The corporate treasury--from cost center to profit center

Bristol-Myers Squibb Co.’s $275 million write-down on auction-rate securities partially collateralized by subprime mortgages was more than just the biggest loss by a nonfinancial company related to subprime investments: It has become the stimulus to reopen the debate on whether corporate treasuries should operate as a cost center or, on the other end of the spectrum, a profit center. Jeff Wallace, managing partner at Greenwich Treasury Advisors, sums it up: “Is it treasury’s job to take trading risks to bolster the bottom line, or should it be assuming a more conservative posture of preserving capital and keeping the company’s cash liquid and available?"

That question is reverberating in e iboardrooms and C-suites around the country, as directors and executives question their roles as cash managers. The pendulum has swung back and forth over the years on the issue—for instance, taking a sharp swing towards the conservative after the bond default by California’s Orange County. With the cash buildup in the years since 9/11 and the Enron Corp. debacle, treasurers have been increasingly placed between the need to manage risk and the equally compelling requirement to produce a better return for shareholders. When economic times look rosier—and the need for a cushion seems less, the impetus has been to more actively invest these liquid assets either by sinking money back into the enterprise in R&D, capital investment or M&A; bolstering the stock price through higher dividends or stock repurchases; or investing in slightly more risky short-term investments. “These [strategies] all play into the overarching theme of trying to derive increased value for the company,” says John Tus, treasurer of Honeywell International Inc.

One of the options that many companies pursued in the quest for better yield was the same auction-rate securities (ARS) that Bristol-Myers lost its shirt on. Although ARSs have been safely traded for years and few have led to a Bristol-Myers-type meltdown, the drug company's loss has some finance departments reconsidering the risks. Among the nonfinancial corporate names already reporting balance sheet hits from the subprime meltdown are Ciena, Lawson Software, 3M and U.S. Airways. The losses were more restrained than Bristol’s—$13 million for Ciena or two cents on earnings per share for Lawson—either because the company’s didn’t invest as much or move faster to liquidate when subprime started looking shaky.

Not all companies took the bait of what one banker estimated as a premium of 300 to 400 basis points on some ARSs. Honeywell, the 2007 Overall Excellence winner of the Alexander Hamilton Award, is an example. Treasurer Tus says it wasn’t worth the risk. “To the extent that you have cash on balance sheet,” he says, “it is important to develop an investment policy that everyone feels comfortable with.”

The debate over treasury’s role raises strong feelings among treasurers. “Our job is to protect the capital of the company,” says Tim McDannold, the treasurer at Diebold Inc. “I would be concerned if the treasury were operated as a profit center, because it would push the organization to go beyond the border of investment policy as defined by our investment committee in conjunction with the board.”

The posture of a treasury doesn’t have to gravitate to the extremes. Greenwich Treasury’s Wallace suggests that most treasuries—particularly the best practices ones—fall somewhere along the spectrum between profit center and cost center, either in the role of service center or value-add center. Each of these, he says, suggests a much more active treasury but one that is not necessarily taking on the same financial risks as a brokerage might. “But it’s like arguing about religion,” says Wallace. “There is no single right or wrong answer.”

For Bristol-Myers, the debate is likely to get heated as well. Consultants speculate that the choice to invest in ARSs was likely driven by Wall Street pressure to boost earnings after one of its biggest money makers Plavix took a hit from generics that were dumped into the market. A banker who asked to remain anonymous was sympathetic. “If a company has $1 billion in cash, potential gains of $37.5 million outweigh the possibility of taking even a $10 million writedown,” he says. The problem was the writedown turned out to be more than 30 times that number.

Bristol-Myer’s biggest sin apparently: relying on Standard & Poor’s and Moody’s triple AAA ratings, says Tony Carfang, a partner at Treasury Strategies inc. “If a company decides to manage a portfolio on its own, it better do the research itself,” he warns.

There were other missteps. Treasuries that opt to be profit centers also better diversify their portfolios and buy securities from multiple dealers that can give you different views of the market, says Carfang. Better yet, he recommends avoid ARS-type investments, which can be illiquid if auctions fail for lack of bidders. “These instruments are structured with maturities ranging from 10 to 30 years with no put-back to the investor,” he says. “Thus, the structure of the security does not provide for liquidity for terms less than the original maturity.”

