Treasurersalliancenov2013lr

Treasurer’s alliance

By Global Executive Forums, LLC

|

WINTER 2013

Eric Ball

Senior VP & Treasurer, Oracle pg 3

The Developing Normal For Treasury: Moving from Visibility to Dimensional Risk Visualization

pg 4

Editor’s Introduction pg 2 Treasurer’s Alliance – Get Involved pg 13 Changes at the Top pg 14 Opportunities + Executive Talent in Finance pg 15

www.globalexecutiveforums.com

T R EA S U R E R ’ S ALLIANCE W I N T ER

|

2 0 1 3

IN T H I S I S S U E

4

| Eric Ball

4

|

The Developing Normal For Treasury: Moving from Visibility to Dimensional Risk Visualization

10 |

Deutsche Bank Update of European Economic Picture

11 |

Pension Risk Management is a Trend in Full Swing

12 |

Financial Impact of Cyber Risks

13 | About the Treasurer’s Alliance – Get Involved!

14 |

2013 Turnover in Top Mega Cap Treasurers’ Positions Increases by 50% More Than in a Normal Year

15 |

Financial Executive Opportunity + Talent Exchange

16 |

SEC Proposal for Money Market Fund

Dear Treasurer’s Alliance Members and Friends,

T

ogether with your help, participation and input, we have created outstanding treasury groups. Both the small group size and the meeting format have delivered outstanding value to our participants, evidenced by the fact that new Treasurer’s Alliance groups are filled to capacity almost immediately after they are formed.

The Mega Cap Treasurer’s Alliance I is full and the Mega Cap Treasurer’s Alliance II is expected to be filled to capacity by the middle of 2014, with a combined market cap of the two groups ranging from 7 to 8 trillion.

We anticipate that 2014 will be a busy and exciting year with the first Mega Cap Treasurer’s Alliance Europe meeting in London in the fall and a number of regional Treasurer’s group meetings around the country, including the Midwest Treasurer’s Alliance, the Southwest Treasurer’s Alliance in Chicago and the West Treasurer’s Alliance in San Francisco. Focusing on the Fortune 1000 companies, our goal is to bring treasurers together to promote community, communication and innovative improvements in treasury practices.

The mission of Global Executive Forums is to connect people and mine the extensive knowledge and experience of these members in the most efficient way possible. In keeping with this objective, each issue of Treasurer’s Alliance will focus on one member treasurer and the innovative things he or she has accomplished in treasury operations. Other regular features will include relevant and interesting articles submitted by treasurers, finance executives and those who service treasury operations. We encourage anyone serving the treasury function to submit articles of interest for consideration. Our extensive network of treasury and finance executives, which is updated quarterly, is a valuable resource in the executive search and placement area relating to treasury and finance executives.

For information and postings, please review the Opportunity and Talent section on page 15. All postings are blind and information is kept in confidence until interviews reveal a good fit and both parties confirm their wish to meet.

If you are not a member of a Treasurer’s Alliance group or wish to add yourself or a colleague to the mailing list, learn more about joining or signing up on page 13. Help us continue to provide greater value to executives in finance. Your suggestions are warmly welcomed. Please email your thoughts to ronglobalexecutiveforums.com or patrick@globalexecutiveforums.com.

A special thanks to all Treasurer’s Alliance members and supporters who have played a significant role in helping to build groups and deliver value to finance executives everywhere. Your support and hard work are very appreciated.

Reform

Sincerely,

A publication of Global Executive Forums, LLC

2

|

WINTER 2013

RONALD C. TRACY Editor

Eric Ball Eric Ball, Senior VP & Treasurer, Oracle Diane Sage, Staff Writer

T

here’s no mystery as to why in 2011 Treasury & Risk Management named Eric Ball, senior VP

and treasurer of Oracle, one of the “Top 100 People In Finance.” Throughout his career, he has always been one to question conventional wisdom, making him a much sought after trendsetter in the field of finance.

For example, in 2005, within months of arriving at Oracle, Ball found himself issuing $5.75 billion in bonds to pay for Siebel, Oracle’s second largest acquisition. Oracle was the first cash-rich technology company to issue debt, establishing a record for the largest capital market transaction ever completed by a tech company at the time. That record was quickly broken one month later by Cisco and subsequently shattered by Apple this year when it borrowed over $17 billion in one day. Debt is now almost as commonplace in Silicon Valley tech companies as in traditional industries.

Oracle is one of many companies that generates strong global cash flow but borrows in the U.S. This is an artifact of the national corporate tax rates, which are generally higher than in other parts of the world and can make it prohibitively expensive to deploy cash earned overseas back into the U.S. Ball spends some of his time with the company’s government relations team, helping them educate legislators on this dynamic.

Both conventional wisdom and the finance books say that companies should match their assets with their liabilities. Oracle has taken a different tack, borrowing a lot of money at historically low interest rates, locking in low rates for the short and long term. Having access to extraordinarily inexpensive capital has enabled Oracle to fund over 100 acquisitions since Ball joined the company in 2005. In 2006, Ball hired Bruce Cochran from Cisco to manage debt issues, which now total over $30 billion in bonds, including the first Euro bond issuance in July 2013. As Ball puts it, “We are quite comfortable with long-term fixed rate debt and short-term floating rate assets.” continued on page 7

WINTER 2013

|

3

The Developing Normal For Treasury:

Moving from Visibility to Dimensional Risk Visualization Craig A. Jeffery Managing Partner Strategic Treasurer, LLC

C

orporate treasury groups have made great strides in recent years in gaining visibility to their bank balances. Now they’re increasingly trying to get more information on those balances along such dimensions as currency, country, counterparty, asset class and industry. And given the lessons learned during the financial crisis, leading treasuries are designing their technology stacks to allow them to perform rapid analyses of emerging risks.

