Treasurer’s Role in Strategic Risk Management

Mario J. Cornacchio, Jr., CPA Treasurer Bose Corporation Jiro Okochi CEO & Co-Founder Reval.com, Inc.

Agenda

• • • • • • • Expanded Role of the Treasurer Bose’s Perspective Visibility into Your Risk What Kinds of Risk Should the Treasurer Manage?

Hedge Performance: Planes & Boats Is Treasury Transforming?

What Does the Boss Want?

New Requirements

Many treasurers already see themselves as being strategic. However, many have new requirements since the financial crisis— monitoring metrics differently, more risk averse, looking for better investment performance. They are looking for guidance and support to be more efficient day-to-day (core functionality) while supporting their evolving role (better visibility).

Treasury Saves Companies

• • • • Ford Motor’s Treasury foresight resulted in a changing the game in the Auto industry.

Managed liquidity risk, debt and working capital – Reduced debt by $10bn in 2009 – Lowered interest expense by $500mm annually – Amended and extended credit revolvers for better liquidity – 1H 2010 reduced its debt by another $7 billion Only Big 3 Auto not to take government bail out.

“No-bailout Ford on turnaround roll: 3rd-quarter profit up 68%” USA Today, Oct 26, 2010

Word Association

External: Expanded Role of Treasurer

• If a corporation has a good treasurer, then he plays a significant role in solving the company’s problems.

• The global financial crisis made the treasury function in many organizations more strategic.

• Treasurers now focus on risk management, capital structure, corporate finance, and are more engaged in other parts of the business and operations. • They need to learn to speak another language – they can’t use hedging gobbledygook. They have to develop a manner of communicating in a way that is accessible to others at the table.

• Treasurers should have a seat at the table. • They need to have a blend of finely honed technical skills…but also an ability to match this with a strategic vision.

Co-Facilitator

Mario J. Cornacchio, Jr., CPA Treasurer, Bose Corporation

Mario Cornacchio has been Treasurer of Bose Corporation since 2003 and is responsible for worldwide treasury operations, credit risk management, and the company’s consumer finance group. He also oversees the pension plans and related investments. Prior to joining Bose, Cornacchio was Vice President and Treasurer of Welch Foods, Inc. and also spent 16 years at Cabot Corporation where he held a variety of positions including Internal Audit Manager, Director of Investor Relations, Corporate Staff Controller, Business Development Director and Assistant Treasurer. Cornacchio began his career in the Boston office of PriceWaterhouse Coopers a global public accounting firm after receiving a B.A. in Economics from Bates College and an M.B.A. degree at Rutgers University.

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Evolving Towards Strategic Risk Management

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Some observations from Bose

Complexity and risk driven An opportunity to lead Pragmatic approach to risk management New skills demanded Overcoming resource constraints via efficiencies

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An Increasing Array of Risk Management Issues

Foreign exchange Interest rate Commodity Counter party Customer credit default Supplier financial condition Supplier concentration Pension funding Information security

Strategic Treasury at Bose

Some Examples

• • • • • • • Innovative FX options hedging program More advanced customer default risk assessment Hands on support in supplier risk assessment China supply concentration and RMB hedge Opportunistic Mexican peso hedge Data breach response plan Use of Six Sigma & “Lean” techniques for efficiency

Strategic Risk Management – A Simple Metric

Are the business people coming to you for help in solving their risk related business problems?

Better Visibility

Treasurers require even more operational efficiency, including a means of better visualizing the entire treasury picture in the most comprehensive manner. Now, more than ever, they need better visibility into their positions and risks in order to effectively manage them, create accurate forecasts and make the right strategic decisions.

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Finding Risk: Exposure Identification

New Risk Mindset

Post financial-crisis, treasurers have adopted a new risk mindset. They worry about many different types of risk; they’re one of a few executives in a company that have a hands-on role in managing these risks; and they understand that those risks which are not readily apparent.

apparent are often the ones that have the most impact.

Hedge Performance

Airlines Stocks Slump; Fuel Costs Rise

• • • “US Airways Group Inc to hold from buy, citing the recent jump in fuel prices, and cut its earnings estimate. Shares slipped about 0.6%. “ “US Airways is known to practice very little fuel hedging, a type of insurance to offset volatility in the jet-fuel market.“ “At the other end of the spectrum, Alaska Air Group Inc. is considered to be one of the best positioned for rising fuel prices, said Standard & Poor’s Equity Research analyst Jim Corridore, who reiterated his buy rating on the Seattle airline’s shares.”

Royal Caribbean 1Q Tops Views, Aided By Fuel Hedges

• “Royal Caribbean Cruises Ltd. (RCL) reported stronger-than expected first-quarter results…aided by lower costs and a gain from its fuel-oil hedges...” • “Rising fuel costs will take annual earnings down 30 cents and the events in north Africa and Japan will sap another 20 cents..much of this will be offset by the company's hedging program.” • “Royal Caribbean said it is 56% hedged for the remainder of this year at the equivalent of $75 a barrel of West Texas Intermediate, and 55% hedged next year at the equivalent of $86 a barrel. “ • “Shares of Royal Caribbean closed up 11 cents at $39.82 a share.”

From the Wall Street Journal, April 28, 2011

Stakeholder Communication

As Treasury Evolves … so Must Technology

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Leading Change

One way to become more strategic is to lead change that impacts across the organization.

Treasury can touch every department – Exposure management with sales subs – Commodities hedging with procurement – – – FP&A Tax & Accounting HR Treasury can leverage its financial acumen and discipline to all of these departments to impact the business.

Need efficient ways to get the data and the proper tools to conduct the analysis.

“Can’t be Strategic if no one knows who you are!”

How Strategic Is Treasury?

• • • Not very when based against pay – Treasurer Base Salary Avg: $171,909 (Source AFP 2011 Compensation Survey) – Avg. Hedge Fund Professional: $326,000 (Source jobsearchdigest.com 2011 Hedge Fund Survey) – MD Derivative Sales Base Salary: $400,000 Not very when based against staff size – Only 0.8 FTEs for every $1bn in revenue (Source: IBM/AFP 2010 benchmark study) Not always from the CFO’s perspective – CFOs wants treasurers to stick to their core competency; take care of business first, then branch out. (Source: Peppercom CFO/Treasurer study 2011)

CFO Expectations

“CFOs wants treasurers to stick to their core competency; take care of business first, then branch out.”

- 2011 Peppercom CFO/Treasurer insight study

CPA Information

CPA Field of Study: Management Advisory Services CPE Code: MA99