Why share repurchases become a drug for companies.

Responding to questions about their capital allocation priorities, assistant treasurers at a recent NeuGroup meeting acknowledged “regurgitating the standard [capital] deployment line,” as one participant put it, after organic growth captured nearly half the votes and M&A ranked second.

Stock buybacks ranked last, even though much of the discussion ended up focusing on that use of capital, which may be a clearer indication of capital priorities. Key insights included:

• Like a drug. Returning capital to shareholders through stock repurchase programs often starts out as a way to dispose of leftover cash in a meaningful way. But soon the programs become a key element to achieve a targeted earnings-per-share (EPS), and then whatever remains becomes the leftover. “It’s like a drug that you can’t get off,” said a participant. “I’ve seen that in company after company.”
• Analysis of buybacks’ value varies greatly. One member said her team performs extensive analysis on whether share repurchases are providing adequate returns. Another member said that if repurchases are the last choice in capital deployment, then there’s not a lot of value from examining their returns, although some may want to maximize even the returns of leftovers. 
   
• A signal to investors. For fast-growing companies, noted the assistant treasurer of a major technology firm, announcing that cash will go to repurchases instead of capex tells investors the company no longer has opportunities in which to invest, and its business model is changing.
   
• Downplaying repurchases. A company whose acquisition opportunities come in “chunks” may see repurchasing shares as a good way to return money to shareholders and even out cash levels. To downplay the importance of buybacks in managing their EPS, they may report earnings before share repurchases. 
  
  “They have that line item because that’s what they want investors to focus on,“ a member said.

S&P 500 as a benchmark. Several participants acknowledged their companies assume the money they return to shareholders will earn S&P 500-type returns, so if a company’s stock is outperforming the index, it should slow repurchases, and vice versa. One member prompted peals of laughter by asking whether anybody had ever heard their CFO say the company’s current share price made repurchases too expensive to continue.

Accountability for allocation decisions? Sort of. Responses to a survey question asking whether there is accountability for ensuring that capital allocations generate anticipated returns were 53% affirmative and 35% saying no.

But further discussion revealed that for most members, the answer rests somewhere in between. Their companies may have rigorous accountability policies, but given the long-term nature of significant investments, the relevant decision-makers often have left the company or are in very different positions. Monitoring too closely for accountability can stifle innovation.

Founder’s Edition, by Joseph Neu

Investors and corporates need to know about conflicts of interest when proxy advisory firms team up with activist investors against management. 

The former CFO of a company that successfully defended against an attack by an activist investor shared some key lessons learned from the experience at a NeuGroup meeting last week. Here’s a big one:

• Management at even the most shareholder-friendly corporations must court passive investors to counter the inherent power of proxy advisors that support the activists. 

A powerful duopoly. An editorial in the Wall Street Journal on Monday highlighted the power of the proxy/corporate governance duopoly. It reveals:

• In­sti­tu­tional Share­holder Ser­vices and Glass Lewis con­trol 97% of the proxy ad­vi­sory mar­ket.
• ISS pro­vides rec­om­men­da­tions to 2,239 clients, in­clud­ing 189 pen­sion plans, and ex­e­cutes 10.2 mil­lion bal­lots an­nu­ally on their be­half.
• Glass Lewis, which is owned by the On­tario Teach­ers’ Pen­sion Plan and Al­berta In­vest­ment Man­age­ment Corp., has more than 1,300 clients that man­age more than $35 tril­lion in as­sets.

More: “Stud­ies have found that the two firms can swing 20% of votes in proxy elec­tions. An Amer­i­can Coun­cil for Cap­i­tal For­ma­tion re­view last year found that 175 as­set man­agers with $5 tril­lion of as­sets voted with ISS rec­ommen­da­tions 95% of the time. Ac­tivist hedge-fund in­vestors of­ten en­list the proxy firms to shake up man­age­ment, for bet­ter or worse.”

SEC scrutiny. This power has invited scrutiny from regulators. On November 5, the SEC voted to propose amendments to its rules governing proxy solicitations “to enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide their clients. The proposal would also provide an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice.”

Allegations made by companies include:

• Disparity in governance ratings given to firms that pay ISS or Glass Lewis for consulting vs. those that do not.
• Conflicts of interest when proxy advisors are paid by activist investors or other institutional investors with an agenda.
• Lack of adequate means to dispute proxy advisor recommendations and even to correct factual errors.
• Poor transparency on shareholder vote counts, including point-in-time ownership and associated voting rights.