When the global financial crisis began in 2008, many treasury groups scrambled to deal with a combination of events they hadn’t expected as Wall Street’s problems caused a freezing up of the debt markets. That experience left businesses with an increased understanding that risks are varied, they are unpredictable and they come in unexpected combinations.

The financial crisis also changed the amount of attention paid to risk, starting right from the top of the organization. Senior management and the audit committee of boards are far more aware of financial risk, and that translates into increased expectations of the treasurer. There are more meetings to discuss the company’s risk exposures and what treasury is doing to monitor and contain them. Increasingly, treasury is expected to help detect risks and prevent them from developing into catastrophes.

That risk focus elevates the importance of hav4

|

WINTER 2013

ing a clear view of the company’s cash. Prior to 2008, visibility was viewed as a nice thing to have, but its value was subject to debate. “What’s the value of being able to see all of our balances at all of our banks across the globe? Can you cost-justify each additional connection to the bank?”

Such questions have largely ceased. Organizations are now intent not only on achieving visibility but knowing their exposure to each bank, in each currency, in every country.

According to the annual Cash Forecasting Survey conducted by Strategic Treasurer and Bottomline Technologies, the number of companies with total visibility to their banks and the cash balances they hold at those banks surged from 40% in 2010 to just over 60% in 2011. The 2013 survey showed that more than two-thirds of companies now have that total visibility. That’s a monumental shift driven by this change in expectations and requirements, with every bank representing a point of exposure for the organization.

80%

“Organizations are now intent not only on achieving visibility but knowing their exposure to each bank, in each currency, in every country.”

Strategic Treasurer & Bottomline Technologies’ Visiblity & Cash Forecasting Survey, 2013

CASH VISIBILITY ACHIEVED

70% 60% 50%

2007 20–25% estimate 2010 40% 2011 60% 2012 60% including smaller firms 2013 70%

40% 30% 20% 10% 0% 2007

2010

2011

2012

2013

TECHNOLOGY INVESTMENT CHANGES EXPECTED 2012 vs 2013 treasury

Treasury and Payables

Neither

Payables

0%

10%

20%

30%

40%

50%

60%

There’s also a technology aspect. You can’t always buy a system that will model the next risk coming down the road. But you should have a technology stack—including your data, your connections to institutions, sources and systems, and the analytic and visualization layer that helps you assess risks—that allows you to analyze situations quickly.

That need to respond rapidly illustrates the difference between treasury and accounting.

In the accounting domain, when FASB or IFRS comes down with a new ruling, companies usually have multiple years to implement the change.

In the treasury world, changes have to be addressed very quickly. If Dexia is going bankrupt or there’s concern about the Euro debt crisis, treasury has to provide the CEO and the executive board with a quick analysis and a plan of what needs to be done. And it needs to provide those the same day. Treasury can’t say, “We’ll get back to you on our exposure on French banks,” and it can’t say, “We’ll need two weeks to put together a nice PowerPoint.” That kind of timeframe will not work in the treasury environment.

Treasury’s work has to be almost real time, and it has to be accurate.

mature and multi-faceted (i.e. multiple types and sources of ratings). The expansion of visibility is a clear and emergent trend.

In this environment of rapid changes, unpredictable events and unexpected combinations of events, people need to be prepared to analyze, to evaluate and to act. But how can organizations prepare for things that can’t be predicted? There are many ways. Organizations have a margin of capital and of capacity. They have flexible people who are nimble, able to evaluate, able to think on their feet and make good decisions.

Map Visualization of Risk Levels, Calibrated By Country Risk Ratings.

2013

2012

Strategic Treasurer & Bottomline Technologies’ Visiblity & Cash Forecasting Survey, 2013

Meanwhile, treasury departments’ spending on technology is increasing. In 2012, just 27% of the organizations surveyed by Strategic Treasurer and Bottomline said they planned to spend a significant amount over the next year on technology for treasury, payables or treasury, and payables. In 2013, this number jumped to 79% (organizations reporting they were making significant technology investments in these areas). There was almost a four-fold jump in organizations making investments just in treasury, from 11% in 2012 to 41% in 2013. Very few companies are not making a significant investment in one of the two areas.

What are your peers doing? Organizations that don’t have visibility into their cash are building that functionality out now. The others are focusing on achieving greater visibility and flexibility when it comes to assessing their risks. This includes achieving better visibility to foreign exchange exposure through their balance sheet, understanding country level risk, achieving insight into counterparties that are their banks, customers and suppliers. And, in addition to being able to see the level of exposure, firms are making progress in calibrating the level of risk that they have.

This, this calibration is already becoming more

With continued globalization and elevated turmoil, managing country level exposure is now seen as vital.

