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Teaming Up with Tech Firms: Deutsche Bank’s Multifaceted Approach to Cash Management Solutions

Money Is Time: How TIS Simplified One Treasurer’s Bank Connectivity

Mining Merchant Services for Today’s Gold: Data

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

The value of data is why e-commerce giants like Alibaba in China have moved quickly to dominate in a wide variety of merchant services, including digital payments. It may have started with helping customers pay with less friction, but now the data is more important.

  • China + data. The experience in China, where Alibaba’s Alipay and Tencent’s WeChat Pay have totally disrupted banks on consumer payments and other merchant services, is one reason transaction banks outside China are trying hard to disrupt merchant services themselves. But like the e-commerce giants, they’re also eying the value of data.

A major problem with merchant services has been its fragmentation—too many players serving different segments of the market; there was also a general lack of integration end-to-end. This creates inefficiencies and higher fees, but it also means that a lot of data gets lost.

  • Creating end-to-end platforms. Hence, the desire for players in merchant services to create end-to-end platforms, either through acquisition rollups or greenfield investment.

Banks, particularly those with a strong retail presence already, are looking at creating end-to-end global payment and merchant services platforms as potential cores to their broader transaction services businesses. “Payments are now nonlinear,” said one banker who heads global merchant services sales for such a bank, “so you need to own the payment system end to end. You also want to be able to serve all clients from smallest to largest, across segments.”

In theory, this push toward single platforms also will help merchants and consumers get something in return for the data they end up sharing at the point of sale.

  • Consumers, for example, could be offered more choices for rewards depending on the form of payment—e.g., use this card and you will get a $50 credit on your next purchase at that store, bypassing the typical 1%, 2% or 3% cash back.
  • Merchants, meanwhile, may be able to drive more sales with loyalty programs and targeted incentives, but also tap into a broader pool of data to manage inventory and product selection. This will also allow them to share more of the value in interchange fees and lower them via the data capture (e.g., so-called level 3 data such as invoice and order numbers).

Watch this space!

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Negative-Rate Concerns Spreading to Pension Funds

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”
 
Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One member noted the impact of falling rates on her company’s P&L and said her team is now concentrating on investment manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity line up?” she said. 

Cutting costs. The topic of centralizing pension plans across European countries also arose during the meeting. This was in regard to enabling pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded while others are in the red. A participant noted that Belgian law permits pooling pension fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium and Austria, for example—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said. 

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For Property & Casualty: Look Past the First Tier

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

Request denied. At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

That prompted a search beyond the biggest names. “We went with Oswald, a tier 2 broker that has alliances overseas that its customers can access and is hungry for business. They cut our premiums by almost $2 million,” the member said, to the audible gasps of fellow treasurers. “Almost 40% in one year.”

In return, Oswald received a base fee and a percentage of premium savings.

Coverage quality still good. Asked if coverage quality suffered, the member said the level of coverage remained largely the same, as did the carrier group—Chubb Limited, Aegon N.V., etc. “And they were able to come to us and say, ‘Here’s the data you’ll need, here’s how to put it together, and this is what the insurance companies are looking for,” he said, adding, “They did a lot of heavy lifting.”

Related risk management. The member also noted Oswald’s ancillary risk management services, such as implementing driver monitor and safety programs for auto-insurance policies related to the company’s transportation needs.

Fast. The member said his treasury group moved quickly to replace its current policies, and Oswald kept pace, replacing policies “within a quarter.”

Go long. One member asked if peers recently renewing their property and casualty policies had done so annually or for multiple years, and the consensus was a combination, although today’s rising premium environment favors longer rather than shorter. A couple of members said their brokers had locked them into two-year contracts that had worked out well. “Insurers have been hit very hard recently,” noted one. “The industry is saying we need to make money on these products.”

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Making Bank on Receivables

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.

Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.

Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.

Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

  • Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.
  • Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.
  • Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.
  • Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.
  • New value in data sources. This data, unfortunately for banks, resides mostly in ERP systems and not in the banking system. This explains the opportunity for ERP vendors and fintechs to partner to source this data to reduce trade friction and mitigate credit risk. If every invoice that gains approval were updated in the ERP and that information was made available instantly to a bank or securitization pool, the world would be a different place.
  • Trusted intermediary for the data. With concern growing about who has access to what data, especially when it involves historical relationships between trusted counterparties, who plays the role of intermediary for receivables data matter.
    • Banks would be one option, but they are limited in how many counterparties they can onboard to their systems (and how quickly) due to KYC regulations. Unregulated fintechs have more scope to onboard, but do they have the trust factor?
    • Another option might be platforms like Marco Polo or Voltran (now Contour), that could use their distributed ledger/blockchain to provide secure intermediation of the transactions and the data.
  • Who provides balance sheet? Corporates in the Fortune 50 that look at supply chain finance programs also want to have someone else’s balance sheet behind them. “If the whole thing goes upside down, they want to know that there is a backer able to write a half-billion-dollar check,” said one banker. Yet no bank wants to support a platform that is not exclusively theirs and no corporate wants their supply chain dependent on one bank. Bolero and Swift efforts have shown the challenges of pleasing all constituencies.

