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

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 non-executives will have the confidence and assurances that will enable them to fulfil their governance roles. 

Proactively sharing this with your non-executives 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, non-executives will often sit on other boards, providing a good opportunity for wider knowledge sharing. 

 

Barclays Bank PLC is registered in England (Company No. 1026167) with its registered office at 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority (Financial Services Register No.122702) and the Prudential Regulation Authority. Barclays is a trading name and trade mark of Barclays PLC and its subsidiaries. Find out about the Financial Services Register.

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