That’s a challenge if the treasury department doesn’t have systems in place to help it get the work done. If people go off of memory or plug stuff into Excel, they may find their exposures are different than they calculated. If treasury tries to formulate a plan based on incomplete information, it can create a lot of problems. The technology stack has to be flexible and capable WINTER 2013

|

5

of meeting the treasury department’s need for ad hoc analysis.

And more and more, treasury departments are turning to solutions that help them visualize the dimensions of risk, which could include their liquidity over the next six months, by month, or their exposure by bank, by country, or by bank by country, or by asset class or owner entity.

Risk visualization is important both for treasury and the rest of the organization. It’s vital that treasury staffers be able to understand and articulate the risk that the organization carries.

They must help executive management and the board understand the company’s exposures, how treasury is dealing with them and how this brings the organization’s level of risk into line with its risk appetite and what it is willing to absorb.

Over the last five years, I’ve had a number of treasurers complain about senior managers in the business units who are upset when their hedges lose money. “We paid for these hedges and they lost money,” executives say, and point out that when they buy insurance and don’t need to use it, they don’t take a loss. Instead of realizing that the purpose of the hedging activity was to bring the unit’s risks into line with its capacity for risk, some executives seem to focus on the financial outcome of the hedge.

For most companies, hedging is designed to reduce the volatility of their cash flow and income and help them maintain a competitive environment. But it’s easy for non-finance board members and managers to lose sight of that. To prevent this, treasury has to help them visualize the risks the company faces and what is being done about them. Treasury needs to remind senior management that there may be other risks, perhaps country-level risks or combinations of risks that they haven’t thought of, both in core treasury areas and nontraditional areas, like the company’s major customers and core suppliers.

But treasury departments face challenges in being able to provide real-time analysis and recommendations, starting with those legacy views on visibility, the mindset that says, “What’s the benefit of pulling all those accounts, even if they’re core accounts?”

Organizations must have visibility to their major exposures, the cash they have in their bank accounts. Asking about the cost benefit of such visibility is the equivalent of asking for a costbenefit analysis of reconciling bank accounts. It’s a necessary control. If it’s not worth having the visibility, you don’t need the accounts.

6

|

WINTER 2013

Turkey Political unrest and loss of confidence from foreign investors.

Syria War and unstable foreign investment.

Argentina Defaulting and slashed credit ratings.

Map visualization of risk levels, calibrated by country risk ratings.

“Asking about the cost benefit of such visibility is the equivalent of asking for a cost-benefit analysis of reconciling bank accounts. It’s a necessary control.

If it’s not worth having the visibility, you don’t need the accounts.”

EXPOSU

RE SUM

MARY

Visualizing Exposures and Risk across Various Dimensions.

Greece Austerity package and social unrest.

OUT

OF C

OMP

LIANCE

S

AIL DET

Monitoring Policy Compliance via Dashboarding Tools – Bank Account Policy Violation Example.

Strategic Treasurer’s DART System.

“Treasury can’t rely on technology vendors to provide them with a giant cube that takes nine months to spit out its first report. The technology has to be more dynamic.”

Technology is another challenge. Companies still have data stored in many separate systems.

They aspire to get all of their data into one giant monolithic ERP system or a single treasury management system, but there will always be new information and developments that aren’t contained in that single system. There’s always a need to manage across systems.

Data not only sits in different systems, it’s in different formats too. That means before it can be used, data must be aggregated and normalized. Pulling that together correctly is critical, particularly when it comes to sorting out the organization’s exposure to counterparties. If the company has bank accounts and bond holdings at Bank of America, but also has swap transactions with Merrill Lynch, it needs to understand those relationships properly and pull those together to calculate its total exposure to Bank of America Corp.

Treasury departments are tackling these challenges by using different data and risk visualization tools, as well as employing modern treasury management systems and treasury risk management systems to pull the data together and enable rapid reporting. They’re also using business intelligence and treasury dashboarding and analytic tools to map risk relationships, create models and help the organization visualize its exposures. Treasury departments can’t rely on business intelligence vendors to provide them with a giant cube that takes nine months to spit out its first report. The technology has to be more dynamic.

Leading organizations are looking at their systems in the light of new technology that’s available, and re-architecting their technology stacks to provide them with the self-service ability to perform rapid analysis and visualize their exposures and risks while addressing their current operational needs. The reasoning behind this shift is the increasing recognition of the level of risks faced by organizations and their need to be more resilient and highly flexible. n

WINTER 2013

|

7

eric ball, continued from page 3

Foreign currency is another area where Oracle has taken a different position than many companies.

According to Ball, a lot of treasurers spend quite a bit of time forecasting currency exposures and analyzing those exposures—how they can mitigate the impact of the currency exchange rate on their revenues. Ball says, “We are a global company exposed to a global basket of currency and we are not trying to hedge that. Our dollar denominated results will go up and down with currency movement and our investors understand that. Investors are making a global investment in us.”

If there is one word that describes Eric Ball, it is “strategic.”

According to Ball, too many treasurers and finance professionals buy into the world’s view of the finance function as being primarily “back office.” Ball believes that a key question is, “What drives the company’s success?” As Ball describes, “I happen to work in an era and area where engineering drives the company, as it should, but that doesn’t mean finance still can’t be strategic.” He challenges finance professionals to reject the world’s view of finance as just keeping the books, with a main objective of running the company as efficiently as possible with the lowest head count possible. He believes the role of the finance department can go beyond managing costs.