Meanwhile, the opportunity to package trade receivables and the underlying data to create optimal pools of receivables at scale to meet investor demand remains.

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Treasurers Educate HighRadius on Cash Forecasting Needs

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

  • Drill down to the invoice level. The HighRadius app enables companies to explore which of dozens of variables—business line, currency, country—generate most of the variance between forecasted and actual cash. A NeuGroup member suggested going deeper still, to reveal which customers generate the variance.
    • A HighRadius representative said the firm’s technology already predicts payments by individual customers on the collection side, and “we’ve been debating how far to take it” with cash forecasting.
  • A longer tail. Orders for goods and services would be another helpful variable, one member said, because they look out further than invoices.
  • Size matters. Another member suggested that HighRadius include the ability to drill down to customers responsible for 80% to 90% of a company’s AR and provide details on those accounts.
  • Override. The app allows for manual overrides when, for example, a major customer wants to pay early, prompting one meeting participant to say it should identify the customer and explain the reason for early payment.
    • “We’ve heard similar requests, so it’s on the roadmap,” a HighRadius rep responded.
  • Cross-company learnings. A corporate customer may historically pay its annual invoice on time but face challenges this year that aren’t captured by historical data. A member asked whether HighRadius’ app incorporates that company’s more recent payment history with other clients, indicating potential troubles ahead.
    • That will come as High Radius’ customer base grows, a rep said, since “learnings from one company could apply to others.”
  • Sales forecasts? Yes, said a HighRadius rep, sales forecasts provided by a company’s FP&A group could be included in the model to generate long-term forecasts.
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Steps on a Technology Journey to Data-Driven Decisions, Actions

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.  

The role of the cloud. The presenter said that moving treasury applications to the cloud to co-locate data reduced IT’s footprint by 60%. Treasury has about 40 applications; 24 of them are first-party apps (meaning the company builds and maintains them in-house), and the rest are third-party apps. The first-party apps address:

  • Cash forecasting
  • Cash visibility
  • Bank account management
  • Intercompany loan management
  • Wire requests and tracking

SWIFT gpi and transparency. The company was an early adopter of SWIFT gpi, which allows treasury to track wires once they leave treasury’s banking partner. One member said this is good news for her treasury. “This will be very beneficial to us as we have limited visibility to transactions once they leave our banks,” she said. “SWIFT gpi will provide more transparency on payment statuses.”

SWIFT and the cloud. The company and SWIFT have worked together on a cloud-native project that allows SWIFT wire transfers to be done over the cloud. The teams have enabled SWIFT wire transfers on this setup. The company is the first cloud provider working with SWIFT to build public cloud connectivity and will work toward making this solution available to the industry. 

How it works. Treasury sends a wire instruction through a web app on the cloud, which is validated by using machine-learning algorithms.

  • Once validated for authenticity, these wires are sent to SWIFT via the company’s SWIFT installation on the cloud. SWIFT validates the wire instructions and sends it off to the appropriate bank. Once the bank carries out the wire instruction, it sends confirmation through to treasury.

Machine learning. Treasury built a machine-learning forecasting solution that is addressing a key FX exposure for the company while improving forecast accuracy of AR and operational efficiency for the team.

  • Historical data in the cloud was cleaned and used to create the solution using the R programming language and other tools.
  • Cumulative forecasting of notional exposure improved by 6%.
  • Volatility of FX impact on other income and expense was reduced by ~25%.

The people part. Like many treasury teams, this one is trying to strike the right balance between people in possession of core treasury knowledge and skills and those who are more adept at data analytics and have advanced quantitative abilities. In addition to everyone learning Power BI, treasury recently hired its own data analysts.

The problem remains, though, that some staff lack the skills, ability or interest to learn new tools and technology at a point when data science is increasingly critical. The treasury team highly encourages employees to take courses to increase their skills in the data analytics space and provides sponsorship to help them achieve these goals.

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Tales from the Cyber Crypt

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Bad timing. The email system of a NeuGroup member firm’s collections team was compromised, revealing all its customer contacts. The fraudsters then sent realistically scripted emails to customers requesting payments be sent to a different bank and providing the necessary details.

The member’s security team wanted to alert customers, but it was two weeks from quarter end, “and you don’t want to spook customers so they don’t pay you—a real treasury issue,” the member said.

Cyber reticence. Companies develop their cybersecurity plans internally, but then what? “One of our biggest challenges was that people don’t want to talk about cybersecurity,” one participant said, noting wariness about discussing the plan with third parties.

  • “We had a hard time finding peers to benchmark against, and we were paranoid as well, creating a special NDA that we made all of our banking partners sign before talking about our cybersecurity,” he said. Even his team’s discussion about how to store the plan was challenging, “because we effectively created a playbook for how to hack us.”

Cryptocurrency conundrum. A ransomware attacker may demand the transfer of $50,000 in Bitcoin to a cryptocurrency account to unfreeze a company’s system. If news breaks on CNBC about the attack, pressure will mount to meet that demand, but opening cryptocurrency accounts takes time. Companies may open cryptocurrency accounts in preparation for an attack, but would this information becoming public in an earnings call invite such attacks? And should any payment be made at all, given that the attacker could be a terrorist organization?