Of course, corporate managements only have themselves to blame if they don’t hold themselves accountable to governance standards—and increasingly to environmental and social standards for corporate behavior (E, S and G).

• Still, companies that do all they can to be good corporate citizens and look out for shareholders (and all stakeholders) should expect a fair hearing.

Don’t wait. The best advice is not to wait for a proxy battle to tell your positive story. “We had heard that good investor relations was to be proactive to passive shareholders,” the former CFO speaking to our members said. Not only IR, but the C-suite needs to meet regularly with investors to share the company’s business strategy along with its ESG story. This is the best way to counter the proxy duopoly.

One member’s approach to reviewing accounts, purging the inessential and optimizing.

A photo of a smiling Marie Kondo, author of The Life-Changing Magic of Tidying Up, helped set a positive tone for one member’s presentation on the thorny task of bank account rationalization. 

• The treasury operations team’s embrace of purging clutter and keeping only what’s essential was fueled less by the desire to spark joy than the imminent, mundane chore of moving offices. That meant buckling down and weeding through each and every physical folder for every single bank account. 

Inventory overload. Taking inventory of bank accounts is an onerous task to say the least. In a quick poll of meeting attendees, about 95% of members have over 500 accounts, and only a handful have a formal bank account rationalization process. It is important to remember that a recently closed account can be just as important as an open one for audit and FBAR purposes.

• Inventory checklists should evaluate the accounts’ ties to the overarching bank relationship, products and services, portal(s), and business/accounting purpose, usage and signers. 
   
• To keep or not to keep, that is the question. With all the aforementioned information the question of “what do we do?” becomes easier to answer. The inventory process helps you discover accounts you may have overlooked and products and services you don’t use or aren’t using enough. And that drives decisions to help you achieve account optimization, improving efficiency.  

Leaner and nimbler. Starting with large amounts of bank account paperwork, the presenting company digitized bank account files for all open accounts and two years of previously closed accounts. Then it established an ongoing plan for maintenance as well as one designed for facing M&A integration projects. While recognizing that “no two integrations will be the same,” the focus is on keeping bank relationships but consolidating accounts wherever possible. 

  Pros:

• Reduce administrative work, KYC, audit requests, online administration, account maintenance
• Increase liquidity: concentrate cash balance, enhance and maximize yield on investable cash   

   Cons:

• Time consuming up-front work
•  Easy to accidentally overlook some bank products and services (example: letters of credit)

Cast a wide net and target end-goals. Involving all internal stakeholders such as tax, legal and payment operations allowed for transparency, educated account closures and keeping purpose-specific open accounts. The presenter advised other members that when tackling account rationalization in an M&A integration, the game plan should be established and clearly communicated, while being sensitive to human relations (i.e.: what is happening on the other side of the integration equation). 

Don’t forget where you came from. Unfortunately, bank account rationalization isn’t a one-and-done project. The presenter stressed that establishing timelines, setting milestone objectives and scheduling ongoing maintenance of the process is necessary for continued success. 

The treasurer of a decentralized team says he’s more influencer than boss. And it works—for him. 

The corporate treasurer of a fast-growing, global holding company that owns multiple brands explained at a recent NeuGroup meeting that each brand has its own treasury team but that treasurers at the brands report to local CFOs—none of them have a formal, direct reporting line to him.

• Why. The member inherited this decentralized structure, which corresponds to a business model where each brand manages itself and the holding company, following an acquisition, strives to retain the company’s founding members and corporate culture. 
   
• A rare bird. This structure is relatively rare among multinationals, stood in contrast to the other members at the meeting who have centralized treasuries, and struck some of them as far less than ideal.

What he does. The member sets goals for treasury, controls the banking group (“Strategy gets set at the top of the house with me,” he said.) and establishes risk tolerances for this high-growth company.

Why it works. The member, who has decades of experience and has worked at world-class companies with centralized treasury models where the treasurer is boss, says in his current role the word that best describes him may be influencer. He says this model works not only because of his skills and background but because of his ability to listen. 

• “I have been successful in doing this using strong influencing skills,” he said. “But another treasurer who needs formalized reporting lines would not find the same success.”
   
• He works closely with the treasury teams at each brand and admits he confronts pushback at times and sometimes loses when pursuing an initiative. 

