Canadian Treasurer Magazine Winter 2015

Canada’s magazine of Corporate Finance

Winter 2015 • www.canadiantreasurer.com

Trendwatch:

Governance:

China’s Bond Market Yields Opportunity

Transforming the finance department

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16

Enterprise Risk Relationships and strategies drive decision-making

Regulatory: Navigating Bill 198

PM40050803

Canada’s magazine of Corporate Finance

Winter 2015 • www.canadiantreasurer.com

Table of Contents Departments & Columns 4

Industry Watch

18

Events

Enterprise Risk Relationships and strategies drive decision-making

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6

Prepared for Emergency?

What leaders need to know about risk and reputation management

10

Shining Light on the Dark Web Prevent the growing cyber risks for your company

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Divergence Between the U.S. and Canadian Economies: What It Could Mean for Treasurers

Features

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Trendwatch China’s bond market yields opportunity for foreign investors

16

Governance Transforming your finance department

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Regulatory Bill 198: Navigating an uncertain landscape

22

Your Team Five steps to integrate coaching into your talent management strategy

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In the next issue: The next issue looks at best practices, applications, processes, and trends for streamlining and optimizing planning, budgeting, and forecasting.

Winter 2015

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Industry Watch

Fintech poses ‘long-term and dangerous’ threat to golden goose of Canadian banks, analysts warn Canada’s banks may be pitching their big push into technology as a growth platform, but in reality it is just a way — and a costly one at that — to try to preserve their “golden goose” of dominance in personal and commercial banking, according to a new report from analysts at National Bank Financial, says Peter J. Thompson of the National Post.

“We think the Big Six Canadian banks have all embarked not on offensive, growth-oriented strategies – as recent rhetoric from all suggest … but rather, they have gone on the defensive,” bank analyst Peter Routledge and two associates wrote in the report.

“We now see all Canadian P&C banking fintech or digital initiatives as necessary responses to a long-term and dangerous competitive threat.”

The defensive strategies to protect revenue and earnings in their profitable personal and commercial banking franchises – along with the imperative to invest in technology – could “overwhelm the earnings growth imperative” of the big banks, the National Bank analysts wrote in a report distributed Sunday evening.

The report predicts the big, dominant banks will prevail in their showdown with fintech rivals. But they suggest it will be a long and expensive battle that won’t allow the banks to weather cyclical and economic challenges to earnings growth – as they have in the past – by cutting costs.

Canadian banks have been reviewing their operations and looking to cut costs for months amid concerns about an economic slowdown and curtailed borrowing by over-leveraged consumers.

A report from Reuters on Monday said several hundred employees could be cut by TD in a series of cuts that began last week. Canada’s second-largest bank has about 85,000 employees in its retail, wholesale and investment banking operations in Canada and the U.S. A TD spokesperson told the Financial Post an organizational review that began in the first quarter focusing primarily on the United States has now shifted to Canada and should be complete by the end of the year.

“Its focus is primarily on clearly defining our executive and corporate management structure,” the spokesperson said in an emailed statement. “As a result of the review, some roles are changing and some are being impacted.”

Earlier this month, National Bank of Canada announced cuts that will affect a few hundred employees of the Montreal-based bank.

Investor conferences held by Toronto-Dominion Bank and Canadian Imperial Bank of Commerce this month convinced Routledge and the other National Bank Financial analysts not to take the bank “messaging” about tech and digital innovation at “face value,” according to their report this week – though their conclusions are not confined to those two banks.

TD and CIBC showcased strategies for their business, and highlighted the strengths of the personal and commercial lines which have been a key driver behind all the Canadian banks’ profit growth over the past several years.

Of particular note to the National Bank analysts were comments executives at TD and CIBC made about partnerships forged with outside “fintech” companies that are innovating in traditional business lines such as payments.

“Why, we asked ourselves, is the boring but profitable Canadian oligopoly inviting third parties into their most valuable, profitable business line?” the analysts wrote. “Simply put, we think they are worried … worried that innovators will nip away at, and ultimately fleece, their Golden Geese.”

Winter 2015 Volume 25 Number 17 Publisher / Corporate Sales Mark Henry mark@canadiantreasurer.com Editor Karen Treml karen@canadiantreasurer.com Contributors Sandy Bird, IBM Fellow, CTO Security Systems Division Michael Goodfellow, Partner in Deloitte’s Audit and Advisory practice John Landry, Head of Treasury and Trade solutions, Citi Steve McCaughey Consulting Partner in Deloitte’s Finance & Performance Management Consulting practice Renee Robertson, CEO, Trilogy Development

CANADIAN TREASURER

Natalia Smalyuk, vice-president of the corporate & financial practice at Environics Communications Helen Wong, Chief Executive, Greater China, The Hongkong and Shanghai Banking Corporation Limited

Creative Direction / Production Jennifer O’Neill jennifer@canadiantreasurer.com Photographer Gary Tannyan President Steve Lloyd steve@canadiantreasurer.com For subscription, circulation and change of address information, contact subscriptions@canadiantreasurer.com Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to:

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Cameron Rose, senior vice-president, Canadian zone underwriting officer, Chubb Specialty Insurance, Chubb Insurance Company of Canada

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Winter 2015

Industry watch The report noted the personal and commercial franchises of the Canadian banks have been largely insulated from competition in the past, due to their individual and combined market share and regulations that have made it difficult for foreign players to enter via acquisition.

The most imminent threat from the fintech firms is to the payments operations of the Canadian banks’ domestic personal and commercial banking franchises, the report suggests.

Those nipping at the heels of Canada’s dominant banks may not be of the magnitude of a Microsoft, which, the report points out, benefitted greatly from being invited to the table with IBM, but the National Bank analysts say they “do think the Canadian Big Six banks face a material threat to their most profitable business line.”

The report concluded that the big banks will be forced to confront and combat the fintech firms over the long term.

“In other words,” the analysts wrote, “this threat is clear, present, intensifying and has staying power – one or two simple alliances will not neutralize it.”

For breaking news and in depth new features, visit our website at www.canadiantreasurer.com

HotelQuickly uses Transpay for mass payments Transpay , a leading provider of B2B/B2C cross-border payments based in New York, will enable payouts to Southeast Asia and Europe for HotelQuickly, a mobile application for booking lastminute hotel rooms throughout the Asia-Pacific region.