  • One solution: “We back up all our data, even on the desktops, so if we get locked out of our primary system, we can just reload everything,” one member said.
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Crisis Management Brings Executives Together

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Multipurpose framework. The head of internal audit at a major government contractor said in a recent NeuGroup meeting that his company uses the National Fire Protection Association 1600 Standard on Continuity, Emergency and Crisis Management. He described it as a “fairly transferable” framework that can be used across a variety of scenarios, from fire drills to much more complex and resource-intensive corporate initiatives. Most members participating in the meeting were unfamiliar with the NFPA document and listened raptly as the IA chief describe the benefits.

The member noted that the company’s risk committee chairman had required adopting the framework and given the nature of the company’s business, most of its provisions were already in place.

What not to do. The member said a fascinating outcome of crisis response planning is understanding better what executives are not supposed to do or say, “particularly for the C-suite, where it’s not uncommon to have lots of type A personalities.” The exercise clarifies what each executive’s role is and emphasizes letting the crisis manager inform them about developments so they can better determine their next steps.

By promoting understanding of the various scenarios and analyzing what to report versus what to disclose, the requirements and the cadence of reporting, “We really challenged management to think about that, and it was very helpful,” he said.

Muscle memory. “Every time we went through the exercise, whether [for a major initiative], or for cyber, or an inside threat, we’d learn something new, or ask questions we hadn’t thought to ask before,” the member said. The future will always bring situations that can’t be anticipated, and he recounted a few humorous ones. “There’s always something you don’t think about, but the more you do it, it builds muscle memory,” he said.

Political capital. The member noted that facilitating these conversations in his capacity as IA was highly rewarding. “It engaged management at different levels and created political capital that has paid dividends in so many different areas for IA,” he said.

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Appealing to Millennials and Gen Zers: The Academic Perspective

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

  • Strategic thinking
  • Business decision-making
    • A Foster School assistant dean later elaborated: “New graduates are seeking jobs in strategic positions that impact a company’s present and future direction. They are savvy in technology, use of communication networks, and see both the present and the future in how they think, so where they can exercise these attributes and skills makes a difference to them.  They think with innovation in mind and have a global sense of their potential impact.”
  • Cross-functional teams
  • Salary
    • The average salary for Foster’s 2018 MBA finance graduates was about $115,000, plus a signing bonus of $25,000.
  • Flexibility/work balance.
  • Promotions.
    • In an earlier session, one treasurer asked his peers if they found that new hires expected a promotion every year. He said that’s unrealistic and his approach is to tell people the company is “going to get you where you ultimately want to go,” but don’t expect a promotion every year. Another treasurer said finance has a 70% retention rate and warned, “You’ll lose them if they’re not advancing.”
  • Frequent feedback. The Foster School professors added that MBAs want contact with senior leadership.

How to engage potential recruits. The Foster School presentation recommended members take these actions to appeal to MBA students:

  • Give a guest lecture or serve on a panel at the school.
  • Host a group of students for a tour or talk.
  • Sponsor a spring analytics project.
  • Mentor a student.
  • The obvious: Hold on-campus recruiting events.

The corporate perspective. Not all the treasurers present said they favored MBA graduates. In fact, one member said MBA grads who are on rotations in the company’s leadership program usually don’t return to finance roles because they “want to do exciting business stuff, sexy biz dev stuff.” It’s easier, he said, to retain undergraduates who start in finance. “I love the leadership program when we get undergrads,” he said.

  • Another treasurer asked, “How do we make finance sexier?” He noted that corporates are often competing against investment banks for top talent.
  • The first treasurer said that when he does hire MBAs, he takes graduates from “second tier” schools who did well and are intent on proving themselves, as opposed to trying to recruit Ivy League MBAs. “Let them go to McKinsey or Goldman Sachs,” he said.
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Supply Chain Finance Faces Rising Regulatory Scrutiny

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

  • Extended payables vs. debt. At issue is the ability of companies to use a financial intermediary to pay suppliers at a discount while extending their payments terms to the suppliers (sometimes in conjunction with raising financing against their own receivables, too), or simply extend payables beyond the norm to preserve cash (aka reverse factoring, payables financing or supply chain finance). Many such transactions are not recorded as debt but rather as trade payables.

The collapse of the UK construction firm Carillion in early 2018, linked by critics to its misuse of supply chain finance, is seen as one tipping point. But the broader use of reverse financing to help firms fund themselves at lower cost that is being promoted by a growing number of financial intermediaries is also driving regulatory scrutiny. Here are some recent examples:

  • Big Four ask for guidance. The Big Four accounting firms in October took the rare step of sending the FASB a joint letter, asking it to weigh in on how companies should classify various supply chain financing transactions and what details they should disclose.
  • Rating agencies. Fitch has a formula it uses to adjust company debt ratios to reflect their use of supply-chain finance. Moody’s has issued a warning.
  • SEC calls for MD&A disclosures. At the American Institute of CPAs conference in December, SEC Corporation Finance Deputy Chief Accountant Lindsay McCord said businesses needed to use the Management Discussion and Analysis section of their financial statements to give investors insight on their use of supplier finance programs that might change their financial condition.