Ball points out that there are many areas where finance will always be tactical. A lot of finance professionals necessarily focus on processing and efficiency—things like closing the books and financial 8

|

WINTER 2013

reporting. However, there are also many ways the finance professional role can be strategic. “For example,” says Ball, “it can drive the capital structure, raise financing, enabling the company to be acquisitive. Capital structure and growth organically versus acquisition is a strategic decision and finance drives those decisions.”

Ball challenges finance professionals to ask themselves, “What part of my role is strategic and what part is tactical and what within my capabilities can I do to support the CEO strategically?” When taking on a new treasurer’s role, Ball suggests that one look historically at what the treasurer role has been. He challenges such individuals to then think about what the role could be and, if necessary, to have the courage to shift it to be more strategic.

Ball remarks that CEOs may not always know how finance can support the company’s strategic priorities. Part of the treasurer’s job is to understand the CEO’s priorities, then make the financial connections and recommendations to support him or her in achieving the company’s objectives and priorities.

Ball sees the treasurer’s role as that of an ambassador for the company. He points out that of all the roles in finance, the treasurer is the most externally focused, directing investor relations and talking to bankers and rating agencies. Ball says, “Because the treasurer spends a high percentage of his time externally, he or she must be aligned with the message the CEO wants conveyed.”

Ball is much more than a sophisticated quant. He is also a strong leader who places a high value on soft skills. In addition to managing Oracle’s debt, Ball’s treasury team of 23 people manages cash operations, investments, foreign exchange, stock administration, insurance and risk, stock buyback and Oracle’s ven-

ture portfolio. Ball says, “I learned while at contract manufacturer Flextronics how to manage a small team and believe the benefits of coordinating a small team often outweigh the benefits of additional head count. It fits in with the engineeringdriven culture at Oracle, which eschews G&A staff regardless of profit margin.”

When asked about the importance of management and leadership, he says, “Finance professionals such as treasurers, controllers and CFOs succeed initially because of their quantitative and analytical abilities. One needs those skills early on in one’s career but when you get to the higher levels of management, your success is based on how you manage and lead people. The soft skills and culture become more and more important as you move up in the organization.” He says that many people have difficulty making the transition because it is hard to walk away from what made you successful in the first place.

Ball is passionate about the subject of motivation and how to get the best work out of a team.

He notes that research shows that money alone is not a primary motivator, but rather that how much you pay a given person on the team relative to how much you pay every other individual on the team is a much larger motivator than the absolute dollar amount you pay people. He is also a strong advocate of the idea that recognition has a huge impact on motivation, an idea he believes is lost on many finance professionals, who tend to be more oriented toward the work rather than the people.

When asked what advice he would give young people wanting to move up within the finance function, he said, “Get different experiences. People who work in big companies tend to have a narrow set of skills. They go deep but not broad.” He says that he never stayed in a job more than two years because he didn’t want to become too specialized. He tells his treasury team, “If you want to be treasurer some day you have to leave treasury for a while. Moving around, even moving out of finance can be very helpful.” To emphasize his point he quotes the CFO of Intel, Stacy Smith, who said, “I want my direct reports to have depth and my successor to have breadth.”

In his own career, Ball has always tried to maintain a balance between depth and breadth.

His depth is capital markets, a skill set he built outside of technology. When the technology market matured and demanded those skills, the doors were open to him. At the same time, he attributes much of the success he has achieved to the broadening of roles he has had.

He also advises young finance professionals to recognize that their next career stop may not be at their current company. Ball says that many people get comfortable in their current role and company and fail to accept the fact that their career isn’t going anywhere because the opportunities just aren’t there.

Ball recently co-authored a book published by Kaufman Fellows Academy, Unlocking the Ivory Tower: How Management Research Can Transform Your Business. Ball and his co-author and friend, Joe LiPuma, believe that academia and corporate America have much to teach one another but rarely do the two sectors speak. Ball is able to straddle both worlds: he has a PhD in management from the Drucker-Ito Graduate School of Management and has worked as a professor at three different universities and a massive open online course (MOOC). He and his co-author believe there is a strong subset of research coming out of academia that is absolutely relevant to how managers spend their day. Because managers don’t have the time to wade through the mounds of research coming out of academia, Ball and LiPuma identified specific subsets that include strategy, leadership and finance. They summarized the information to make it readily accessible and applicable to decisionmakers in companies and corporations.

When he is not managing finance at Oracle, Ball keeps busy in other ways. He has made several investments in local startups with famous Valley venture capitalist Don Lucas, who originally funded Oracle in 1980. Ball also earned his pilot’s license in 2012, something he describes as a good antidote to cerebral work. “Being in a cockpit forces you to be in the moment and I sometimes need to be pulled into the real physical world,” he says.

Eric lives in Menlo Park, California, with his wife Sheryl and their two children. n

“Get different experiences.

People who work in big companies tend to have a narrow set of skills. They go deep but not broad…

If you want to be treasurer some day, you have to leave treasury for a while.