Transpay said it was pleased to partner with HotelQuickly, a service available in more than 250 destinations across 15 Asian countries. As the world’s largest, independent bank payout network, Transpay’s payment platform will enable HotelQuickly to pay their hotel network through direct bank deposits in local currency.

“Transpay has helped us simplify our mass payments, which used to be costly and time-consuming,” says Mario Peng, CoFounder and CFO of HotelQuickly. “The service has allowed us to send faster payments to our hotel groups without hidden fees.”

HotelQuickly has also adopted Transpay for their international payroll.

“Asia Pac presents special challenges when it comes to mass payments,” says Nagarajan Rao, Senior Vice President of Transpay. “We are excited to be solving those challenges for HotelQuickly and look forward to growing our relationship in the years to come.”

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Winter 2015

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Enterprise Risk

Prepared for Emergency?

What leaders need to know about risk and reputation management 6

CANADIAN TREASURER

Winter 2015

Enterprise Risk

By Natalia Smalyuk

H

enry Kissinger once said, “There cannot be a crisis next week. My schedule is already full.” Many leaders might relate to this sentiment. A crisis throwing their life off course is their worst nightmare. What to do if a malfunctioning product causes deaths, an environmental accident wreaks havoc on the community or a whistleblower brings on allegations of corruption? No two crises are identical, but the guidelines below will help decision-makers prepare for ‘predictable surprises’.

Recognize the red flags Seventy-five per cent of all crises are ‘smoldering issues’ not dealt with on time, says crisis communications expert Jane Jordan-Meier. In issue-prone organizations, ordinary risks have a tendency to escalate into adverse events that can damage their reputation, bottom line and even their ability to fulfill their strategic goals. Here are some common behaviours signalling an environment might be issue- and crisis-prone: ◉◉ “Prevention is too expensive” Many organizations – including those in high-risk industries, such as manufacturing, transportation, engineering, and natural resources – see proactive risk management as an expense.

They don’t invest in building resilience because they don’t see the business case for it. “What’s the ROI?”, they ask.

Ironically, this question is absent when something does go wrong, and millions are spent on litigation. ◉◉ “This won’t happen to us” British Petroleum (BP) did not have a viable crisis plan when an oil rig exploded near Louisiana, causing the disastrous BP Deepwater Horizon oil spill in the Gulf of Mexico. This is one of many examples when organizations turn a blind eye to risk. To some, the possibility that something may go wrong is so uncomfortable that they deny it all together, overplaying progress and

Winter 2015

underestimating challenges. Warning signals slip under the radar. A disaster is the worst time to start improvising. ◉◉ “We just need someone in charge” Some organizations assign responsibility for preparedness to a person not fit for the role, or without the necessary resources to succeed. Example: the head of IT put in charge of crisis planning successfully navigates a massive data breach, but fails to mobilize an effective response to allegations of sexual harassment.

Problem: a lack of authority to develop solutions that require complex problemsolving across organizational boundaries, outside one’s functional area of expertise. ◉◉ “It’s all in that binder” Virginia Tech learned the hard way that a crisis plan needs to be stress-tested. If, at the time of the tragic shooting spree that occurred on its campus, it had the right step-by-step procedures for such a situation, it could have responded faster – and, possibly, saved lives. No matter how thorough, a crisis plan is only one step in what should be an ongoing organizational exercise in proactively learning to solve problems together, under uncertainty and stress. If not tested and updated regularly, a crisis plan may actually provide little more than a false sense of security. ◉◉ “Who’s to blame?”

In the aftermath of the Chernobyl disaster, knowing the facts was critical to the ability of the affected population to protect their health. Yet, the former Soviet Union’s government bureaucracy blocked public communication. While this is an extreme example of ‘hiding skeletons in the closet’, organizations uncomfortable with confronting their inconvenient truths might similarly struggle in their crisis response. Ignoring suspicions of negligence or wrongdoing and silencing whistle-blowers, they let their issues incubate. When there’s an obvious problem, the goal should be to identify solutions, not scapegoats.

Define crisis planning goals In 1994, when a U.S. frozen foods company Schwan’s Sales Enterprises found itself in the centre of a massive salmonella

outbreak, its president asked his team: “If you were a Schwan’s customer, what would you expect the company to do?”

This question served as a guiding light as Schwan navigated a response. The company was able to recover quickly without losing its customers.

Some organizations assign responsibility for preparedness to a person not fit for the role, or without the necessary resources to succeed.

Crisis leaders can learn from Schwan’s use of an aspirational goal to manage an adverse event. Before dealing with any tactical structures of preparedness, they should ask what motivates their organization. Doing the right thing?

Serving the customers, employees, shareholders, communities? Sustaining revenues? Protecting the brand? Avoiding litigation? Implementing direction from the head office? Asking these questions will provide an overarching guide in crisis planning – but equally important is to ask if the court of public opinion will agree with your priorities.

Build a crisis management team Many organizations include the CEO in their crisis management team, the heads of security, IT, operations, human resources, legal and public relations. The challenge is to represent all important organizational functions while keeping the team small enough to move quickly in time of need. The team’s leader should be able to make effective judgment calls within the parameters of the established crisis management process. A positive, resilient mindset, coupled with a broad understanding of an organization and its values, culture, operations and strategy, are indispensable in this role.

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Enterprise Risk Assess crisis risks No one has a crystal ball that predicts what’s going to happen when. However, organizations can, and should, prepare for the “known unknowns,” such as a flood, data breach or a chemical spill. The job of the crisis team is to identify all significant internal and external risks and then prioritize them based on: ◉◉ Their likelihood to cause a crisis; ◉◉ The level of threat each crisis would present to the organization’s ability to fulfill its strategic goals.

Here’s an example of a basic three-level crisis hierarchy: ◉◉ Level I – does not threaten the organization’s strategic goals; should be handled by the crisis team. ◉◉ Level 2 – poses a risk to the organization’s ability to achieve its strategic objectives; should be handled by the crisis team with senior leadership support. ◉◉ Level 3 – will likely result in severe operational and reputational damage directly threatening the ability of the organization to fulfill its mission; response should be led by senior leadership in close consultation with the crisis team.