For now, consultants reckon, boards and treasurers will take a more conservative stance. “Treasurers don’t get high-fives if they do a few basis points better, but they can get fired if they lose money,” says the banker. They will likely make use of the time to evaluate how best to invest idle cash, possibly reinvesting it in the company, repurchasing shares or providing dividends.

Investment banks that issue or sell ARS products, not surprisingly, take issue with Carfang’s blanket dismissal of these securities. “On balance, as long as companies account for this properly, they usually do come out ahead," says Peter Jankovskis, chief investment officer of Oakbrook Investments LLC. “Even if they look foolish in the short-run, by writing off losses on continuing investments, they can hold the securities until they pay off.”

Article found in Cash Management, Treasury Management, Credit Risk Management, Corporate Finance

Taking the long-term view

Most CFOs want to scrap quarterly guidance pronouncements, according to a recent survey by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business. An overwhelming majority (81%) believe that this practice monopolizes management’s time and takes it away from more value-added strategizing and other, more critical responsibilities. Ultimately, CFOs and other financial experts argue that the practice plays into the hands of hedge funds and private equity firms by bringing unnecessary volatility to share prices and corporate market capitalizations.

It also puts CFOs on the hot seat. A company that fails to manage market expectations to the penny risks watching its share price pummeled for the slightest discrepancy—sometimes either way. Too often CFOs have been the fall guy, being sometimes forced to resign over a miss. “We’ve seen companies—and their CFOs—taking severe hits in the past few years after missing forecasts,” says Fritz Roemer, who heads up the enterprise performance management executive advisory program at benchmarking consultants The Hackett Group. “Stock prices become unstable and valuations drop dramatically.”

Finance executives are not alone in their disgust. No less than Treasury Secretary Henry Paulson and a former head of the Securities and Exchange Commission (SEC) have called for an end to this practice. "Quarterly guidance is at best a waste of resources and, more likely, a self-fulfilling exercise that attracts short-term traders," according to a report by a panel chaired by ex-SEC chairman William Donaldson. Despite the fact that half of U.S. listed public companies still make a stab at providing investor guidance, opponents like the Conference Board note that the practice is banned in most other countries.

Sixty percent of the CFOs in the FEI-Baruch survey would go even further than simply eliminating guidance: They propose that earnings statements be issued only twice a year rather than quarterly.

According to the Hackett Group, the vehement rejection is hardly surprising given the poor job companies do of forecasting even annual sales and earnings, let alone quarterly expectations. About two-thirds of the 70 U.S. and European companies studied for Hackett’s new forecasting Book of Numbers missed the mark by anywhere from 6% to more than 30%. “It’s shocking to see this level of poor performance in such a key area,” says Hackett’s Roemer. “Yet companies still refuse to make the necessary efforts to get this under control.”

Article found in Treasury Management, Accounting/Financial Reporting

Careers

Sprint Nextel, the $41 billion provider of wireless and wireline communications services, with headquarters based in Reston, Va., named senior vice president and controller, William G. Arendt, acting CFO Arendt, 50, replaces Paul Saleh, who left the company January 25. Beginning in 1997, Arendt served in various senior finance position with Nextel until the time of the Sprint Nextel merger. Post merger he served as senior vice president and controller.

RH Donnelley Corp., the $1.9 billion provider of interactive offerings, with headquarters in Cary, N.C. has named R. Barry Sauder vice president, corporate controller and CAO. Sauder, 47, joins RH with over twenty years of financial management experience, he previously served as vice president of finance, corporate controller and CAO for InfraSource Services Inc. Prior to InfraSource, he assumed the role of vice president of finance and principal accounting officer for GSI Commerce Inc.

Hawaiian Electric Industries Inc, the $2.5 billion power supplier to over 400,000 customers in the Hawaiian Islands, with headquarters based in Honolulu, named controller Curtis Y. Harada interim financial vice president, treasurer and CFO. Harada, 51, replaces Eric K. Yeaman, who has been promoted the company’s senior vice president and COO. Harada, joined Hawaiian in 1989 as director of internal audit. One year later he was named the company’s controller. Prior to Hawaiian, he held numerous financial positions with Pacific Telesis Group in San Francisco and was an auditor with Coopers and Lybrand in Honolulu.