Moving around … can be very helpful… He quotes the CFO of Intel, Stacy Smith, who said, ‘I want my direct reports to have depth and my successor to have breadth.’ ”

WINTER 2013

|

9

Deutsche Bank Update of European Economic Picture

Mark Wall, Managing Director Co-Head European Economics, Deutsche Bank

W

e recently modestly upgraded our view on the euro area recovery. The longest recession in post-war history ended in Q2 2013 and, notwithstanding some volatility, we feel confident enough about the breadth of growth drivers going forward to have raised our GDP growth expectations to -0.2% in 2013 and +1.2% in 2014. The drivers range from external demand to inventories, slower fiscal austerity and a likely improvement in the bank credit cycle. The ECB Asset Quality Review (AQR) and European Banking Association (EBA) stress test will be a key event in 2014. Our bank analysts are optimistic that peak deleveraging is behind us, that European banks on average will be Basel III compliant next year and the capital cost of the balance sheet assessments will be minimal. There is nevertheless uncertainty, most fundamentally on who finances a capital deficit if private investors cannot. A 1.2% growth in 2014 is in line with our estimate of potential growth and would merely stabilize the output gap. Our preliminary estimate for growth in 2015 is 1.4%.

The euro crisis is structural in nature. There is a danger that markets misinterpret cyclical growth for structural resolution. The return to growth gives politicians across Europe a reason not to push sustainable resolution—sufficient austerity, deleveraging, reform and integration. Insufficient effort on addressing the structural problems will

10

|

WINTER 2013

leave the euro area vulnerable to any surprise reversal of growth. There may be some noise from the smaller peripherals in the nearer term, but we are not expecting PSI (private sector involvement) beyond possibly a voluntary agreement by domestic investors to roll over debt in Portugal. The crisis would need to return to the systemic peripherals to significantly challenge the current market calm.

Italian political risk has subsided in recent weeks, raising prospects that the government will limp on until 2015 and achieve an electoral reform that could further underpin political stability.

The ECB introduced forward guidance to help decouple European monetary conditions from the U.S. With data improving, the ECB has struggled to get the market to price the message of unchanged or lower policy rates for an extended period. The ECB is determined to hold the message, being nervous about the recovery being “too green” to sustain a tightening of financial conditions as well as perceived weaker money and credit trends. We see no policy rate hikes until 2015, consistent with our view of still significant slack in the economy.

The ECB says it stands ready for new liquidity injections if necessary. We believe 10Y Bund yields will rise to 2.50% over the next year. From a public debt stabilization point of view, the rise in sovereign funding costs is more than accommodated by the improvement in growth. Nevertheless, Europe remains vulnerable to the U.S. budget and debt ceiling—political deadlocks with the potential to adversely impact the U.S. economy. The combination of demand shock, tighter financial conditions and a weaker dollar (stronger euro) could impinge on Europe’s nascent recovery and force a policy response. n

T Ari Jacobs, Global Retirement Solutions Leader, Aon Hewitt

he financial crisis and decline in funded ratio observed in 2008 and 2009 made pension risk an agenda item for every U.S. plan sponsor. Now, organizations are asking, “What’s next?” Aon Hewitt sees five key areas of focus and activity:

1. Focus on the Economics: Plan sponsors are increasingly aware of the fact that the reported liabilities disclosed for financial reporting and local funding purposes understate the true value of the economic commitment. Even accepting a discount rate based on corporate bond yields as the appropriate rate, the GAAP and PPA liabilities generally exclude a proper reserve for PBGC premiums, administrative and investment management expenses, life expectancies and the effects of downgrades and defaults on the bond return. The true economic liability often exceeds that GAAP liability by 10% or more. The economic liability should be used for assessing a settlement strategy or dictating triggers for funding or de-risking.

2. Settlement Equilibrium: A compelling case can be made for paying lump sums to terminated vesteds—the economic, administrative and HR implications are all in support.

The decision to settle more—either through lump sum offers to other groups, annuity purchase or full plan termination—is a difficult one. There are two camps emerging—one in which settling liabilities will be the clear goal, with the entire plan likely eliminated in 10 years; and a second in which a properly risk managed, self-insured program will be seen as an economically superior outcome to paying a premium to an insurer.

3. Asset-liability Management: Pension funds have historically been equity investors, with investment staff, manager products and consulting research focused on the return-seeking portfolio. However, the average corporate pension plan will soon have a majority of its assets in fixed income—with tremendous implications for the pension industry. It will influence which investment managers see AUM increases and which face declines, and change the skill set needed to be a successful pension fund manager or consultant. The demand for high quality, long-dated fixed income may explode and put upward pressure on prices and downward pressure on yield spreads. Pension funds that build up their long credit bond portfolios and adopt creative strategies to manage interest rate exposure will have the advantage.

Aon Hewitt studies on pension risks over the past three years show that dynamic investment policies have steadily grown in popularity among plan sponsors as a portfolio de-risking approach.

4. People are Living Longer: Good news—longer life expectancy. Bad news—more expensive pensions. The pension industry in the U.S. is due for two mortality table updates: one to the assumed rate at which mortality is expected to improve, and a second from the base assumed mortality tables from the RP–2000 to a more current table. The combined effects of these updates could result in a 10% increase in liability.

This will increase interest in settlements and generate interest in “in-plan” longevityhedging products such as annuity buy-ins, longevity swaps, insurance-linked securities and related structured products.