Develop a crisis management plan Each of the crisis levels above require step-by-step response procedures. How did the organization and others in the industry handle similar incidents before?

What worked well? What didn’t? Answers to these questions will help develop realistic, easy-to-follow response plans.

Ideally, these documents contain few words, but many templates, checklists and samples. Below are some key elements of the crisis management plan: ◉◉ Brief introduction and guiding principles ◉◉ Roles, responsibilities, emergency contact information ◉◉ Crisis level definitions and classifications ◉◉ Scenarios and step-by-step response procedures, including escalation and notification ◉◉ Samples of media holding statements and key stakeholder communications

Set up your crisis communication channels Being able to communicate using the

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Regular exercises, simulations, and media training will help spot gaps in the crisis plan. right channels is essential to responding quickly when disaster strikes. This means organizations need to understand the communications channels most frequently used by their stakeholders, and have their own presence on these channels established in advance. Setting up your company’s Twitter handle (with no followers) on the day that the world is criticizing you on Twitter isn’t likely to be effective.

Airlines as an industry have learned to do this well. Following an accident, they issue updates quickly, stating on their social media, among other channels, that it either happened or they are investigating.

If there’s a risk of a serious crisis, a socalled ‘dark site’ – a landing page or microsite pre-populated with pre-approved responses to a predictable crisis – is a helpful addition to the communications mix. Similarly, establishing a blog and attracting followers during good times provides an efficient mechanism for telling your side of the story to a large audience during bad times.

Media-train spokespeople Who can forget the tone-deaf line from BP’s former CEO Tony Hayward during the Deepwater Horizon spill: “There’s no one who wants this thing over more than I do.

You know, I’d like my life back”?

Prime Minister Silvio Berlusconi’s response in the aftermath of the 2009 earthquake in Italy that killed over 300 people and left many more homeless is another example of an insensitive remark.

Berlusconi asked survivors to consider themselves on a camping weekend: “Go to the beach,” he said. “Take a short vacation.”

Perception is reality, and if leaders can’t handle the news during a crisis, the perception will be that they can’t handle the crisis itself. It’s not enough to do the right thing and be closely familiar

with the issue. Crisis leaders should also communicate about it with sensitivity, compassion, and accountability, especially when speaking with those who may have suffered. Maple Leaf Foods CEO Michael McCain won accolades for his frequent updates during the company’s listeriosis crisis, particularly when he famously said, “There are two voices I’m not listening to right now: lawyers and accountants.”

The ability to handle the news needs to be tested and refined in the media room.

Stress-test your crisis plan Regular exercises, simulations, and media training will help spot gaps in the crisis plan. Is it still relevant and up-to-date? Do members of the crisis team have enough authority and expertise to find solutions?

Are they able to contact each other day and night? Does their communication demonstrate transparency and accountability? Do they function well under uncertainty and stress? These are examples of what organizations should address, updating their crisis plan – a living and breathing document – at least once a year to make sure they are prepared.

Prepare to lead An ounce of prevention is worth a pound of cure. A word of caution though. A pre-established plan is indispensable in guiding faster, better decisions when there is no time to prepare. Yet, it won’t tell crisis leaders what’s right, what’s important and what exactly to do in each unique emergency situation. To make sense of it all, they need to apply their aspirational goals and values to see the light at the end of the tunnel and lead the organization there to emerge from the crisis stronger than before.

Natalia Smalyuk is a 15-year media and communications veteran, and a vice-president of the corporate & financial practice at Environics Communications. With 235+ awards for client work, over 120 staff in Canada and the United States and annual fee income of more than $15 million, Environics Communications offers modern communications solutions for the trust marketing era. You can reach Natalia at nsmalyuk@environicspr.com.

Winter 2015

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RegulatoryRisk Enterprise news

Shining Light on the Dark Web Prevent the growing cyber risks for your company

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Winter 2015

Enterprise Risk

By Sandy Bird

H

ackers are some of today’s most sophisticated criminals. Organized cybercrime is now named one of the most profitable types of crime, even surpassing home burglaries and bank robberies. To put this in perspective, the average total organizational cost adds up to $5.32 million, according to this year’s Ponemon Institute’s ‘Cost of Data Breach’ study in Canada. The same study indicates the average cost of $250 per compromised record.

It’s extremely critical for companies, specifically leaders, to grip these figures and recognize the very real and tangible impact cybercrime has on a company – often with profound and irreparable damages.

Just look at some of the most highprofile data breaches this year alone.

Take for instance, the Ashley Madison scandal, which torpedoed across the world because of a single data breach. Since its leak of personal information, the online dating service lost its founder and chief executive, and was hit with a $760 million class-action lawsuit in August.

But aside from being one of the most notorious breaches of the year, this scandal shines light on what, chances are, only a few people are aware of in the cyber space: the ‘Dark Web’.

What lies behind the Dark Web According to reports, hackers responsible for the Ashley Madison breach used the Dark Web to dump personal data held within the company and launch the attack. Unfortunately, this wasn’t the first time a breach took place within the hidden network.

The Onion Router (Tor for short) is a network that connects directly to the Dark Web, and enables anonymous communications by letting users jump through relay nodes via multiple internet protocol (IP) addresses.

This anonymous communication is incredibly useful for worthy causes such as journalists uncovering stories, government officials exchanging

Winter 2015

intelligence, or law enforcement trying to track predators. However, it also allows stealthy hackers looking to strategize openly on a cyberattack, sell malware viruses, or even recruit other hackers.

The ‘3Q 2015 IBM X-Force Threat Intelligence Quarterly Report’ verified the growing dangers of cyberattacks originating from the Dark Web through the use of the Tor network/browser. The report found that until August 2015, more than 600,000 malicious events originated from Tor around the world. The United States led with more than 150,000 malicious events, while countries including Romania, France, and Luxembourg, have each seen more than 50,000 malicious events originating from Tor. Strangely, employees can be one of the main causes to this problem. For example, individuals may be tempted to download the Tor browser to find out what they can discover on the Dark Web – even for nonmalicious reasons. But, if an employee activates a Tor browser on an enterprise network, it not only puts the company at risk for a malicious attack that can compromise confidential data, but in some instances the organization can be held legally liable for data or illicit or malicious content that comes through that Tor node.

