Financial Risk

As Seen in CFO Studio Magazine Q1 2017 Issue

CENTRALIZED VS. DECENTRALIZED TREASURY: WHICH WORKS BEST FOR YOUR COMAPNY?

-BY WALTER CIRILLO, Treasurer, Novitex Enterprise Solutions, Inc.

 

During the last global economic downturn, many companies were caught unprepared by the speed at which events impacted their business. Many CFOs asked questions like, What is our current cash balance globally? In which financial institutions are these balances invested? and, What is our counter-party risk?

Companies with centralized treasuries typically had better visibility and information relating to these questions. However, decentralized treasuries deliver other benefits for many companies.

Will a centralized or decentralized treasury function be best for your company? That depends on the nature of the business. Factors such as global geographic footprint, the similarity of business operations across geographies, and management’s philosophy all weigh in this decision.

Pros and Cons

Treasurers are responsible for managing a company’s assets and liabilities, financial risks, and banking relationships. For businesses with operations around the globe, managing these components is complex.

Some of the benefits of a decentralized treasury structure are: (1) Flexibility, as local operating units or subsidiaries manage treasury in line with local conditions, and the solutions are specific. (2) Knowledge of local markets provides advantages for selecting appropriate debt or investment vehicles, foreign exchange hedging instruments, and banking partners. (3) Local staff may have more intimate knowledge of local regulations, and business/legal/tax/banking environment. (4) Local staff likely takes pride in managing all aspects of the operations.

On the other hand, some of the benefits of a centralized treasury structure are: (1) Economies of scale. (2) Rationalization of costs. (3) Standardized cash flow forecasting. (4) Identification of company’s cash balance and risk. (5) Closer control over investment performance and risk. (6) Greater access to financing and liquidity. (7) Ability to leverage banking and other relationships. (8) Local staff can focus on growing the business.

A particularly strong argument for a centralized treasury is that such a structure allows integrated payables and receivable solutions to achieve straight-through processing, which can help improve a company’s working capital position.

Consider Specifics

A centralized treasury structure seems more efficient, but a key question to reflect upon is leadership’s philosophy toward managing the assets and liabilities of the company. A company’s specific situation, such as degree of international presence, type of business, growth prospects or business cycle, sophistication of ERP system, availability of Treasury Management System, and external factors (global/regional financial crises), all play a role.

Facilitating the trend toward centralization is technology (more sophisticated treasury workstations interconnected with ERP systems), as well as legislation or regulatory changes (i.e., the Eurozone’s move from national payment instruments to SEPA, Single Euro Payments Area, and easing of controls in several emerging markets), and globalization of markets.

However, centralization is not without its challenges. Treasurers need the communication and cooperation of local staff to provide valuable knowledge and information on local rules and regulations. Ultimately, the company that implements a centralized treasury approach will likely be better prepared to manage the risks of the global marketplace.

Principles for Growth

As Seen in CFO Studio Magazine Q1 2017 Issue

THE CFO OF JOHNSON & JOHNSON LINKS ETHICAL DECISION-MAKING WITH STEADY, STRONG RETURNS

Dominic Caruso, CFO of Johnson & Johnson, told CFOs gathered at a recent CFO Studio Reception held in his honor that the company bases all its important decisions on the Credo that General Robert Wood Johnson II wrote in 1943. But he said he realized that the audience might be a little bit skeptical. They might wonder “How stringent are you? Do you ever bend? Do you ever flex?”

“We do flex these principles,” he said. “We constantly challenge ourselves. We go to Credo challenge sessions to make sure we understand what [the Credo’s wording] means in the new environment.…But we generally stay pretty close to those principles.”

He noted that the Credo is “not an aspirational statement,” but a set of responsibilities by which “we live our lives at Johnson & Johnson and make business decisions.”

Each of its four paragraphs talks about “what we must do for each of our constituencies.” First, for patients; then for employees — their welfare and careers; next for the communities where the company lives and works around the world; lastly, for shareholders. General Johnson was a shareholder, “and he placed himself last.”

Mr. Caruso said that the 32 consecutive years of adjusted earnings growth that J&J has returned is “the proof in the pudding” that the company’s firm principles are properly guiding J&J through turbulent times and changes in economic circumstances.

An attentive group of around 60 finance leaders from New Jersey and the tri-state area formed the audience at the Heldrich Hotel in New Brunswick, NJ. CFO Studio Publisher Andrew Zezas introduced Mr. Caruso, who was profiled in the Q4 2016 cover story, stating that under Caruso’s stewardship, Johnson & Johnson has strengthened and built upon its position as the world’s largest and most diversified health care company.

“During his 10-year tenure as CFO, Johnson & Johnson’s share price has appreciated over 90 percent,” said Mr. Zezas. “Speaking as a shareholder, thank you, Dominic.”

Finance’s Pillars

In his remarks, Mr. Caruso said, “I owe a lot of credit to my predecessors. I’m fortunate to be in a long line of previous CFOs at Johnson & Johnson who have done outstanding work.”

He went on to enumerate the four principles by which J&J’s Finance organization operates. These are: to drive competitive profitable growth, generate sustainable cash flow, allocate capital to maximize shareholder value, and manage enterprise risk.

Regarding that third principle, allocating capital to maximize shareholder value, Mr. Caruso said, “We have very strict principles by which we do this. We have a set of hurdle rates and analysis that we use to ensure that each decision we’re making is maximizing the value that we set for the deployment of our capital.”