5. Preparation is Key: Historically, it was difficult to claim that pension plan management was a significant value driver for an organization or a source of outperformance—due to a lack of transparency and understanding. As pensions are increasingly material and volatile, the investor community becomes more knowledgeable about pensions, and as management strategies diverge, successful programs will be a source of outperformance. Organizations have been rewarded for implementing and communicating their de-risking, settlement and mark-to-market accounting strategies.

Plan sponsors won’t want to explain the performance of their 70% equity portfolio in the next down market when their peers are 70% fixed income.

Prepare now for the next steps in managing risk, and position your organization to reap the rewards. n WINTER 2013

|

11

Financial Impact Kevin Kalinich, Global Practice Leader—Cyber, Aon PLC 2013 Cyber Trends rudent treasurers increasingly utilize technological tools to maximize corporate sales and reduce operating expenses. Cloud computing, mobile devices, social media and “big data” analytics have helped entities achieve immense profits and lift U.S. stock markets to record heights.

However, the digital revolution also raises new cyber risk concerns that, if mis-governed, can materially affect an entity’s financial statements.1 Consider the following developments: • $45 MM fraudulent ATM transactions • Twitter feed hack spurs drop in the stock market • SEC Cyber Exposure Guidance • NSA data collection/government shut-down • Declaratory judgment actions to determine “no insurance coverage” in the wake of multiple $100+ MM data breaches

P

Convergent Technologies and Interrelated Businesses Third party outsourced service providers impact today’s businesses frequently and severely. The hacker of the AP Twitter account posted an erroneous story about a bombing in the White House. Are the intermediary companies, Twitter and AP, liable for having their systems hacked to perpetrate crimes?

What about the India based payment processors whose IT security failed to adequately protect the UAE and Oman banks in the ATM hacks?2 Regulatory Developments The FTC and Wyndham are currently battling over whether the FTC can sue an entity for lax data-security practices. The SEC issued its 2011 guidance: “Views regarding disclosure obligations relating to cyber-security risks and cyber-incidents.”

Is an incident “material” enough to disclose?

2 3

|

WINTER 2013

Financial Statement Impact The U.S. legal system remains the most costly as a share of GDP.3 Insurance underwriters of traditional insurance policies, such as property and general liability, did not contemplate these new exposures that resulted in over $100 million in losses for each of TJX, Heartland Payment Systems, Global Payments and SONY. Despite the efforts of entities to find coverage under legacy policies, insurers are filing declaratory judgment actions against their insureds, stating that direct costs to companies impacted by cyber breaches, such as forensics, notification, credit monitoring and public relations costs, legal defense and regulatory fines are not covered. The prudent treasurer will direct its organization to: 1. Qualify and quantify its cyber exposures, including the potential impact to its balance sheet4; 2. Mitigate its cyber exposures, including due diligence and contractual allocation; and 3. Conduct actuarial modeling to determine whether to assume and/or transfer such risks—such as purchasing a cyber insurance policy.

Treasurer Duties The next wave of shareholder class action litigation is predicted to be against boards of directors who have not satisfied their duty of care to manage such exposures.5 As a matter of judicious corporate governance, treasurers must understand the potential financial impact of privacy and security incidents6 since latency, jurisdiction, privacy, data and security obligations can possibly remain the legal burden of the board’s entity—even though caused by a third party outsourced service provider or anonymous hacker.

This article is for general informational purposes only and is not intended to provide individualized business or legal advice. The information contained herein was compiled from sources that Aon considers to be reliable; however, Aon does not warrant the accuracy or completeness of any information herein.

Should you have any questions regarding how the subject matter may impact you, please contact your legal, financial or other appropriate advisor. n

Law in the Boardroom: Corporate Board Member/FTI Consulting May 2013 Survey: http://www.fticonsulting.com/global2/media/collateral/united-states/law-in-the-boardroom.pdf How Boards & Senior Executives Are Managing Cyber Risks: http://www.rsa.com/innovation/docs/CMU-GOVERNANCE-RPT-2012-FINAL.pdf NERA Economic Consulting study for US Chamber Institute for Legal Reform, May 16, 2013.

4 “We ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being.” Nate Silver, The Signal And The Noise: Why so many Predictions Fail – But Some Don’t.

5 The Next Big Thing In Securities Litigation: http://www.kslaw.com/imageserver/KSPublic/library/publication/2013articles/2-13Law360BessetteBilesHighful.pdf 6 Steps the C-Suite and Board Can Take to Guard Against Cyber threats: http://deloitte.wsj.com/riskandcompliance/2013/05/07/steps-the-c-suite-and-board-can-take-to-guard-against-cyber-threats/ 1

12

of Cyber Risks

The Treasurer’s Alliance and Its Groups

...the value proposition

“Treasurers of companies from diverse industries, with some commonality as to size, meeting in small secure groups of 30 to discuss best practices seeking solutions to common problems.” ...this is the vision shared by Brent Callinicos, VP Treasurer of Google, and Ron Tracy, Founder/owner-Editor of Global executive Forums, in the fall of 2008.

A

cting on this vision, Global Executive Forums hosted the first meeting of the Mega Cap Treasurer’s Alliance I at the Ritz Carlton in Half Moon Bay, California, in May 2009 with only eight companies in attendance. Both the concept and the treasurer-driven content became so popular that the group grew to its full capacity of 30 companies by 2010, leading the formation of the Mega Cap Treasurer’s Alliance II group.

