Understanding, Measuring, and Managing Risk

Craig Jeffery: 

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INTRO: 

Welcome to the Treasury Update podcast, presented by Strategic Treasurer, your source for interesting treasury news, analysis and insights in your car, at the gym or wherever you decide to tune in. On this episode of the podcast hosts Craig Jeffrey joins Tony Krabill, Assistant Treasurer at Greif on understanding, measuring and managing financial risk. This wide range discussion covers the foundational elements of risk, including various types of exposures, organizational approaches, measurement and management methods and effective hedging concepts. Listen into the discussion to find out more. 

Craig Jeffery: 

Welcome to the Treasury Update podcast, this is Craig Jeffrey and today’s episode is understanding, measuring and managing risks. I’m here with Tony Krabill, who’s the Assistant Treasurer at Greif. Tony, welcome to the Treasury Update podcast. 

Tony Krabill: 

Thank you. Thanks for having me. 

Craig Jeffery: 

I hope you’re staying warm and safe from the virus. 

Tony Krabill: 

So far, so good. 

Craig Jeffery: 

Excellent. So I was wondering if you could give a quick sketch of your career path. I’ve known you since you were at NCR and now at Greif, maybe you could just tell people a little bit about the path of your career. 

Tony Krabill: 

Sure. So while I was in college, I did some kind of related finance jobs, including being a stockbroker, but that turned into a job in treasury at NCR when I left college. And I’ve really been in treasury the whole time since. I had a couple of brief sidebars, but between capital markets, currency exposure, cash management, risk management, I’ve spent pretty much my whole career in treasury which is 20 plus years now. So I would say roughly half of that time, maybe a little less than half, I’ve been responsible for currency and interest rate exposures, but at all times pretty much in treasury. 

Craig Jeffery: 

Yeah. Fair enough. And you’ve been with Greif since when? 

Tony Krabill: 

Six years now. 

Craig Jeffery: 

Okay. And you’re now the AT at Greif responsible for? 

Tony Krabill: 

Correct. I’m the AT, but I have responsibility for capital markets and global cash management. So I’ve worked at NCR and Greif, both global companies, and I kind of specialize in that. I was the Assistant Treasurer at NCR before I left there as well. But that would have been the Assistant Treasurer, they were split into Assistant Treasurer of Operations and Assistant Treasurer of Capital Markets. And I was the AT of operations there, so more cash management focused. 

Craig Jeffery: 

Great. Well, today’s topic when we talk about managing risk, we’re mainly talking about different types of financial risk. One of the elements to set the stage as we go in, there’s this concept of when you look at risk, let’s think through the process. You have to understand what your risk is? What are the exposures you face? What’s your organizational desire to produce those, eliminate those, not take those on? So this understanding of how you approach it is important. And there’s this measuring or calibrating it, knowing what the size is and what you want to get it to. And then the different methods of managing it. So those are some broad categories and we could define those differently. 

Craig Jeffery: 

Those are some of the elements to come up with a foundational understanding of risk. What are the exposures we have? How big are they? What are we willing to bear? What do we need to get off of? And how do we go about doing that? So that’s a lot, we’re not going to cover all that on today’s podcast. But as you think about these key areas of risk, what do you think about, how would you guide people that are starting out or in this area to think about risk in that way? 

Tony Krabill: 

Yeah, it’s a very difficult thing to encapsulate into a single conversation. There’s really a lot of understanding of nuance when it comes to hedging on these risks, I think. The way I think about it is anyone can hedge, hedging is easy. You can learn to hedge in a few days, really. The hard part is figuring out what to hedge and why you’re hedging it because if you don’t really understand that, what often happens is you’ll think you’re hedging the right thing and that’ll go on for a period of time until something changes. And once something changes, you’ll discover that what you thought you were hedging, the result that your hedge was supposed to produce did not produce the result it was intended to. And that’s going to be an uncomfortable conversation between you and probably the CFO. 