Mr. Caruso runs a global finance team of 5,000. He spent part of his time at the microphone discussing the role of “the great financial people at Johnson & Johnson.”

Finance professionals at J&J “are asked to do three things,” he said: “To drive sustainable, superior financial performance. And, I say that very clearly: to drive it, not to monitor it, or to measure it, or to report on it. To actually drive it. They’re also asked to develop great leaders,” he said. “And they’re asked to do one more thing, which is without compromise the most important thing that they do: To assure the financial integrity and compliance in what we do as a finance organization for Johnson & Johnson.”

Mr. Caruso and the finance leaders at J&J have assured the company’s financial integrity such that Johnson & Johnson remains one of two companies in the world with a AAA credit rating. The CFOs in attendance gave him rousing applause for that accomplishment.

Cyber Vigilant

As Seen in CFO Studio Magazine Q1 2017 Issue

CYBERSECURITY CONTINUES TO BE A TOP CONCERN AMONG CFOS

Fran Shammo was prepared to talk about digital media and corporate communications in a virtual world that is rife with cyber criminals, and found the roomful of financial executives a more-than-willing audience. “I am very interested in knowing if CFOs at other companies are experiencing the same kind of apprehension and worry,” explained Mr. Shammo, who stepped down as Verizon’s CFO at the end of October in anticipation of his retirement at the end of the year. Less than a week after he spoke, Yahoo, which, two months earlier, Verizon announced it had plans to acquire, revealed that half a billion user accounts had been compromised.

Mr. Shammo spoke on “Delivering Your Company’s Message in a Digitally Risky World—Communications and Media from the CFO’s View,” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at The Bernards Inn in Bernardsville, NJ. CFOs from select New Jersey–area companies attended the invitation-only dinner. Mr. Shammo said the intense discussion that followed his opening remarks on the cybersecurity concerns that plague him proved that “As CFOs, we’re all in this together when it comes to dealing with the very real and constant threats posed by cyber-attacks.”

Mr. Shammo cited statistics from Verizon’s recent Data Breach Investigations Report, which shows that, among other things, passwords are still the weakest link in the chain. “Sixty-three percent of confirmed data breaches involve using weak, default, or stolen passwords,” he said. This resonated with dinner participants who said they do, indeed, take the issue of passwords very seriously, and noted that password-enforcement programs are in place at each of their respective companies. Mr. Shammo mentioned that Verizon forces automatic password changes on its corporate network every 30 days, which elicited several nods of agreement around the table.

Participants expressed curiosity about the kinds of attacks that have taken place at Verizon. “Given the scope of service Verizon provides,” Mr. Shammo said, “we see almost every kind of attack on a regular basis, and we’re constantly trying to find ways to educate employees to be ever-wary of phishing scams and ransomware.” The group was familiar with the more common phishing scams in which a fraudulent email, appearing to come from a legitimate source, requests personal information. However, ransomware needed a bit of an explanation, which Mr. Shammo provided: “It’s a type of malicious software, or ‘malware,’ that prevents users from accessing their system until a sum of money is paid.”

This caught the attention of Greg Douglas, Vice President of Sales for Eatontown-based Yorktel, a video-communications and managed services provider, and a CFO Studio Business Development Partner. “It’s so important that everyone be informed and trained on cybersecurity. It’s not just for the people in Information Technology (IT), as the threat is huge.” He continued, “Financial executives are choice targets for hackers because of their authority to control company funds. They need to be particularly vigilant in their actions to avoid being compromised.”

Mr. Shammo agreed, and offered his fellow finance execs a sobering reality: “There is a high probability that every one of your companies has been hacked.” He added, “Most of you just don’t know about it, nor do you have any idea about who has been in your system, when they were there, or for how long.” In order to combat such cyberattacks, Mr. Shammo recommended long-term contracts with security firms.

Does Privacy Still Exist?

The conversation then shifted to mobile devices: “Years ago, we were all issued a company device that was for business purposes only, and secure. Then, we started bringing our own devices to work,” Mr. Shammo said, acknowledging that this resulted in a whole host of security concerns and problems for the IT department.

“I see things coming full circle,” he opined, “with a return to company-issued devices.” Attendees were in agreement; just about everyone in the room had a personal phone and a work phone in their pocket. “This is actually a good sign,” said Mr. Shammo, recognizing that “we are simply becoming more mindful about keeping personal stuff personal, and business strictly business.”

Mr. Shammo predicted that the next wave in security is going to be triple authentication procedures. “Double authentication,” he explained, “in which you log in to a website and receive an access code to enter will no longer be sufficient.” He continued, “It’s going to come to a point where, in order to get into a site, you’re going to have to allow location services to be enabled on your phone for an extra layer of protection.” This led to a consensus that, as years have gone by, there is simply no privacy anymore.

A Rock and a Hard Place

The evening was coming to a close as Mr. Shammo finally addressed digital media. “Verizon is a network company as well as a digital media company,” he said, “so there are different regulations that apply to different parts of our business, and different regulatory agencies that apply them. As a company, we are very focused on protecting our customers’ privacy across the entire company. From a regulatory perspective, however, it doesn’t make a lot of sense for consumers to have different rules and different regulators dealing with different parts of the Internet ecosystem.”

Mr. Shammo concluded that it’s a “fascinating world” right now. “Things are converging, and our ability to regulate or control privacy is just not keeping pace. We must be extremely careful about protecting the work we do.”

Copyright 2017