To get the views of our members, I reached out to a few who manage significant supply chain finance programs.

  • Transparency and standardization needed. “The significant variations among accounting professionals in how they treat SCF reporting, even within the same accounting firm, does create external reporting challenges,” one member said. He would support standardization of interpretation and transparency of reporting.
  • The ESG component. Standardization would support good governance “to remove financial engineering and creativity merely for the sake of metrics reporting (for MNCs and large corporates) that are not necessarily beneficial to the overall business environment,” the member said. SMEs can be especially victimized by extraordinary extended terms (240-360 days), he added, with settlement delays of another 30-60 days in some countries.
  • Are new rules really needed? In another member’s opinion, “Any hack analyst can tell what is going on. Yes, it is a bit of a trick with the ratings agency’s metrics, but they too know exactly what is happening.”

I think it is fair to say that audit firms should be able to come up with a more consistent application of the current principles-based approach—i.e., the extent to which an intermediary’s involvement changes the nature, amount, and timing of payables, plus the direct economic benefit the entity receives—even without the intervention of those who set accounting standards.

  • We should all support disclosures that are sufficient to determine adherence to this principal and make clear how financing techniques affect the statement of cash flows. Reputation risk and ESG ratings related to the treatment of suppliers will also help prevent abuse if capital providers are paying attention.

To see what such disclosures might look like, take a look at examples from Masco and Keurig Dr Pepper in their responses to SEC staff comment letters.

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Managing FX in Currency Tiers to Control Cost, Workload

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Global policy, local execution. Generally speaking, at this company, corporate treasury at HQ is responsible for the framework and policies and the global hedging approach, but local (in-country) treasury staff implement the hedging strategy with advice and approval from HQ.

Big countries have their own treasury organization. Some countries in the global group are so large relative to the size of the company and have their own currencies that they will have their own treasury. Other countries together form a “cluster” that also can be managed on its own.

But “tier two” countries don’t. Various tier two countries can be served directly by corporate treasury. Here, local treasury and in-country project controllers forecast and monitor FX risks resulting from purchase orders, sales orders and tender offers, but the exposure is hedged at the group level by corporate treasury.

Other tier two countries are served by local treasury, such as India, China, South America and Africa; here, risk identification is done as above but the exposure is hedged with local banks by local treasury. (However, the valuation of the local third-party hedges is performed by corporate treasury.)

Group guidance promotes the use of global currencies like USD or EUR for project tenders in emerging markets but when that is not possible, negotiators need to ensure that currency fluctuation clauses are in the contracts. Failing contracts in global currencies, local treasury consults closely with corporate treasury to monitor risk and manage the cost of hedging.

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Smoother Sailing: The Benefits of Dynamic Discounting

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

A treasury executive from a major technology company explained her firm’s challenges and the benefits of implementing C2FO’s DD platform at a recent NeuGroup meeting sponsored by the Kansas City-based fintech.

The biggest challenge. The member said that aligning top executives internally was probably the most time-consuming aspect of the adoption, noting that there were multiple areas and teams impacted whose cooperation was critical. Besides the initial IT investment, the implementation required changing the company’s procurement and accounts payable processes.

  • The assessment and ultimately the recommendation to adopt C2FO were made by an executive committee comprising representatives from finance, treasury, IT, supply chain, procurement, and credit and collection. Ultimately the company’s CFO signed off on the project.

Three choices. The company considered employing the traditional discounting model, in which vendors receiving early payment within a certain number of days would accept a specified discount. Also contemplated: a sliding-scale model that tied the discount percentage to how many days early the vendors were paid.

  • Those approaches typically require extensive negotiations with suppliers and allow limited flexibility. The company chose the dynamic-discounting model, which lets it define the amount and timing of cash it deploys into the program and enables vendors to bid on the discount percentage they are willing to provide.

Smoothing out cash flows. The flexibility of the C2FO platform allows the company to better manage its cash flows, making the model especially attractive given the transactional, potentially volatile nature of the company’s business.

Benefits across the company. Treasury’s DD benefits include a risk-free investment opportunity, optimizing working capital and payment-term extensions. In addition to being a tool highly leveraged by treasury, there were benefits in other areas too:

  • Procurement: Stronger supplier relationships; standardized processes and payments; no more negotiating one-off discount terms.
  • IT: Minimal support required; a secure SaaS platform; easy user experience with minimal training; operations on multiple ERP systems.
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Share Repurchases: Don’t Wait for the Sell-off

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

Danger in waiting. Research by Deutsche Bank suggests that for almost all sectors, more shares are repurchased (at a lower price per share) if companies buy as soon as cash becomes available instead of waiting until the stock declines.

“Management is notoriously optimistic about its undervaluation,” the Deutsche Bank expert said. But given the commitment companies make to repurchase shares, they have to buy them back eventually, even the dip never comes, he said. “So the danger is waiting.”

Methodology. The back-testing research assumes that if the required dip does not occur after one year, the company starts spending incremental cash flow on share repurchases because “we assume that no more than one year of cash flow can be retained,” the banker said.

