A Treasury policy without work instructions is like a list of cake ingredients without the actual recipe. You know that you need eggs, flour, sugar, and baking powder, but without the recipe you are not likely to be able to bake a decent cake (unless you happen to be a pastry chef, but few treasury professionals are).
During my corporate treasury days, I came across some business units that had come up with truly imaginative ways following the corporate treasury policy. In one subsidiary country, the general manager had outsourced currency risk management to a consultant whose job was to eliminate the effects of currency exposures to the unit’s operation.
Our CFO, being a crafty sort of fellow, smelled a rat and asked me to investigate what this consultant was all about. What I learned was nothing short of flabbergasting.
All currency-based transactions where accounted for at the previous month’s closing exchange rate. The consultant then promptly proceeded to sell currency-based receivables whenever the the spot rate was better than the previous month’s closing rate. If the spot rate did not exceed the closing rate, this “consultant” simply left the position uncovered. This way the consultant always managed to show a profit and the consultant had gained a reputation as somewhat of a guru at the operating unit.
The only slight problem with this neat little arrangement was that it had bugger all to do with ensuring the profitability of the business. It was, in fact, a pure hoax. I did manage to convince the consultant to start looking for new victims (err, clients) but quite a bit of damage had already been done.
How could this have happened? The business unit had nobody who had any understanding of currency risks. Guided by just the treasury policy, they knew that they had to cover currency exposures, but they had no clue what that really meant. The policy must be supplemented by practical worki instructions if you want to avoid situations like this.
The most important point of the treasury work instructions is to describe in detail what following the treasury policy actually means.
Sometimes the issue is not the lack of work instructions. Sometimes the business units simply do not understand why the policy must be followed. It can be hard for the business unit to understand why it must cover its US dollar exposure when everybody knows the dollar is going to get stronger — even the paper says so. Or why should the business unit fork its hard-earned cash over to be managed by the treasury; they could use the extra cash as a buffer against surprise expenses.
This is precisely why the work instructions should contain not only practical instructions but also some motivational information to the business units — reasons why they should actually do as they are told. This motivational section describes what is the purpose of systematic currency hedging and company-wide liquidity management.