The Mega Cap I and II, each meeting twice annually, are projected to grow to their joint capacity of 60 companies by the second meeting of 2014 with a combined market cap ranging from 7 to 8 trillion. These groups include the treasurers of Apple, Google, AT&T, Wal-Mart, Boeing, Microsoft, McDonalds, Exxon, Merck and other top Fortune 1000 companies.

Regional Groups: Reaching out to companies with a market cap of less than 25 billion, Global Executive Forums will be hosting regional group meetings in 2014 beginning with the Midwest Treasurer’s Alliance, the Southwest Treasurer’s Alliance and the West Treasurer’s Alliance.

International: Mega Cap Treasurer’s Alliance Europe will meet in London in September of 2014.

For additional information on these Treasurer’s Alliance Groups, and to be considered for membership or added to the distribution list for the Treasurer’s Alliance, please complete the following and send it to Patrick Tracy, managing director, at patrick@globalexecutiveforums.com (All contact information to be held in confidence not to be distributed for purposes other than Treasurer’s Alliance communications).

NAME + TITLE DATE

EMAIL ADDRESS PHONE

COMPANY NAME + ADDRESS

INDUSTRY TYPE AND PRODUCT OR SERVICE

MARKET CAP

Become a Treasurer’s Alliance Member and join us in May of 2015 at the Treasurer’s Alliance Summit in Washington, D.C. WINTER 2013

|

13

2013 Turnover in top Mega Cap Treasurers’ Positions Increases by 50% more than in a normal year

Ron Tracy, Founder/Owner-Editor, Global Executive Forums

M

anaging treasurer groups has provided the executives at Global Executive Forums with insight into the average turnover of top treasurers’ positions, which annually averages 20%. The Mega Cap Treasurer’s Alliance I, which is limited in size to 30 companies (the optimum size for effective round table discussions), has had nine turnovers so far in 2013, amounting to almost a 50% increase this year when compared to the average year.

Aetna: Best wishes and congratulations to Lankford Wade, VP of corporate finance and treasurer, and Al Quirk’s replacement. The Mega Cap Treasurer’s Alliance treasurers are pleased to welcome Lankford to the Mega Cap.

We bring people and companies together, keep your contact information in our system current and secure in our commitment that it will only be used to communicate Treasurer’s Alliance information.

Send changes to patrick@ globalexecutivefourms. com.

Google: Congratulations to Brent Callinicos and Tom Hutchinson. In addition to being a founding member of the Mega Cap Treasurer’s Alliance, Brent resigned as treasurer of Microsoft in 2007 to become VP treasurer and chief accounting officer of Google. He resigned from Google this past August to take the position of chief financial officer at UBER. Tom Hutchinson, VP of tax for Google, took over as treasurer in addition to his other role.

Express Scripts: In addition to his responsibilities as VP and corporate treasurer of Express Scripts Holding Company, Matt Harper has taken on additional duties as interim CFO as of July 30, 2013. He has been missed at the Mega Cap Treasurer’s Alliance meetings.

Hess Corp: Eric Fishman took over the position of VP treasurer at Hess, replacing Bob Biglin who moved to VP of finance.

Hewlett Packard: Best wishes to John McMullen, VP treasurer of HP, who retired in August of this year to be replaced by Jim Murrin. Jim, we look forward to seeing you at the Mega Cap meetings.

Kimberly Clark: Congratulations to Karen Leets, new VP treasurer of Kimberly Clark. She replaces Nancy Loewe, who was promoted to chief strategy officer reporting directly to CEO Tom Faulk. Karen resigned as treasurer of US Gypsum to take the treasurer’s position at Kimberly.

MasterCard: Juan Rajlin resigned his position as assistant treasurer at General Motors to take a VP treasurer’s position at MasterCard. He replaces Sachen Mehra, who moved on to the position of business financial manager for MasterCard North America.

Pfizer: Best wishes to Bob Landry who resigned as VP treasurer of Pfizer to take the CFO position at Regeneron Pharmeceuticals. At the time of this issue’s printing, Pfizer had not appointed a new treasurer.

PPG Industries: Congratulations to Aziz Giga on his retirement from VP treasurer after 25 years with PPG. Best of luck to Eric Theile, former assistant treasurer, on his new position as VP treasurer.

Proctor & Gamble: Congratulations to Terri List on her new role as senior VP of finance at Kraft Foods. She resigned as VP treasurer of Proctor & Gamble, and Valarie Sheppard, comptroller at Proctor & Gamble, will assume the position of treasurer in addition to her role as comptroller. n

14

|

WINTER 2013

financial executive opportunitY + Talent EXCHANGE A listing service filling corporate needs for talent in finance

by Global Executive Forums, LLC

H

iring managers and financial executives wanting to place or respond to a listing may reach out to me for assistance by email: patrick@globalexecutiveforums.com. We are a relationship business, using our network to bring good companies together with outstanding individuals. I look forward to helping our members and friends in finance.

Patrick Tracy, Director

Executive Opportunities:

#13-11-034: Wanted seasoned treasury executive with heavy M&A and other treasury experience , FortuneFilled Position 500 company, Mid Atlantic location. # 13-11-35: West coast privately held company, high growth, market cap established at 4 billion in need of an assistant treasurer to manage Risk & Insurance as well as other treasury functions. Attractive compensation package with excellent equity potential.