The rise of Tor represents a troubling problem for companies. That’s why it’s best to begin strengthening the company’s defense as soon as possible. In order to avoid potential threats and liability concerns, organizations should: 1. Outline the acceptable use of networks such as Tor in their corporate policy If the company requires the use of Tor-like networks, such as journalists and law enforcement, ensure there is a corporate policy in place so all employees requiring this platform understand how and when they can access these networks. Limited approvals for the use of Tor can also lower the risk of cyber threats.

2. Deny access to anonymous proxies or anonymization services such as Tor Very few industries actually require

access to the Dark Web. Therefore, most companies should look to configure their corporate networks so that access to Tor will be denied.

3. Educate employees about the potential consequences of accessing prohibited websites It’s important all employees understand how accessing a hidden network on a corporate device may harm the company. By educating them, employees are less likely to put their company and their role at risk.

The Ashley Madison scandal is one of many hacks shedding light on how critical it is for businesses to protect themselves against dangers found in the Dark Web. In the past, the Dark Web has been associated with classified media websites and illegal marketplace operations. Hackers are becoming more and more sophisticated, capitalizing on new communication channels and coordinating planned attacks together.

Enterprises need to seriously consider re-evaluating their strategic agenda to survive in today’s digitally-driven landscape. These tips, on top of leveraging security intelligence and cognitive technologies, will be key to safeguarding sensitive information and avoiding burdening security costs.

As cyber threats grow quickly, with various tools such as the Dark Web, leaders need to address these challenges by implementing the finest security measures for their company.

Sandy Bird, IBM Fellow, CTO Security Systems Division was the co-founder and CTO of Q1 Labs, now part of IBM. Today, he’s the CTO for IBM Security and is responsible for the company’s strategic technology direction. Sandy has extensive technology experience specializing in database design and development for web applications.

Prior to IBM and Q1 Labs, he held a variety of technical positions at the University of New Brunswick in support, development and administration. Sandy studied Electrical Engineering at the University of New Brunswick and was named an IBM Fellow in 2014.

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Enterprise Risk

Divergence Between the U.S. and Canadian Economies: What It Could Mean for Treasurers

By John Landry

A

s Canadian treasurers work to navigate the choppy waters in today’s economy, their outlook and plans are defined by many variables from the core strength of their firm’s finances, to risk tolerance, and the desire to pursue growth opportunities. One important external variable that is not easily understood is the play between the Canadian and U.S. economies.

Underlying economic activity and outlook are core considerations for Canadian treasurers.

But an additional lens can be applied which influences the resources available to the corporate treasury as well as the tools treasurers might use to achieve their goals. That lens is the potential for economic divergence between Canada and the United States. With ~75% of Canadian exports bound for the US in 2014 according to Export Development Canada, relativity, rather than absolute economic measures, may be the most important to a treasurer.

Currently, there is no clear consensus on Canada’s economic prospects relative to those of the U.S. One scenario sees the U.S. and Canadian economies diverging across a number of measures, particularly GDP, inflation, and manufacturing input costs. The magnitude and type of that divergence will determine the impact of the suggested considerations below.

“The outlook for the Canadian economy remains poor given a variety of externally and domestically focused downside risks,” says Dana Peterson, an economist with Citi Research in New York. “We look for the economy to expand in a range of ¾-1 ¾ per cent year-on-year over the

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next few years instead of a range of 1-2 per cent.”

This outlook differs to the U.S., where a recent employment report “reestablished that the labor market is improving on a trend basis and takes the Federal Reserve (“the Fed”) a giant step closer to the first rate hike,” says Peterson.

Trying to navigate relative economic factors, while in the dark on exactly what the future will hold, is a challenge. However, by undertaking an analysis of a treasurer’s organization, it is possible to determine where specific challenges and opportunities lie. Whether the U.S. economy outpaces the Canadian economy on its continued growth trajectory, or if both economies grow or contract with differing slopes, the strategy for being prepared is the same.

The dynamics at play Core Revenues & Expenses

A relatively accelerating U.S. economy should be broadly positive for Canadian companies.

Certainly there are exceptions, but the majority of Canadian manufacturing and services companies will see a marginal improvement from increased demand driven by U.S. growth.

For many Canadian treasurers, an improving U.S. economy will likely mean an enhancement in revenues through increased demand, directly or indirectly. However this is not the whole story. An acceleration in the U.S. economy may see a continued relative devaluation in the Canadian dollar. That again may accelerate revenues to a Canadian exporter supporting a rosy outlook for those companies. Despite the debate about whether the weaker Canadian dollar (CAD) has had the expected positive impact on exporters in 2015, most economic models predict a benefit.

Winter 2015

Enterprise Risk

Treasurers also need to anticipate the same impacts to their cost of inputs. As Canadian firms source almost half of their raw and intermediate materials from the U.S., a rising U.S. dollar (USD) will also increase their costs, and put pressure on profit margins. The balance between potentially enhanced revenues and a firm’s exposure to a stronger U.S. dollar can be complex, but it is important to understand.

The same pressures apply all the way down companies’ supply chains.

Suppliers are often a homogenous group, and the viability of important partners may be highlighted by a challenging economic environment. Partners’ U.S. vs Canada sales, revenue, working capital and expense mix may differ to your firm’s, making it even more important to understand your supply chain’s financial health in relatively challenging economic times. The same thorough understanding should be applied to a firm’s client base.

Interest Rates

The impact of a potentially widening currency valuation is linked to a potential widening of interest rates between the U.S. and Canada. It is important to understand how one drives the other and to anticipate the stresses or opportunities that might bring about. The Fed raising rates may further strengthen the USD relative to the CAD. The widening of the measures in Canada vs the U.S. is most important to this part of the discussion. The dynamics surrounding currency valuations on both sides of the border will likely impact customers’ and companies’ supply chains and both merit consideration when planning and executing treasury functions.

What can be done?

These unique and dynamic variables suggest a call to action, specifically regarding the possibility the U.S. and Canadian economies do in fact diverge. Without a crystal ball, some thoughtfulness and detailed planning for this possibility is merited. There are specific tools within the treasurer’s tactical scope separate from a firm’s fundamental capitalization and debt

Winter 2015

Understand Core USD/CAD Revenue and Expense Volatility • What proportion of your sales are directly or indirectly into the U.S.?