Craig Jeffery: 

Yeah. So Tony as you were describing that the easy part is hedging, the harder part is knowing what to hedge and why, your overall risk framework and risk appetite, where do we start with this? 

Tony Krabill: 

Yeah, it’s very difficult to bring all of your company’s exposures. I think particularly for treasury people who longtime treasury people may be not as comfortable speaking the language of the businesses of their companies or their divisions of their companies. So it’s difficult to … that is the hard part, to bring in all the exposures and understand what is really driving the outcomes of your business. So while on the surface, it might look like a certain silo or a couple of silos of risk. Like this division is driven by the Euro dollar currency rate or that division over there benefits when the British pound weakens. 

Tony Krabill: 

Those sorts of things may be true, but it’s often the case that you’ve got to dig even deeper and find out why that’s being driven and understanding deeper parts of the business. So for example, maybe the easy part is to say, well, as the Euro strengthens our consolidations to dollars is easier or is better. We have more revenue or more profit. But what are your suppliers do? If you have cross border suppliers, maybe at the same time, they’re increasing prices when that happens. So it may be more complex than that. And until you really understand all of those pieces and consolidate all those pieces, you don’t really know what to hedge yet. That’s why the hardest part is figuring out what you need to hedge. 

Craig Jeffery: 

You mentioned silos. Silos are towers of risk, why or how does that add complexity or challenge? 

Tony Krabill: 

Those silos often have correlations between them. And again, this is the hard part. This is the part you have to get through. So as I mentioned, maybe you may benefit from a certain currency pair moving in a certain direction, but if you only hedge that silo, you may not understand the full exposure that your company has and you might end up hedging the wrong things. That’s going to lead to a contradiction where your CFO, or maybe your explanation to the street of your company’s results. Some really sharp analyst is going to figure out, wait a minute, you told me last quarter that when the Euro does X, that I should expect this result, but I’m not seeing that. What happened? So until you understand each one of those silos, but also the way that they correlate to each other, then you may find that you’re hedging the wrong thing. 

Craig Jeffery: 

Is this analogous to the maxim that if you optimize part of the process, you sub-optimize the whole. Is that if you optimize part of your hedge, part of your exposure, you sub-optimize the whole. Is that what you’re saying? 

Tony Krabill: 

Yes. Until you’re hedging the entire process you’re at risk of actually adding risk. So if you hedge only part of it, and then things move in an uncorrelated way that you’re not used to, you could actually be adding risk to your company instead of reducing it. And usually the whole goal here is to reduce risk. 

Craig Jeffery: 

What are some of the methods of stepping away from that type of problem? The problem of focusing on a silo or one aspect of it. And I’ll add another piece in here. How do you avoid that? And how do you avoid that when your information may be limited and you actually don’t have good visibility to all of the silos of risk? 

Tony Krabill: 

It is difficult, but the thing you should have in mind right from the start is that you should not, if you’re just doing this for the first time or your company is doing it for the first time, you should have an expectation that this is not quick. This is going to take time, potentially even more than a year. It wouldn’t be surprising if you have a complex business that it might take a couple of years. You’re going to have to model these things and then watch as the market changes. 

Tony Krabill: 

So make predictions in a model, test those predictions against actual changes in the market and see what happens. You don’t find anything out until the market changes. Everybody looks great in their hedging portfolio when nothing changes, it’s only when there’s a major change that you discover what your actual exposures are. So that long slow kind of methodical process of testing, modeling and studying, it’s going to take time. 

Craig Jeffery: 

It certainly takes time. It takes effort. It’s not cost-free. How do you get the organization to make that type of commitment of resources to do this? 

Tony Krabill: 

Yeah, you’re right about that. I would say that the best way to do it is to start with what resources you have. Do some basic modeling and start to try to figure out how big the exposures could be, but you’re going to have to quantify this somehow. So what has been successful for me at multiple times in my career is to do some basic modeling, take it to the leaders that are appropriate. In my case, typically that’s going to be the CFO, and start putting numbers on the page. And say, look, we have so many dollars at risk here, it’s very potentially depending on what that risk is, it could be very inexpensive to hedge this. Wouldn’t you like to for a very cheap price, pay a premium, just like an insurance premium, like you would pay in your other parts of your risk management program, wouldn’t you love to pay a cheap premium to take this risk off the table so that you don’t have to fight it again? 