The bottom line. The treasurer emphasizes that ultimately, it’s not the structure or process that determines success—it’s having the right the people in leadership positions. That applies to him and all the people he works with in treasury. 

• “I do not advocate for centralized or decentralized,” the treasurer said. “Instead I have tried to adapt and maximize the effectiveness of our strategy based on the company’s overall structure, which is decentralized.”

Founder’s Edition, by Joseph Neu

Cybersecurity is now a board-level risk and that might justify a board-level cyber risk committee, NeuGroup members said during our recent Internal Auditors’ Peer Group meeting. 

In a discussion about cyber risk and a tangential conversation on separate audit and risk committees, chief audit executive members from tech and other IP-intensive firms highlighted the issue of cybersecurity expertise and experience at the board level. Directors on most audit or risk committees don’t necessarily have this specialty expertise in their backgrounds.

• Don’t wait for the mandate. While other specialty areas of expertise, e.g., finance, have been mandated, cyber risk is too important to leave off the list of desired qualifications for board of director recruiting.
• A dedicated cyber risk committee would help with recruiting. Forming a separate committee for cyber risk would help focus minds on recruiting such directors. It would also elevate the CISO or Infosec head with a board committefe reporting line.

Separating the chief information security officer (CISO) or information security reporting lines from the chief technology officer or IT function was also a takeaway for several members. The reason: 

• It’s too easy for the technology group to allocate budget away from cybersecurity-related projects to favor shiny-object, customer-facing or revenue-generating technology spend. 

Some firms thus have CISO/InfoSec reporting into the CFO if there is no CRO instead, but: 

• A CISO/InfoSec reporting line to the chair of the board’s cyber risk committee would give them that much more autonomy. 

If you’re looking for a driver to push this initiative, look no further than the SEC’s  Commission Statement and Guidance on Public Company Cybersecurity Disclosures, which came out in February 2018. In the wake of Equifax and other breaches, the SEC had felt an increasing need to issue guidance on disclosures because senior executives were found to have sold company shares during the period when they were aware of an incident, but before it had been publicly disclosed.

Generally, once specific risk factors are called out for disclosure the need for governance of them also rises. The SEC guidance includes the following on board risk oversight:

• Current SEC regulations “require a company to disclose the extent of its board of directors’ role in the risk oversight of the company, such as how the board administers its oversight function and the effect this has on the board’s leadership structure.” How does it look if the board doesn’t have cyber in one of its committee’s mandates?
• Such disclosures “should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.” This is where the reporting line to cyber risk head comes in.
• “To the extent cybersecurity risks are material to a company’s business, we believe this discussion should include the nature of the board’s role in overseeing the management of that risk.” Yes, cyber risk counts as important!
• “In addition, we believe disclosures regarding a company’s cybersecurity risk management program and how the board of directors engages with management on cybersecurity issues allow investors to assess how a board of directors is discharging its risk oversight responsibility in this increasingly important area.” Outlining the program in SEC reporting is one thing, but investors and regulators will also naturally look into the qualifications of the directors charged with cyber risk oversight.

Have you done your due diligence on the need for a cyber risk committee? Hint: Consider rolling privacy into their mandate, too.

Rolling in the Deep (Data)

As a related issue, data and data privacy are other areas that boards are going to need to have some knowledge of, particularly when it comes to requirements for last year’s general data protection regulation – GDPR – and now California’s similar California Consumer Privacy Act (CCPA).

Data collection, storage and management, as just about every corporation is learning (in some cases, the hard way), is critical to success. Like blood it needs to course through the company’s veins in order to stay competitive. However, if there’s a breach and that data starts pouring into cyberspace, it could cost the company dearly. That’s why governments are stepping in.

Both GDPR and CCPA are regulations that require companies to get a handle on their sprawling data troves, make sure they are secure and be ready when someone – the “data subject” – wants their personal data purged from wherever the company holds that data.

As IAPG members learned at their recent meeting, complying with the data subject part isn’t that easy.

• What is personal data? What is personally identifiable information? GDPR thinks of them as two distinct things – but both critically important. And who will manage it all? The DPO of course. If your company doesn’t have a data privacy officer already, then it should be looking for one posthaste.  

But even with the best data organizing efforts, total control is elusive. As a presenter at the IAPG meeting pointed out, “100% GDPR compliance is an illusion.”