Dollar cost averaging. In simple terms, the problem with spreading out buybacks over a longer period of time is that stock prices have risen over the long term, the banker said. And while dollar cost averaging makes sense on an emotional level, “It’s best to spend the money as soon as it’s available.” The one caveat, he added, is that it’s smart for companies to have a liquidity reserve in case of severe downturns.

Buyback ups and downs. S&P Dow Jones Indices in December reported that share buybacks for S&P 500 companies reached $175.9 billion in the third quarter of 2019, 6.3% higher than Q2 2019, 13.7% lower than Q3 2018, and 21.1% lower than the $223 billion record set in Q4 2018. Numbers for Q4 2019 aren’t available but S&P says most estimates call for $189 billion.

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Activist Investors Who Care About More Than One Kind of Green

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

  • Inspired by Silent Spring. According to Ubben, the Spring Fund name was inspired by the Rachel Carson environmental science book published in 1962.
  • What makes the fund unique. It’s run by one of the leading activist investors at a firm with $16 billion under management that’s famous for, among other thing, forcing its way onto the board of Microsoft, proving mega-caps were not off limits. “It takes a profit maximizer to know a profit maximizer,” Mr. Ubben said. Bringing an activist mindset to an environmental and social investment mandate has appeal, and Mr. Ubben has raised $1 billion in capital so far.

Here are some key insights from Mr. Ubben:

  • Larry Fink’s letter ups the ante substantially. BlackRock Chairman and CEO Larry Fink’s latest annual letter to CEOs ups the ante on sustainability, calling for “a fundamental reshaping of finance.”
  • Building on multi-stakeholder and corporate purpose mandates. Climate risk as investment risk and putting sustainability at the center of investment mandates may be the most powerful driver of the multi-stakeholder, corporate purpose mandate that Mr. Fink helped usher into modern thinking in his earlier letter.
  • Sustainability is a way to get the long term back. The constituency to support sustainability includes at least two-thirds of CEOs who see it as a way to win back a long-term view from shareholders—give me more than a quarter to reallocate capital to save the world before showing returns on that investment. There are probably one-third of those that are really driven to save the world.
  • Profit maximization over decades. To make the case for profit-driven investment in sustainability, investors need to understand that the time frames must extend 30 to 40 years. Decisions made based on current values, versus terminal values, will lead to investments that will destroy capital over the next generation. They are not conducive to long-term profits.
  • Change the investor base. Thus, companies that want to embrace sustainability and long-term profitability in their corporate purpose need to move toward investors who share that purpose.
  •  This is the window to move. Not only is more research convincing more people to believe in climate risk and the need for action, but the cost of capital in the current lower-for-longer interest rate environment is conducive to making new investments and reallocating capital. As Mr. Ubben notes, we have moved from the traditional situation of being short financing to being short human, social and environmental capital.
  • The effort is capital intensive. Ultimately, the transition to sustainability will be capital intensive. Such a capital-intensive effort will require the capital structures of existing large companies. For this reason, Mr. Ubben is not a fan of villanization.
  • Big Oil capital budgets needed.  One of his investments is in Nikola Motor, for example, which is developing hydrogen fuel cells for long-haul trucking.  To move to this future, there needs to be substantial capital invested in refueling platforms and distribution. “We will need the capital budgets of a Shell or a BP to do this over the next 30 to 40 years,” he said.
  • Shifting value propositions. While shifting to long-term value propositions is one necessity for the fundamental reshaping of capitalist economies, another is a change in perception of value and unit economics. As an example, Mr. Ubben said that if biodiesel becomes mainstream, it would make sense for McDonald’s to pay customers to order french fries to generate more used frying oil to convert into fuel.
  • Utilities need pristine governance.  The grid is the most important asset in the energy economy, including a clean energy one. So it’s imperative that utilities embrace a multi-stakeholder model and adopt the best possible governance. If customers have no choice but to be utility customers, then the economy must rely on regulators and government to sustain their ESG viability. This drives Mr. Ubben’s activist investment in Hawaiian Electric Industries and his calls for a management shake-up. He favors performance-based ratemaking for utilities, encouraging them to become asset light and deploy micro grids.

Ultimately, it’s impossible to know if green activist investors like Mr. Ubben are motivated mostly by a philanthropic desire to fix a system they helped create and make capitalism work for society, or are using the increasing embrace of ESG to profit from green activism. It’s probably a bit of each. Regardless, finance professionals at multinationals have no choice but to pay attention and take action.

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Do You Need Outside Help for TMS Implementation? Maybe

Consultants can help TMS implementations, but practitioners retain some skepticism.

Implementing treasury management systems (TMS) is an arduous and complicated task that can benefit significantly from outside expertise but maintaining a skeptical eye can optimize the outcome.

Consultants can help TMS implementations, but practitioners retain some skepticism.

Implementing treasury management systems (TMS) is an arduous and complicated task that can benefit significantly from outside expertise but maintaining a skeptical eye can optimize the outcome.