Citadel Broadcasting Corp. the $433 million radio group, based in Las Vegas, announced that CFO, Robert G. Freedline, resigned January 31, 2008. Freedline will be replaced by newly named senior vice president and acting CFO, Randy L. Taylor. Taylor, 47, has served as the Citadel’s vice president of finance, principal accounting officer since November 2006. Prior to that he served as vice president of finance, principal accounting officer of Citadel Broadcasting Company. January 2001 to September 2005, Taylor held the position of vice president of finance and corporate secretary, and from April 1999 through January 2001, as its vice president and controller. From September 2005 and September 2006, he served as vice president and corporate controller for Bally Technologies, Inc.

NYMEX Holdings Inc. , the $497 million parent company of New York Mercantile Exchange Inc., based in New York, has appointed Anthony Filoso senior vice president of finance and corporate controller. Filoso joined the company in 2004 serving as director of Securities and Exchange Commission reporting and taxation and has most recently served as vice president of finance and corporate controller. Before joining NYMEX, Filoso, served as director of financial reporting for Nautica Enterprises Inc. Prior to Nautica he was with Marks Paneth & Shron LLP serving as a senior manager,

Brooks Automation Inc., the $743 million provider of automation solutions and integrated subsystems, with headquarters in Chelmsford, Mass., named Martin S. Headley as executive vice president and CFO. Headley, 50, replaces Richard Small, who has been serving as acting CFO since the beginning of the year. Prior to joining the company, Headley served as executive vice president and CFO for Teleflex Inc. Earlier, he assumed the role of CFO for both Roper Industries Inc. and the North American arm of McKechnie. Earlier in his career, he spent 13 years with Arthur Andersen & Co.

Article found in Careers

Compliance Spectrum puts the "R" in GRC

Austin, Texas-based Compliance Spectrum, a relative newcomer to the financial reporting arena, has added a risk component and real-time reporting functions to its Spectra automated compliance on-demand solution. The new risk assessment and analysis capabilities give finance executives, auditors and compliance officers a tool to identify, assess and manage the most critical risks and estimate the costs of mitigating those risks, explains Colleen Murphy, Compliance Spectrum vice president of development. “These advanced risk management and reporting features allow customers to integrate risk management into their compliance and governance lifecycle programs,” Murphy says.

A software as a service (SaaS) solution that is licensed for a subscription fee, the Spectra tool calculates a “risk rating” based on potential business impact, probability of occurrence and estimated cost to remedy. Risk levels are tracked over time and incorporated into Spectra’s policy, audit and task management capabilities and real-time dashboards. Any number of regulatory components can be factored into the software, so companies can monitor for compliance with such regulations as Sarbanes-Oxley, Basel II and IRS rules during an internal audit as well as ensure that transactions comply with internal policies and risk tolerances. New OLAP analytics capability allows drill-down and ad-hoc analysis of objectives and controls with respect to risk, says Murphy.

Article found in Tools & Technology, Enterprise Risk Management, Compliance

If only Société Générale had the new Oversight fraud monitor …

Oversight Systems Inc. is upgrading its continuous monitoring and auditing technology to make it even easier to spot innocent errors and premeditated fraud. The new version applies sophisticated forensic analytics technology and a “profiler” that not only isolates anomalies, but triggers a review of similar transactions to discover trends—like, say, a series of rogue trades, according to Oversight CEO Patrick Taylor. “Catching one suspicious action and then looking back at everything else a particular employee has done gives you the big picture,” says Taylor. Also new is the ability to track complex debit-credit pairs in general ledger entries that when connected net out to fraudulent transactions. The individual pairs appear to be normal transactions, but when the links are discovered, the intended fraud becomes apparent, says Taylor. Oversight’s tool, available for installation or as software-as-a-service, sifts through all transactions flowing through a company’s enterprise resource planning (ERP) and financial systems. It operates in real-time, finding and fixing all control violations, weak controls, errors and fraud. The upgrade will be introduced Feb. 25.

Article found in Risk Management, Accounting/Financial Reporting, Tools