• What are your currency payment terms for those U.S. sales? Can you designate USD or CAD? • How much of your inputs are directly or indirectly linked to the U.S.?

Planning for Interest Rate Divergence • Can you easily divert excess funds to USD and CAD investments?

Can you readily switch between the two?

• If your working capital plan depends on short-term borrowing, do you have access to both currencies? Can you readily switch between the two currencies?

• What are your currency payment terms for your suppliers? Can you designate CAD? Can your firm adjust those terms or switch your supplier mix?

• Do you have a currency hedging strategy and if so, does it contemplate those potential changing revenue/ expense mixes in this scenario?

structure that can help to build an understanding of a firm’s risks and opportunities in this diverging economic scenario.

Consider the questions in the above chart when undertaking this analysis.

The probability that the U.S. and Canadian economies grow or contract at differing rates is a likely scenario in 2016.

While there are additional considerations, hopefully this outline has provided some clarity on the dynamics at play and what

Banking Infrastructure

• Does your banking partner offer you ready access and transparency across USD, CAD and other currencies driving your firms’ revenues and expenses?

• Do you have a consolidated view of your cash forecasting across your currencies?

• Does your banking partner allow you direct access to payment initiation, investment booking and receivables reconciliation across currencies?

• Have you investigated cross-currency pooling, sweeping or target balancing to optimize your positions?

steps Canadian treasurers can take to prepare. In this situation as with all others, having a trusted banking partner who can bring experience, share trends and support your planning process with research, analysis and tools is an invaluable asset towards ensuring the calmest seas possible in today’s economic climate.

John Landry is the Head of Citi’s Treasury and Trade Solutions business in Canada.

CANADIAN TREASURER

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Trendwatch

China’s Bond Market Yields Opportunity for Foreign Investors

By Helen Wong

C

hina’s recent stock market and foreign exchange developments have drawn the attention away from a major development in another part of the country’s capital markets: the further opening-up of the bond market to foreign investors.

In July, the People’s Bank of China announced that certain foreign institutions – including central banks, sovereign wealth funds and international financial institutions – would have open access to the interbank debt market, where the vast majority of China’s government and corporate bonds are traded.

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This is China’s latest measure to integrate its insulated capital markets into the global financial system. Currently, foreign investors have only a handful of channels through which to access China’s domestic bond and stock markets.

Two such channels are the Qualified Foreign Institutional Investor (QFII) scheme and its renminbi cousin, RQFII. These two cross-border investment vehicles allow approved foreign fund management and securities companies to invest in onshore Mainland securities. Canada is a recent RQFII participant, having been granted an investment quota of RMB50 billion at the end of last year.

Winter 2015

Trendwatch

The influence of market forces Despite such schemes, China’s capital markets remain largely isolated from the rest of the world. At the end of 2013, foreign ownership via QFII and RQFII of China’s stock market, measured by market capitalization, was only 1.5 per cent.1 Likewise, foreign investors held just 2.4 per cent of domestic government bonds in China – one of the lowest percentages among emerging markets.2 China has made clear it wants market forces to play a more decisive role in the allocation of capital, and that it wants its financial markets to become more efficient and competitive.

For years, bank lending has fueled China’s rapid economic growth.

Banks are by far the biggest source of financing, accounting for much larger share than in the US and Japan, as well as in other emerging markets that are at a comparable stage of economic development.

Now that China’s economy has entered a state of new normal, the need for deeper and more liquid capital markets has grown. Further developing its bond market will help support economic growth, improve the allocation of capital, and bring down borrowing costs for corporations and governments.

Measures of growth China’s bond market has come a long way.

The Bank of International Settlements calculates that at the end of the first quarter of 2015 the size of China’s bond market was about $5 trillion, trailing only the U.S. ($36 trillion) and Japan ($11 trillion). 3 But there is still ample room for development.

First, although it has doubled in size in just five years, it is still small compared to the size of the Chinese and the world economy Although China’s economy accounts for 12 per cent of global GDP, its outstanding bonds amount to only 5.1 per cent of the world total.4 Second, issuance is dominated by government, rather than corporate bonds.

China is home to Asia’s second-largest corporate bond market, but corporate bonds account for only about 25 per cent of total bonds outstanding – much less

Winter 2015

By welcoming more foreign investment, China will gradually increase the size and range of the investor base. than in developed markets and many other developing Asian nations.5 Third, maturity is tilted towards the short-term rather than the long-term. 40 per cent of bonds outstanding in China mature in less than three years,6 and nearly 40 per cent of new issuance is of bonds with a maturity under one year.7 This is in stark contrast to other markets, where long-duration bonds make up the bulk of the market.

Lastly, according to data compiled by the Fung Global Institute, the liquidity of China’s government bonds is well below that of U.S. Treasuries and Japanese government bonds.8 China understands the need for – and the benefits of – a more developed bond market, and the July announcement represents an important step in the process.

Benefits in diversity For China, a deeper, more diverse bond market brings multiple benefits.

By welcoming more foreign investment, China will gradually increase the size and range of the investor base. More foreign inflows could generate a new source of funding for Chinese borrowers and prompt more Chinese companies to issue bonds at home.

At the same time, a more dynamic bond market will help lessen China’s reliance on bank lending, and free up Chinese banks to extend more lending to small and medium-sized enterprises. Although this sector is key to China’s growth and rebalancing, SMEs currently often find it harder than big corporations to obtain funding.

Finally, nurturing the development of the bond market supports China’s

ambition to see the renminbi join the U.S. dollar, the euro, the Japanese yen and the British pound in the International Monetary Fund’s Special Drawing Rights basket – effectively attaining reserve currency status.

It is a matter of when – not if – the renminbi will be included in the SDR basket, but a more robust debt market is a necessary step along the path to SDR membership.

Meanwhile, for foreign investors – including those in Canada – access to China’s domestic bond market will open up another channel to buy into the continued growth story of the world’s second-largest economy. It will also allow them to diversify their investments into a geography that brings higher yields than are currently available in markets such as Germany, Japan, or the United States.

Foreign central banks have already begun to diversify their currency reserves into renminbi-denominated assets.