ATLG members who had implemented TMSs expressed horror at the notion of returning to Excel spreadsheets. Nevertheless, TMS vendor consolidation and other factors have worsened already sketchy vendor support services, increasing the need for outside help and expertise. The peer group of assistant treasurers exchanged insights on how to best go about that:

Self-implementation is best. A member considering a new TMS said that while he’s comfortable using consultants on the front end to analyze current processes and potential treasury transformation opportunities as well as the RFP process, he and his team are debating whether to lean on outside resources to help with implementation. Another assistant treasurer (AT), whose experience included installing four TMSs, recommended treasury implement as much as possible to best understand how the system works. Be prepared for vendors’ poor after-sale service.

Some exceptions. NeuGroup members generally agreed with that advice, although one participant said her team did use a consultant to implement SAP’s treasury module, since the vendor’s “mindset” tends to be focused on enterprise resource planning (ERP) systems rather than treasury.

Consulting on infrastructure. Consultants can be especially helpful in early-on TMS implementation decisions, specifically when it comes to setting up the TMS infrastructure–such as static data, including entity and account structures, naming conventions and a variety of other items that can be difficult to change. “Things you have to live with forever,” said Tracey Ferguson Knight of HighRadius, whose prior experience spans sales, consulting and implementation services at Reval and Thomson Reuters’ TMS division.

RFP consulting concerns. A few members noted consultants’ familiarity with the range of TMS options and which may fit a company best. Ms. Knight cautioned about using consultants to guide the RFP process, however, given that many of their practices increasingly rely implementing systems. “Some are better than others, but they’re likely, even if subconsciously, to steer you toward solutions they know better, where they can earn more business on the implementation,” she said.

Make no promises. If a consultant’s systems selection help is necessary, don’t make any promises or even discuss the possibility of implementation work, to avoid potential bias throughout the implantation process, Ms. Knight said.

Just advice, please. Ms. Knight agreed that treasury should perform the bulk of the implementation itself, noting that consultants’ greatest value is advising treasury on how the TMS system works and applies to the specific business. The consultants at vendors, especially quickly growing ones, however, often have recently been hired and may not understand how to best tailor the TMS to the client company’s business. A third-party consulting firm may be a better bet, but make sure their staff is indeed experienced, since they, too—especially the biggest consulting firms—frequently bring on new hires.

One obvious solution. A participant noted her firm simply decided to hire one consultant for the RFP and a different firm for the implementation. “We selected a different one for implementation in part for price but also independence,” she said.

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What Would an AI-Driven Capital Allocation Look Like?

Perennial discussions of capital allocation tend to end up in essentially the same place.

My friend Tom Joyce at Deutsche Bank circulated the chart below last week in his “Chart of the Day” email. This one caught my eye because it shows how corporate uses of capital, at least at the S&P 500-company level, are pretty consistent year to year.

Founder’s Edition, by Joseph Neu

Perennial discussions of capital allocation tend to end up in essentially the same place.


My friend Tom Joyce at Deutsche Bank circulated the chart below last week in his “Chart of the Day” email. This one caught my eye because it shows how corporate uses of capital, at least at the S&P 500-company level, are pretty consistent year to year.

  • M&A and Buybacks. Tom calls out the changes:During the current M&A upcycle, which began in late 2014, M&A has risen as a percentage of total corporate capital allocation. Since the passage of US tax reform in December 2017, incremental earnings benefits have been disproportionately allocated toward stock buybacks.”
  • Marginal differences. Still, should we get that excited about sub-5% average increase in share buybacks? A one year 10% increase in M&A capital allocations?

It seems to me like there’s not much innovation going on with capital allocation decisions. Set your capex need based on where your products are in their life cycle, opportunistically look at liability management, set aside for anticipated M&A and then debate the merits of dividends vs. buybacks in line with your capital return guidance. Essentially a monkey could do it.

Yet, capital allocation is a perennial top project and topic for treasurers in our network. I hate to guess how many hours are spent deliberating and supporting capital allocation decisions with analysis.

  • Thought bubble. What would an AI come up with if it were tasked to optimize the allocation of corporate capital? Especially if it were not constrained with all the commonly held conventions and assumptions about how it is being done now?

If anyone has let an algo or AI loose on their capital allocation, real or hypothetical, I would love to know what that looked like. Or if you are aware of research or solutions in this area, please ping me to connect.

Capital allocation is already on the agenda for at least one of our upcoming treasurer meetings. I’d enjoy shaking up the discussion with something new and relish getting into the weeds on dividends vs. buybacks and the rest, but not if the discussions always lead people back to the same place. 

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A High Bar: Lowering Corporate Expectations and Under-delivering Successfully

Slower economic growth, tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at the recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Slower economic growth and tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at a recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Managing expectations. The key challenge, then, for some members is managing the expectations of those in the C-Suite who still want 10% revenue growth. In other words, CFOs and their teams need to figure out how to successfully under-deliver. This topic—and how to deal with failure—will be discussed at the group’s next meeting in April in Shanghai (email us about your eligibility to attend).

Tighter belts. Dealing with the fallout from lower production has meant implementing cost-cutting initiatives, and some members expect the challenging business climate and the need for belt-tightening to last three to five years.