• That’s because there are “many systems, files, hard copies containing personal data. Think about the human resources archives, systems backup and archives, one-time used Excel work files, etc. There is no company that has a complete and accurate inventory of personal data,” he said.

Nonetheless, companies should be able to show that they are making a solid effort. 

Zeroing in on the cost of carry can help companies get a handle on hedge costs.

Volatile markets require an effective hedge program while ensuring the cost is reasonable for the level of risk reduction. At a recent FX Managers’ Peer Group meeting, in a session co-led by a member and a sponsor’s risk advisory team, the group pondered ways to contain the cost of hedging and the trade-offs.

A critical takeaway was that one of the first things practitioners must do is to consider the cost of carry. This is determined by the interest differential between the two currencies in the hedge (this, rather than basis spread, is the main driver of carry cost). In the currency market environment at the time of the meeting (September), that would indicate favorable hedge costs for long G10 exposures (ability to lock in a hedge gain with a forward contract) while hedging emerging markets (EM) currencies the same way would result in a loss. For companies with primarily short FX exposures, such as the presenting FX member, the scenario would be the opposite.

What’s your hedge “value for money?” Another way to view cost is using the ratio of dividing the carry gain or loss by the implied volatility for the considered hedge period. The higher that ratio is, themore value for money it is to hedge that currency risk. This ratio varies over time and can often tip from favorable to unfavorable, especially in EM currencies. And, the more volatile the currency, the more the timing of the hedge transaction matters.

What about correlation? Members were shown how the carry cost of developed markets (DM) currencies were strongly correlated to 3-month USD Libor where carry cost of EMs were not. Not only that, but because short-term rates are linked to economic cycles and central bank policies, forecasted rates changes are, more often than not, better indicators than forward curves. As one banker noted: “It’s good to look at forecasts, because banks are not always wrong.”

What’s the implication for corporate hedging? Because of correlation effects, offsetting exposures generally benefits those with both long and short exposures. For one member who revealed primarily short FX exposures, it pays to consider groups of currencies more, in this case DM/G10 vs. EMs. In periods like those of the last 12 months, when EM currencies have been negatively correlated vs. the USD, and the size of the exposure relative to the G10s is lower, there is a case for little to no hedging, unless a gain can be locked in from the get-go. For more material exposures (G10 for this company) where the correlations are also higher, a more careful approach is needed when the FX team is also mandated to contain the cost of hedging.

Why paying for performance when trying to cut bank fees may not hold water.

The pain point of bank fees is not significant enough to justify paying vendors who promise to analyze and reduce them on a performance basis. This was the consensus of NeuGroup members discussing bank fee management—one of their top priorities—at a recent meeting. 

While in theory it might make sense to pay a contingency fee based on how much a vendor saves a company, treasury operations managers are understandably reluctant. 

• “We pay our banks a lot in fees, so paying a vendor a percentage of savings would amount to a significant payout,” one NeuGroup member said recently. 
   
• Charging 30% of the savings as payment—what one vendor making the rounds has been quoting—is too high.

On a pure cash outflow basis, treasury has some idea of what it’s paying banks, but the full picture is murky since much of what banks earn off each client in the transaction banking realm is embedded in foreign exchange and interest-rate spreads. Indeed, sometimes an effort to reduce visible fees can lead to uneconomic decisions.

• If your bank fee analysis vendor has an incentive to reduce fees, they may do so at the cost of better interest or FX rates, earnings credit rates (ECRs), or may push other economically irrational decisions.

Further, treasury needs to step back and consider how much it is paying in fees versus the level of bank service it is receiving, including the credit commitment. In other words, it needs to look at the total wallet. Here are three points to consider:

• Is this worthwhile? One banker with experience in transaction banking at a global leader told me he thinks that the relentless focus on bank fees is akin to being obsessed with finding all the coins in your couch cushions.
  
  “Competition among banks has driven fees down, so it should not be as big a concern,” he said. NeuGroup members shot down this notion, however.
   
• More clarity needed. The wallet considerations with bank fees for transaction banking services need to be clearer and banks do themselves a disservice by failing to adopt global standards to make them more transparent and comparable.
   
• Rate environment is conducive to it. Now is the time to get a handle on fees. With persistent negative and lower interest, flatter yield curves, across much of the major developed economies, transaction banking is becoming more reliant on fees to sustain their businesses.   