According to most recent data from the PBOC, central banks held about $107.5 billion of their official reserves in renminbi.9 China’s stock markets tend to grab the limelight, but the development of the country’s bond market is no less significant to its financial market reform.

For China, opening the doors to more foreign participation is an essential element of a more mature debt market.

For foreign investors, it is another door to the China story.

Helen Wong is Chief Executive, Greater China, The Hongkong and Shanghai Banking Corporation Limited 1 HSBC Global Research 2 http://www.wsj.com/articles/china-welcomes-foreignbond-investors-1432226479 3 The rise of the redback III 4 The rise of the redback III 5 The rise of the redback III 6 http://www.wsj.com/articles/why-investorsshy-away-from-chinas-6-4-trillion-bondmarket-1437593482 7 http://chicagobooth.edu/capideas/magazine/ fall-2015/chinas-challenge-how-to-strengthen-thefinancial-system 8 http://www.wsj.com/articles/why-investorsshy-away-from-chinas-6-4-trillion-bondmarket-1437593482 9 http://www.wsj.com/articles/china-to-allow-wideraccess-to-bond-market-1436889468

CANADIAN TREASURER

15

Governance

Upping Their Game Transforming the finance department will create more time for CFOs to act as their organization’s forecasters, financial strategists, and chief economists.

By Steve McCaughey and Michael Goodfellow

L

ast summer, oil was close to $100 per barrel, where it had hovered since the 2008 financial crisis and was widely expected to remain. Just a few months later, however, it had dropped to $45 per barrel – a ‘black swan’ event, something completely unexpected and virtually impossible to predict.

Organizations can’t control the occurrence of black swan events, but they must be able to assess their impact and respond to them, usually in a very short timeframe.

Although Finance is known for its historical cost and control focus, it also has a role in helping the organization anticipate and quickly develop different financial and marketplace scenarios that portray the impact of changes on the organization and its stakeholders, and then determine an appropriate strategic and operational response. That’s not an easy task.

Forecasting is difficult in stable environments where changes are gradual and predictable.

In today’s globally-interconnected world where dramatic and unexpected changes are now normal, effective forecasting is both a greater challenge and a greater necessity if the organization is to operate effectively.

Consider, for example, the wider impact low oil prices may have, given the connections and interdependences of many economic and

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strategic variables. The sudden drop in oil prices was quickly followed by a pullback on capital project spending and a drop in the value of the Canadian dollar. Since then, interest rates that were already artificially low have dropped further, likely taking the dollar with them. How might that affect ballooning Canadian housing prices and growing household debt levels? Will lower interest rates lead to a spike in consumer spending? And would these be temporary, cyclical or longer-term structural changes that transform the economy and industries?

CFOs know they should be able to answer questions such as these and provide senior management and the board with meaningful and current operational and strategic analyses.

A recent Deloitte survey found that 85 per cent of CFOs believe they should partner with their c-suite colleagues to help shape and define the organization’s strategic direction and translate that into operational plans, including developing scenarios based on different capital allocation decisions, return on investment implications and various cost of capital models.

However, that’s something few CFOs actually do. Some may lack the required competencies, but most simply don’t have the time: just 17 per cent of survey respondents felt they have sufficient time for strategic activities.

Winter 2015

Governance Bogged down So where do CFOs and their finance teams spend their time instead?

Many are bogged down with fragmented systems environments. The Deloitte survey found that 51 per cent of respondents still use manual processes and have no automated capabilities.

Another 27 per cent operate with either obsolete or fragmented systems.

Many rely on ‘bolt on’ transactional reporting systems that require inefficient workarounds. Almost three-quarters still rely on spreadsheets to prepare budgets.

Many CFOs also deal with an inefficient and labour intensive financial close process and extended reporting process.

Because the process isn’t streamlined, quarterly reporting is a treadmill that Finance can’t get off. Once one period’s reports are completed, Finance must almost immediately begin working on the next period’s reports. Almost all of its time is spent just pulling together information from across the organization, rarely leaving time to analyze and prioritize that information. Instead, Finance generates ever larger reports, leaving it to users to sort through the data to find the information most relevant to their needs.

A brighter future While the current picture of Finance is bleak, the future likely won’t be as grim.

After decades of implementing performance enhancing technologies in every other part of the organization, cloud technologies now offer a cost effective way to upgrade Finance, and organizations are jumping at the opportunity. A Deloitte survey found that 14 per cent already use cloud technologies, 34 per cent are currently transitioning to the cloud, and a further 24 per cent are in the planning stages or are implementing pilot projects.

To support its move to the cloud, Finance will need a plan for transitioning from manual to automated processes, a key consideration of which will be to develop integrated approaches that improve efficiency, avoid duplications of effort, create team alignment, and replace ad hoc approaches with standardized, documented procedures.

Finance will also need to streamline reporting. Highly integrated systems

Winter 2015

that are seamlessly linked across the organization will make it easier and faster to gather information about all aspects of the organization, freeing up time to analyze that data and provide more focused reports that provide clear insights into operations, cash flows, and the financial condition of the business. To achieve this, most organizations will need to more clearly define “performance” and then identify the most relevant KPIs to measure that performance in real time.

Finance will also need a talent strategy.

People will need to transition from their current roles and responsibilities to new ones that are aligned with Finance’s future role and objectives. When investing in talent, organizations will need to critically assess Finance’s current structure and talent, determine the required training and development for current team members, and identify where new talent and expertise needs to be recruited.

Transforming Finance will be a complex, longer-term process in which multiple activities will need to be carefully coordinated and undertaken in appropriate timeframes. Finance will need to work in partnership with others to minimize the disruptions that will occur during the transition so there should, therefore, be a comprehensive change management plan to manage all of these activities.

One of the biggest challenges during the transformation will be ensuring that Finance does not lose sight of the needs of its customers, including the board, audit committee, other members of management and Finance itself.

Finance, therefore, cannot lose control of its traditional financial reporting responsibilities during the transition, since they provide the foundation of the CFO’s credibility and the value Finance brings to the organization.

to treasury transfers, journals, capital expenditures and the close cycle – will be managed centrally in shared services centres. Think of them as “finance factories” that handle core finance processes and connect to finance centres of excellence and outsourcing partners in a hub-and-spoke model.

Another big change: the close process will be continuous, if not yet in real-time.