Pressure to produce. As demand slows, members say Chinese authorities are exerting pressure on corporates to build inventory to reduce the impact on the economy and keep employment high. Much of this pressure is indirect, through so-called window guidance, which is a part of life in China and the way government agencies influence corporate behavior with unwritten rules.

Credit, not tariffs. Although trade tensions between the US and China have added to the region’s challenges, the tightening of consumer credit in China ranked as a more serious concern for many participants, based on comments during the projects and priorities session at the meeting.

  • Other concerns mentioned at the meeting include complying with China’s corporate social credit system and the wide-ranging reform of the country’s individual income tax that has implications for corporates.

Hope for the future. Members remain bullish on the long-term business prospects in China, thanks in part to the country’s population of 1.4 billion. But for now the pressure is on, and some members are searching for ways to reduce the stress. How else to explain why one finance team has created a “S— Happens Award?”

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What China’s Individual Income Tax Changes Mean for Corporates, Expats

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

Big picture. CFOs—who are responsible for income reporting—need to proactively dig into the details of the changes with tax advisors and coordinate closely with human resources departments to develop retention policies that address the potentially negative financial effects the new rules may have for some employees. These include changes in the treatment of annual bonuses and equity incentives—although not all details have been announced.

Defining residency. High on the list of takeaways is that an individual who lives in China for 183 days or more will now be considered a tax resident, instead of one year under the old rules. This has implications for whether the employee pays tax only on income sourced in China or on all of her worldwide income.
• A new “six-year rule” replaces the old five-year concession rule. Under the old policy, if a foreign worker stayed in China for five consecutive years, her worldwide income would be taxed in China. The new law extends the period to six years, allowing foreign workers in China more time to avoid paying taxes on income sourced overseas.
o Under the new rules, if the person leaves mainland China for more than 30 consecutive days at any point during the six years, the clock to count tax residency will be reset.

Tax-exempt benefits vs. itemized deductions. The new law allows foreign workers to take advantage of several new itemized deductions limited to specified amounts:
• Children’s education.
• Further education.
• Mortgage interest or housing rent
• Medical fees for serious illness.
• Elderly care.

Foreign workers who don’t take the deductions listed above can continue use tax-exempt benefits until the end of 2021 by claiming allowances of a “reasonable amount” for children’s education, language training fees, housing rental, home leave visits, relocation expenses, and meal and laundry expenses. Corporates need to make sure employees are aware of the choice and the pros and cons of their decision.

Greater Bay Area preferential tax policy. To attract highly skilled workers to a number of cities in Guangdong province, China is providing them with the incentive of an effective tax rate of 15% via a tax subsidy. The policy is effective until the end of 2023.

CFO checklist. KPMG identified several areas that fall within the CFO’s purview that require action:
• Review tax budgets and plans for the new IIT system, including interaction with payroll.
• Review compliance and implement robust policies and processes to mitigate risks; prepare for tax audit.
• Review the company’s obligation to employees, offer training on annual tax filing; work with HR on retention.
• Examine how the new rules affect business traveler risks.

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China’s Corporate Social Credit System: What Corporates Need to Know and Do Now

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams. • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job. Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams.

  • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job.

Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The presentation included information from a study published in 2019 by Sinolytics and commissioned by the European Chamber of Commerce. In it, Chamber president Jörg Wuttke writes, For better or worse, China’s corporate SCS is here to stay and businesses in China need to prepare for the consequences, and they need to start now.”

The good news. It’s not too late to prepare. Sinolytics says “implementation gaps” will give companies time to make the necessary internal adjustments to manage their regulatory ratings and engage with government authorities on concerns, but notes that inquiries need to be detailed, concrete and technically precise. Corporate leaders need to:

  1. Understand exactly what the system requires from the business.
  2. Assess where their company stands regarding the requirements—and identify gaps.
  3. Design and implement effective internal adjustments.
  4. Continuously monitor further developments of the corporate SCS.

Hard facts. The corporate SCS assesses the behavior of companies through topic-specific regulatory ratings (e.g., tax, customs, environmental protection and product quality) and a parallel set of compliance records (e.g., anti-monopoly cases, data transfers, pricing and licenses). These ratings will be made public, meaning a company’s customers, suppliers and competitors will have access to information that may cause data privacy issues that are not yet resolved.

Sinolytics says:

  • The system covers virtually all aspects of a company’s business in China. A multinational is subject to approximately 30 different regulatory ratings—many industry-specific— and compliance records, most of which have already been implemented.
  • Each rating is computed based on a set of rating requirements. In total, an MNC can expect to be rated against approximately 300 such requirements.
  • Some requirements create strategic challenges for companies, including those relating to the behavior of business partners such as suppliers and service providers. This burdens companies with the responsibility of monitoring their partners’ trustworthiness.
  • The corporate SCS uses real-time monitoring and processing systems to collect and interpret big data, which allows immediate detection of compliance and determines a company’s social credit score.

Ratings reality. Sinolytics says algorithm-based ratings of companies will have direct consequences after the collected data is processed and rated against the defined requirements. A good rating leads to rewards and a negative performance is sanctioned.