The bottom line.  To fix the pain point of bank fees, banks and bank fee solution providers needs to:

1. Establish more clarity on what bank fees represent, and the market price for them.
    
2. Put them in the context of overall wallet management so treasurers can assess if the upcharge to pay for other services that are not market priced, like credit commitments, is acceptable.

This is the game being played: Banks deliver a range of services for which their corporate customers pay them X, aka the wallet; the allocation of that wallet to various services and fees is used to justify a credit commitment that is otherwise not fully paid for.

• To pay a bank fee analysis vendor on contingency to reduce bank fees may be a fool’s errand unless the contingency fee is reflected in the total wallet picture. 

Cash investment managers are shying away from risk and heading toward safety and liquidity.   

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield. 

• The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said. 

Changing stripes. Another member whose company once owned emerging market debt has derisked and the portfolio is now “very conservatively managed,” she said. It’s largely allocated to bank deposits, government and prime money market funds, commercial paper (CP), some asset-backed CP, mortgage-backed securities and munis. All of it is fairly short duration. 

Investment-grade reality check. Before the meeting, one member wrote:

• “Our major point of interest related to the balance sheet is liquidity. There have a been a number of research pieces floating around suggesting that many corporate BBB bonds are actually BB. During a downturn, those bonds will trade with reduced liquidity. We’re scrubbing our portfolio to identify any concerns of that nature.”

Exceptions to the rule. A few members are willing to venture out the risk curve a bit and invest in high yield corporate debt. But with plenty of due diligence: One member in this camp said that his group “spends a lot of time on credit,” allocating the portfolio to the right geographies and striving to “optimize relative to risk and liquidity.”

The pendulum swing. The only constant, of course, is change. So don’t be surprised if some cash investment managers are singing a slightly different tune at the group’s next meeting about their appetite for risk.  

• One of the members said her team is already asking, “Did we get too conservative?” At some point in the future, she said, there is a “high likelihood we’ll take more risk.”

One woman’s criteria for choosing new jobs that lead to higher rungs on the professional ladder.

At the latest Women in NeuGroup* event, held at Expedia in Seattle, Jenny Ceran, CFO of Smartsheet, suggested that women moving up the ladder should take chances—and take a job even if it means most of it would be learning. 

Her path to CFO. After working in finance at Sara Lee and Cisco, Ms. Ceran won the treasurer’s job at eBay at age 39 ¾., achieving her goal of becoming treasurer by the time she turned 40. Also cool: She was a member of NeuGroup’s Tech20 Treasurers’ Peer Group.

• After nine years in the role, she was ready for a new job at the company. She set her sights on investor relations, a learn-on-the-job opportunity for which she ended up earning accolades but was criticized for not having sharp enough elbows.
   
• Not only that, in order to do investor relations, she also had to take on FP&A, a combination that can be too much for one person with a small team at a multi-billion dollar organization.

After eBay, she served as treasurer and head of IR at Box, before becoming CFO for the first time, at a publicly-traded digital coupon company. She took the CFO job at Smartsheet three years ago.

Shoulda done it earlier. The CFO job is a big one that requires a lot of energy. If she had to do it over again, Ms. Ceran would have gunned for the CFO job earlier in her career when she had more of it. Lesson: Don’t wait.

Picking the next job: Follow your heart. Ms. Ceran advises careful consideration of the following five criteria whenever faced with an opportunity for a new role:

1. Find an industry that excites you. Work in industries that are compelling. The internet was a big draw for Ms. Ceran at the time internet-enabled businesses burst onto the scene, and that brought her to Cisco.
    
2. What work will I be doing? Ask yourself, “Will I learn something new or just reapply skills I’ve already developed?”
    
3. Who’s the boss? It’s important that you have chemistry with your boss. Remember: people don’t leave companies, they leave bosses.
    
4. Is the corporate culture a fit? Does it require you to behave in ways that go against your character? If you speak up about unacceptable behavior, how will that be received? Women in particular need to look out for signs of a “bro culture.”
    
5. The Money: Last and always last. Take the job if it fits your criteria, even if it’s less money. “I’ve taken jobs that pay less because they fit the above four so well,” Ms. Ceran said. “I ended up learning so much and it enabled me to pivot to greater things over the long-term.”

*The next WiNG event is in New York City in spring 2020. To receive an invitation, please email [email protected].