Position Filled

Executive Talent:

#13-11-135: Finance executive with extensive global back office and business services experience.

• • • •

Proven executive with 25+ years within GBS/SSO organizations.

Spent nine years with Fortune 50 tech manufacturer managing a global asset of $10b in 180 countries.

Provided creative solutions/financing to grow market share in BRIC countries.

Effectively managed global team of both retained and outsourced FTE’s on five continents. Leader for the last eight years with global BPO providers.

• Executive has both client and provider experience across front and back office finance and accounting work.

• Executive wants to get back into a GBS leadership role.

#13-11-136: Finance executive with extensive experience in planning, finance and commercial operations in

technology and oil and gas industries.

• Most recently served as treasurer of Fortune 100 energy company ($28 BN market cap; 2012 revenues of $38 BN; $10 BN credit portfolio; BBB rating) responsible for liquidity, cash management, capital structure, pension and commercial insurance.

• Led corporate planning team, which managed capital planning for $5BN/yr capex program, developed business plans for senior leadership and board, worked with strategy teams to translate strategic initiatives into defined operational objectives.

• Commercial director accountable for hydrocarbon sales agreements in three SE Asian countries.

• Served as sales controller for emerging markets division of global technology company, during period of rapid sales growth (>25%/yr).

• Has worked/lived in three countries in Europe and Asia.

• Served for six years as Surface Warfare Officer in U.S. Navy. MBA from the University of North Carolina.

#13-11-137:

Finance executive with extensive experience in corporate finance, treasury and investments, including capital markets, rating agency relations, investment management, pension management, risk and insurance, and mergers and acquisitions at a Fortune 100 health and insurance company. Significant integration and turnaround experience. MBA from Cornell University.

WINTER 2013

|

15

Global Executive Forums, LLC 2289 Placerwood Trail Reno, NV 89523

PRSRT STD U.S. POSTAGE PAID RENO, NV PERMIT NO. 379

SEC Proposal for Money Market Fund Reform

A Roger Heine Managing Director Head of Liability Strategies within Capital Markets and Treasury Solutions

Floating NAV should be relatively innocuous to corporate treasurers— albeit with some potential system headaches—but adoption of “gates” could impair MMFs as a cash investment vehicles and hence also damage the commercial paper market.

fter a long period of public debate, additional reform is almost certainly coming to money market funds (“MMFs”). This stems from September 16, 2008, the day after Lehman filed for bankruptcy and the day the Primary Reserve Fund “broke the buck.” Near panic quickly ensued with $300bn withdrawn from MMFs, mostly from the institutional prime category, within a week before the U.S. government stepped in with a one-year guarantee. In 2010, the SEC adopted rules to strengthen credit quality and liquidity of MMFs as well as enhancing Net Asset Value (“NAV”) disclosure. At the time, the SEC indicated that this was just an initial step and there has been pressure to go further. In June 2013, the SEC issued a two-part MMF reform proposal with the objective of preventing runs that could pose a systemic risk from happening again while maintaining the viability of MMFs. The proposals could be adopted together or separately: Proposal 1 would mandate a floating NAV system for prime institutional MMFs (government MMFs and retail MMFs—in which there is a $1mm per day withdrawal limit—would be exempted). The SEC proposes a lengthy two-year compliance date after adoption to provide enough time to adjust systems to a floating valuation.

Proposal 2 would introduce a redemption fee as much as 2% if liquid assets fell below 15% and would also empower MMF boards to suspend all withdrawals up to 30 days (referred to as a “gate”). Despite the technical discretion under the current proposal, it is felt that fund boards would be hard pressed to deviate from the SEC prescribed rules if confronted with a stress scenario.

Some fund managers initially came out against floating NAV, but we are starting to see more nuanced responses from many fund families reflecting the varied

needs of their investors. From a corporate perspective, treasurers we have talked to have been somewhat more accepting of the floating NAV proposal, realizing that variations from par will likely be slight and some of the questions concerning tax and accounting treatment (IRS proposal to exempt wash sale rule, likely continued treatment as cash and cash equivalent) are becoming more clear. Corporate investors have, however, become more concerned about Proposal 2 due to the possibility of mandatory gates. If enacted, mandatory gates would deny investors their paramount objective—access to their cash on a daily basis. Floating NAV can actually increase liquidity options because it removes the possibility of embedded losses and allows the MMF manager more flexibility to liquidate security positions pro rata across the portfolio instead of relying on the most liquid holdings first to satisfy redemption requests. Essentially, a floating NAV removes the “first mover” advantage, eliminating the incentive for investors to redeem before others—one of the prime causes of runs on MMFs. The comment period technically ended September 17 and the preliminary read is that Proposal 2 is being favored. If this is actually the end result, we suspect that the trend for treasurers to exit MMFs and self-manage their cash will increase significantly. Most treasurers are pretty conservative investors and they may limit holdings to government investments, bank deposits and A-1/P-1 rated commercial paper (“CP”). This shift in supply/demand in the short-term markets may lead to funding pressures for A-2/P-2 CP issuers who may need to resort to a combination of holding more cash, increasing revolver lines, issuing more term debt and borrowing outright from banks. The macro implications could be extensive and unpredictable, particularly if separate Basel III and Fed proposals to impose balance sheet-base capital charges on banks in the 3% to 5% range ultimately are adopted as well. n