A daily soft close will be the norm, made possible by visual close management tools, integrated sub-ledgers, daily time capture, journal workflows, reconciliation tools, as well as the automation of consolidation, foreign exchange, allocation and intercompany transfers.

Not surprisingly, with operational processes automated and integrated, the role of the CFO will also have changed. CFOs will be able to devote greater attention to delivering datadriven insights that enable them and their c-suite colleagues to make smarter decisions. Using integrated planning models and sophisticated analytics tools, Finance will be able to undertake rapid, scenario-based planning, cost modeling and risk simulations with forecasting cycles shortened to the point where same-day turnaround will be the norm. And many CFOs will serve as their organization’s chief economist, scanning the wider landscape to monitor larger macroeconomic events and interpret what they could mean to the business.

Steve McCaughey is a Consulting Partner in Deloitte’s Finance & Performance Management Consulting practice. With more than 20 years consulting to some of the largest Finance organizations in North America, South America, Japan and Europe, Steve delivers large scale finance transformation projects including finance strategy, process design, systems implementation, organization design and performance management.

A new face for finance The result of this effort will be a radically different Finance five years from now.

In 2020, employees will use cloudbased apps on mobile devices to transact their business, and highly standardized, simplified workflow-enabled business processes to handle the rest.

Day-to-day transactional finance – from payables, receivables and invoices

Michael Goodfellow is a Partner in Deloitte’s Audit and Advisory practice. With more than 17 years of experience in financial transformation and technology, Michael works with clients on strategic constructive solutions and delivers projects including finance strategy, process design, systems advisory, organization design and performance management.

CANADIAN TREASURER

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Winter 2015

2016

ISSUES & EDITORIAL THEMES Issue  Q1 2016 Planning, Budgeting, and Forecasting

With today’s networked economy, planning, budgeting, and forecasting are challenged with an increasing need to integrate. This issue looks at best practices, applications, processes and trends for streamlining and optimizing those cycles. EDITORIAL DEADLINE: February 19th

Issue  Q2 2016 Growth, Transition, and Monetizing the Business Plan

Good investor and stakeholder relationships are the key to a sustainable enterprise. We look at the various aspects of stakeholder relations and discuss best practices for effective stakeholder management. EDITORIAL DEADLINE: May 27th

Issue  Q3 2016 Total Finance: A Wholistic Approach

Today, the role of finance has a wholistic perspective. We look at the all-encompassing and overarching role of the CFO and finance and their impact on corporate strategy.

EDITORIAL DEADLINE: August 19th

Issue  Q4 2016 Managing and Mitigating Enterprise Risk

A look at identifying and evaluating risk (financial, operational, reporting, compliance, governance, strategic, reputational, etc.), priortizing and managing exposure, and the processes for managing it. EDITORIAL DEADLINE: October 21st

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Regulatory

Bill 198:

Navigating an Uncertain Landscape Amid court decisions – and reversals – what’s a corporation to do?

By Cameron Rose

A

decade has passed since the passage of Bill 198, but the full impact on public corporations remains uncertain. Legal interpretation of the bill and its provincial equivalents is still unfolding, with some recent rulings favouring the plaintiffs…and others, the defendants. What is clear, however, is that defending claims can be a complex endeavor that demands highly specialized knowledge.

How can corporations bring some certainty to this still-evolving legal landscape?

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Designed to protect investors, Bill 198 holds public companies, investment funds and other issuers – as well as their directors and some officers, influencers and experts – liable for providing continuous corporate disclosure in the secondary investment market.

When the bill was introduced, a few Statutory Secondary Market or Bill 198 cases trickled in, and by 2008 litigation had reached a steady pace. According to NERA Economic Consulting, in 2014, 11 securities class actions were filed in Canada, 10 of which were Bill 198 claims. Since 2005, 64 of the 98 securities class actions filed have been Bill 198 claims. Roughly half of U.S.

Winter 2015

Regulatory

filings against Canadian companies have a corresponding claim in Canada. As of year-end 2014, 22 statutory secondary market cases had been settled, and the average settlement was $8.7 million.

Behind those numbers lies a great deal of complexity.

Defending a Bill 198 claim requires not only quality of expertise, but also quantity of resources. It’s entirely possible in large complex cases to have more than 30 different legal professionals involved from a single firm and up to six law firms working on a single case. Frequently, two to three firms can support a defendant, but more complex or multi-jurisdictional cases may have an even higher number.

Adding to the costs, law firm annual hourly rates have risen significantly over the past decade. Average hourly rates have increased at all levels of the organization, ranging from senior partner to associate.

Because specialized knowledge is critical to these complex areas of litigation, and claims frequency is elevated, costs will likely continue to rise.

Defining the leave threshold On the legal front, the courts are setting ground rules for securities class actions, but the implications for public companies are mixed. In order to proceed with a Bill 198 claim, a plaintiff class (as these matters have, for the most part, proceeded as class actions) must get leave of the court. The leave motions are generally heard in concert with the certification hearing.

Thus far, there have been numerous cases in which leave to proceed has been granted and there are conflicting decisions by the lower courts regarding whether common law claims for negligent misrepresentation can be certified as well, thus expanding the potential exposure corporations face.

In the good news column, the leave test for permitting secondary market class actions to move forward became more stringent. In April 2015, the Supreme Court dismissed a proposed class action against Theratechnologies Inc. of Montreal. In that decision, Justice Rosalie Silberman Abella noted that to demonstrate a “reasonable chance of

Winter 2015

success,” one of the two criteria under the leave test, a claimant must provide “a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.” This decision has been heralded as providing a more robust test under the Quebec Securities Act. Looking ahead, we await the decision of the Supreme Court of Canada in a series of lower court cases referred to as the “Trilogy” (Green v. CIBC, Silver v. Imax and Millwrights v. Celestica) which will examine the similar leave test under the Ontario Securities Act. The outcome of the Supreme Court’s decision on these cases should bring greater clarity to the leave test.

Reducing the risks Fortunately, corporations have powerful tools at their disposal to help reduce the risk of a class action suit. Good governance can go a long way toward safeguarding both corporations and their shareholders. For instance: Due diligence. Directors are required by law to exercise the care of a “reasonably prudent person” regardless of the director’s qualifications. Directors and officers help demonstrate due diligence by possessing a deep knowledge of the company’s operations, strategy, and financial situation.

