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Risk Management Fundamentals: Dashboards and Hedging

Sep 22, 2020

As AFP 2020 draws near, we will be doing a series of deep dives into several of the educational sessions. The goal of this series is to address corporate practitioners’ concerns by having actual treasury and finance professionals interview the speakers.

In this interview, Mike Connolly, treasurer and board member for the Holistic Moms Network and former chairman of AFP, speaks with Amol Dhargalkar, managing director of Chatham Financial. Dhargalkar is participating in two sessions in the Risk Management track at the conference, Creating a Next-Generation Risk Management Dashboard and Hedging Fundamentals: Essentials of a Corporate Program.

Mike Connolly: So, how did you come up with your session on creating a risk management dashboard? I've been trying to figure one of those out for probably 25 years and still haven't.

Amol Dhargalkar: I think you're not alone in that, which is actually why we came up with it, Mike. Over the last 12 to 18 months, this is a topic that has become an increasing priority for a lot of our clients. They want to know, ‘How do I communicate what I am doing with stakeholders outside of treasury, and then also, how do I more effectively manage what I'm doing on the risk management side, within treasury itself?’

You probably know, Mike, just how much time and energy it takes once you have a dashboard that you like. To pull in all this data and format it the right way and have somebody be able to look at it, to really cut down the time. Then secondly, to really be able to spend that time on more important strategic issues, even when it comes to dashboards—how do you communicate more effectively? How do you give information that's actually digestible, as opposed to some big spreadsheet that some CFO is going to look into and say, ‘I don't have time for this. Tell me what I really need to know.’

Even within treasury, if you're running a program that you're hedging x percent of all your exposures. If you didn't hit that trigger in a given month or a quarter, why is that? As you drill deeper into it, you might find it's x, y and z reason. It might be because of an exposure that was not accounted for in one particular entity or one particular occurrence. So, we're just seeing a lot of companies focusing on this.

Then, somewhat fortuitously for this particular issue, though not in the grand scheme of things, this pandemic has put even more focus on the issue of reporting, and communication from treasury to other stakeholders around the company, such as senior management, the Board, and other business units. In some ways, it's similar to the financial crisis of 2008-2009, as there's more stress and more expectation placed on treasury.

Connolly: Excellent. One of the challenges for treasurers is the recurring question from their board and my CFO, ‘So how successful is your program?’ Since a corporate hedge program is not to be speculative, it’s hard to have an answer beyond, ‘Well, it's kind of a binary answer. It's either we're hedged or not.’ So how can dashboards help assist?

Dhargalkar: Yeah, it's a tough question to answer because every company is a little bit different in how they define their objectives, is different in terms of what they are trying to achieve with their hedging program, Mike. Stepping back though, one of the things we're excited about, is actually having three practitioners in our session that are managing the program at large multinational, multibillion-dollar corporations all across the U.S. We've got Levi Strauss, JBT and McCormick. All three of them use dashboards in different ways. Our other clients also use dashboards in different ways. I'd say for balance sheet hedging specifically, that's where dashboards have come in handy the most, to be able to show the effectiveness of a balance sheet hedging program.

If the focus is on coverage as you highlighted, dashboards can be great for that. If the focus is, what could life have been without hedges, and do we want to do some Monday morning quarterbacking, and do we want to take a view on where currencies are or where they’re going? You can certainly build dashboards for that. Our clients all view hedging as a risk management strategy, and they don't want to use dashboards to enable risk-taking taking behavior.

So that's the key. I think what the audience will find is that the experiences of these three firms, while being in three completely different industries, there's some really interesting overlaps. Then of course, a lot of personalization or individualization that's happened, of how they're communicating with stakeholders outside of treasury.

Connolly: As you know, AFP is comprised of companies of all sizes, operations and industries. More than half of these have revenues under $5 billion. Your panel in this session is comprised of corporate practitioners from three significant and established companies. Now, say I'm just a small/medium size company, $1 to $2 billion in revenue. We're just about to go international. How do I follow what  these big companies are doing. How do I begin?

Dhargalkar: I would say this session on dashboards is especially valuable for companies that have a handle on their exposure and have developed some type of a game plan. If that game plan is choosing not to hedge, dashboards can be valuable for that. Management reporting can be valuable for that. Learning from large, established programs can be valuable for mid-sized companies. However, we actually have another session that's maybe even more valuable for the company that you're talking about—those $2 billion companies that are either just trying to go international or have been international, but don’ t have as large an exposure. Maybe this year's dollar volatility has swung it up the list of priorities for the CFO and treasury to take a look at.

For that session, Hedging Fundamentals: Essentials of a Corporate Program, we have two treasurers and a former treasurer joining us to talk about what it's like to design these programs from scratch. They're all very different situations. We've got Peloton, Floracraft and Ortho Clinical Diagnostics. If someone's in that situation, I would actually say the better session to come to is that one.  

Connolly: Looking across the broad spectrum of corporate hedging programs that you see, and thinking of those programs that are consistently the most effective, what are the elements or activities that set them apart from the others? What are the key ingredients for success?

Dhargalkar: There's something that differentiates the companies that are best in class. Best in class are companies that really have a great understanding of all their exposures and are making very strategic decisions around how they're managing them, and have a kind of consistent approach, market timing, things along those lines. But the leading edge are those that take all of that and push it one step further, to your point. They say, ‘Do we actually need to be hedging 25 different currencies? Can we actually get 90% of the benefit by spending only 20% of our time that we're currently spending on this?’ So, once they've gotten their arms around all of it, saying, ‘Is there a more effective, more efficient way of doing this?’

That might be more of an analytical approach that they could take to it. But alongside that comes the need to really communicate what you're doing and why you're doing it, from treasury to CFO, the executive team, and the board. Changing a program is always very challenging, but I would say that's an example where we've seen companies go from best in class to leading, and by definition, there can only be so many companies that are leading.

Don’t miss Amol Dhargalkar’s sessions, Creating a Next-Generation Risk Management Dashboard and Hedging Fundamentals: Essentials of a Corporate Program, in this year’s Risk Management track.

Register by September 25 for the AFP 2020 Virtual Experience and you’ll get complimentary access to the Forecasting in Uncertain Times Pre-Conference Workshop.