  • Carrot: High corporate SCS scores can mean fewer audits (e.g., taxes, safety), better credit conditions, easier market access and more public procurement opportunities for corporates.
  • Stick: Low scores mean the opposite of the above, and for every negative rating, there’s already a set of sanctions in place, Sinolytics says.
    • Sanctions include penalty fees, court orders, higher inspection rates, targeted audits, restricted issuance of government approvals (e.g., land-use rights and investment permits), exclusion from preferential policies (e.g., subsidies and tax rebates), restrictions from public procurement, as well as public blaming and shaming. And don’t forget blacklisting. Sanctions can even personally affect the legal representative and key personnel of a company.

Will the system create a more level playing field?

Sinolytics says yes—in principle. “The requirements and consequences of the Corporate SCS apply to all companies registered in China, regardless of ownership structure. This might in fact translate into an advantage for international companies vis-à-vis their Chinese competitors, as many international companies feature more advanced internal compliance structures,” the study says. However, Sinolytics has these caveats:

  • The field may be more level but the game played on it will be more difficult and controlled than before.
  • The system has the potential for discriminatory use toward international companies as there is no guarantee that the ratings cannot be applied in a biased way, targeting specific companies with greater scrutiny.
  • Some of the rating requirements apply to all market participants but are more difficult for international companies to fulfill. “This appears to be the case for the State Administration for Market Regulation’s blacklisting mechanism for ‘heavily distrusted entities,’ which makes the SCS useable in trade conflicts.”
  • Chinese companies might have an advantage in navigating the intricacies of the system, and that’s potentially enhanced by better information flows from government authorities.
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Love It or Hate It, ESG Is a Key Theme for 2020

Reasons you can’t afford to leave ESG off your priority list.

ESG and related themes of sustainability and green finance are polarizing. Nearly everyone sits on a spectrum where one end thinks it’s all a bunch of hooey and the other argues it’s the key driver of finance for the next decade. Personally, I feel conflicted—one reason ESG didn’t make my initial list of key 2020 issues.

Founder’s Edition, by Joseph Neu

Reasons you can’t afford to leave ESG off your priority list.

ESG and related themes of sustainability and green finance are polarizing. Nearly everyone sits on a spectrum where one end thinks it’s all a bunch of hooey and the other argues it’s the key driver of finance for the next decade. Personally, I feel conflicted—one reason ESG didn’t make my initial list of key 2020 issues.

Mixed feelings aside, I’m convinced the decade ahead is a time to take ESG and all it brings with it seriously. As I noted in an earlier post on green finance, there’s a “tsunami” of sustainability-linked finance products coming, as a member treasurer at one company leading the way put it.

Skeptics coming around. A top M&A and activist advisor at a leading Wall Street firm confirms that even investment banking skeptics have come around to ESG and green finance being a key consideration. “We didn’t really take it that seriously until about six months ago,” he said. “Yet now it’s a strategic priority for the bank, with an executive level committee dedicated to ESG and related opportunities.”

M&A options. More specifically, ESG has opened up a lot of new thinking about what deals might win regulatory approval and political backing when presented through a sustainability lens. The advisor also said that the financing for an acquisition can be structured more favorably now if you look at sustainability finance options.

Activism. ESG was once viewed primarily as a tool for activists looking, for example, to pry open a seat on the board. Now it’s become a guiding strategy in and of itself. Look at Jeffrey Ubben’s ValueAct Spring Fund, which invests in companies aiming to address environmental and social problems. Mr. Ubben represents a new breed of ESG investors who, having made a fortune as activist investors, are now trying to make the world a better place by using their knowledge and experience—not to mention their activist aggressiveness.

Board focus. For these reasons and others, boards are also focused on ESG, so it makes sense for corporate leadership to focus on it, too. According to a recent Deloitte white paper on 2020 board agendas, “Perhaps the most dramatic development―or, rather, series of developments―that boards may need to consider in 2020 is the intense focus on the role of the corporation in society.” This includes “social purpose” but also “concerns about persistent economic inequality, climate change, and the availability and cost of healthcare, as well as concerns about the ability of governments to address these and other issues.”

Investors, workers. As a result, the paper says, ESG “has also garnered the attention of investors and others, who are increasingly asking whether and how companies are affecting and affected by environmental and social developments.” Employees are also asking. “The rise of employee activism during 2019, with actions such as work stoppages and shareholder proposals, has increased the stakes in these and other areas.”

Disclosures. Risks tend to be taken more seriously when they are disclosed prominently in public financial statements. As Deloitte notes, “Companies are being called upon by investors and others to provide disclosures concerning the ESG challenges they face and how they address those challenges.” One driver is “the rise of third parties―including so-called ‘rankers and raters’―who comment on companies’ efforts in this area, making it important for companies to tell their stories rather than let someone else do so.”

Storytelling. As more observers are noting, ESG-driven investing of corporate cash, 401(k) and pension plans, as well as corporate venture funds and M&A efforts by biz dev teams, are relatively cost effective ways to help companies tell this story. Sustainability-linked finance, given its embrace by key market participants, may be an even better way to do this. But whatever you do, put ESG on your 2020 priority list.

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