It’s important for board members to understand the role of the board versus the role of management in strategic planning. Some boards take a more active role in strategy development than others.

Questions are an important part of this process. What are the risks involved in the company’s direction? Is the strategic plan rigorously thought out? Are any changes advisable?

Similar questions are vital in the event of a takeover proposal. What are the company’s current and future prospects, as well as the risks and rewards associated with a takeover? Engaging knowledgeable professionals, including investment bankers and lawyers, is key to assessing potential consequences of the transaction and of directors’ decisions, as well as helping to ensure compliance with the directors’ fiduciary duties. Decisionmaking processes should be both rigorous

and well documented.

Communicate, communicate, communicate. Communication needs extend beyond the formal disclosures required by Bill 198. The media is full of cautionary tales about the need for a crisis communications plan that details the contact people and processes involved in the event of a lawsuit (as well as other crises). Communications teams should include corporate employees, legal counsel, and public relations professionals who are well versed in crisis communications. Consistent, proactive messaging is critical.

Transfer the risk. With claims potentially running into the millions or tens of millions, directors and officers (D&O) insurance can be a valuable addition to the claim management process. A knowledgeable carrier will provide guidance and support on topics such as appropriate legal staffing, hourly rates and strategy for a claim.

When you’re evaluating your insurance options, consider questions such as the following: ◉◉ How many securities class actions has the carrier settled in the past few years, and how much was paid out in settlement? ◉◉ How long has the carrier handled D&O claims in Canada? How much experience does the company have handling crossborder claims? ◉◉ How will a claim be handled in the event of a securities class-action suit? ◉◉ How will the policy respond to other types of claims? ◉◉ Will directors’ and officers’ personal assets be covered? ◉◉ What type of protection is included if the company undergoes a merger?

The courts will continue to clarify the impacts of Bill 198, but corporations need not wait to reduce the uncertainty.

A disciplined approach to managing and transferring risks can go a long way toward protecting the bottom line.

Cameron Rose, a senior vice-president, Canadian zone underwriting officer, Chubb Specialty Insurance for Chubb Insurance Company of Canada in Toronto, can be reached at crose@chubb.com.

CANADIAN TREASURER

21

your Team

Five Steps to Integrate Coaching into your Talent Management Strategy

By Renée Robertson

C

oaching means many things to many people. Many times a certain technique that is referred to as ‘coaching’, isn’t really coaching at all; it’s actually counseling or feedback. For example, you may have heard or had this happen to you – a manager will say, “Let me give you some coaching around ABC,” and they proceed to explain to an employee why the employee failed to accomplish a task.

The manager then explains the way ABC needs to be done. More times than not, the recipient of this so-called ‘coaching’ walks away disillusioned by what they think was a coaching experience and perhaps, deflated and unmotivated. As a result, coaching can get a bad rap and employees may begin to disengage.

Now more than ever, there is a great opportunity to bring coaching into organizations. Why not integrate coaching into your talent management strategy, not only to increase employee engagement, but to achieve other talent development goals such as developing certain competencies like problem-solving, strategic thinking or filling your talent pipeline with ready-now talent for upward or lateral assignments?

In order to integrate coaching into your talent management strategy, the following five steps should be taken: 1. Educate your leaders: Start at the top and educate your executives on the differences and benefits of coaching versus counseling. Interview them on their perspectives on coaching and assess their willingness to participate and support a coaching initiative.

Explain the benefits of coaching and ask them where they see applications for coaching inside their organizations.

2. Identify coaches, participants and executive sponsors: Look for individuals and managers that can become trained

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to be internal coaches inside your company. Consider having talent management or Human Resources executives trained and credentialed by the International Coach Federation as professional coaches. As a result, they will be in an excellent position to coach executives in the company.

Alternatively, you may choose to utilize external coaches. If so, you can submit a request via the International Coach Federation Coach Referral Service website or ask colleagues for recommendations.

Simultaneously, you will want to identify candidates to participate in the coaching program. Therefore, review your succession planning and consider top talent managers, directors and executives. Participants should be excited to be part of the program and willing to make a commitment. Just as important as identifying the coaches and participants is to make certain that you have executive sponsorship.

Determine which executives would like to sponsor the program and be a participant. Request that they support you in your coach and participant identification, marketing efforts, during participant enrollment and throughout the program’s life cycle.

3. Manage expectations: Be sure to clearly set expectations with your internal coaches, individuals being coached, the executive sponsors and, of course, your managers and colleagues. It is best to run the initial program as a pilot and build upon its success. Make certain everyone is clear on the goals of the program, time commitment and their roles and responsibilities.

4. Train: Enroll your internal coach candidates in a coach-training program that is designed to train individuals that work inside companies as a coach. If you choose to enroll internal employees to become coaches, ensure they’re being coached by a coach

with experience coaching internal coaches. In addition, be sure to train the individuals who are to be coached on the role and responsibilities of the participant. While training your coaches, be sure to establish a clear and consistent process for enrolling clients, coaching time and exiting clients. The key here is to ensure that everyone participating has a similar experience.

5. Measure success: Prior to starting the program, determine how you will measure its success. It doesn’t have to be a rigorous measurement such as ROI. If your program is embraced and utilized (coaching clients show up and participate in the coaching), then that’s a great sign. Interviewing them or surveying them on the benefits they received is also an excellent idea. In addition, be sure to ask the managers of the program’s participants about the changes they may have noticed in their employee’s behaviors after being coached.

In a time where we’re surrounded by change and have so many demands on our personal and professional lives, the need for coaching is at an all-time high.

Coaching is a model for engagement, empowerment and accountability.

It teaches those being coached to be responsible and to “own” their results.

By engaging in coaching, you’re making a decision to replace mediocrity with high-performance. So let’s ask ourselves, who and what company doesn’t want full engagement and high-performance?

Renée Robertson is a two-time International Coach Federation Prism Award Winner for Internal Coaching, in addition to being the CEO of Trilogy Development. She shares her insights and first-hand experience in her new book, The Coaching Solution: How to Drive Talent Development, Organizational Change and Business Results. To learn more, visit www.trilogydevelopment.com.

Winter 2015

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