Tony Krabill: 

Another way is depending on how much time you have and how patient you are just wait for something to go wrong, because it won’t take that long if your company has any significant exposures. And once something goes wrong, then you can say, all right, we understand this risk. How big could the rest of the risks be? It’s like anything, you don’t get all these answers for free, you’re going to need some resources, but the commitment of people isn’t huge. Typically, if you’ve got one pretty high level, high operating analyst, you can start to make significant progress in this. It’s more the time aspect than it is the dollar cost to start understanding your risks. 

Craig Jeffery: 

What type of tools do you use? You got the analysts working on things. I’m assuming they’re pulling data from systems. They’re also on the phone with people. There’s maybe other types of reports or sales channels that you’re looking at. What are some of the methods that you use to pull this together? 

Tony Krabill: 

I would start with the thing to not use. And I find that this is a common mistake when I talked to other people in treasury professionals. You probably cannot count on your consolidation system or your ERP system as a source of truth here. So a system like Hyperion, they’re not going to be able to consolidate these risks for you. And many people think that they can, because those systems generally have a button you push that gives you an answer. It’s just not the correct answer. 

Craig Jeffery: 

There’s multiple system providers or FX risk management providers that specialize in pulling out exposures from systems like Hyperion and ERP system. So why do you say that they won’t give you the right information, or maybe a softer question? Why won’t they give you the right information by themselves? 

Tony Krabill: 

Yeah and I think that’s the key right there. They won’t do it by themselves. Just like no software solves a bad process. I think we’ve probably, most of us have all heard that, the same is true here. If you don’t properly understand what you’re putting into that software, it’s not going to give you the right answer. And that’s really the key to all of this. And none of this exists anywhere in a single system. So I’ll give you an example. If you have contracts that adjust based on how currencies move, do you understand that? Have you gone and talked to your salespeople? Have you talked to the leaders of that business? 

Tony Krabill: 

That’s sort of sales price adjustment is not going to be in a system most likely, at least not one that you can easily query and quantify a risk for yourself. So that’s why I say these systems, I’ve actually seen cases where the system gives you an answer that is completely opposed to the actual answer after you studied it. For example, it said that the FX impact was a positive 10, when in reality it was a negative 10. It wasn’t even that it was just not the same number that the system gave, but it was the opposite number. So it was giving you completely false information. 

Craig Jeffery: 

So you go through this process of looking at financials, doing additional analysis, pulling things together to understand your exposures, to model them what they’re going to be. And you’ve got the sense of, here’s what we’re going to experience from a currency movement standpoint since we’re talking about FX. How that’s going to impact the company in the future as you look out the next quarter or next half. What do you do next? 

Tony Krabill: 

Yeah. That is such a hard thing to get to this point in the process. But once you’ve actually done all the work and you understand your exposures, now you ask, what is your purpose for hedging? So I’m surprised a lot of times when I talk to people in treasury that they don’t consider that there are more than one potential goal here. 

Craig Jeffery: 

What’s the most common goal for hedging? What’s the purpose for a corporate treasurer? 

Tony Krabill: 

I think the most common goal is kind of a generic eliminate the exposure kind of answer. Instead of stopping to think about that maybe there are other answers here, including … So just to be clear, that could be a good answer. Maybe you’re at risk of catastrophic failure if you don’t take those risks off the table. So that’s an important thing to consider, but maybe your exposures are more just a nuisance. Maybe it’s something that you just want to avoid having to talk about with your analysts. 

Tony Krabill: 

Maybe it’s something that your investors are even interested in. Maybe they want you to have these exposures, that’s why they’re investing in you as a company. But until you have asked yourself, why, why am I hedging? What is my purpose for hedging? Why do I even want to do this? You can’t start to align the problem with the solutions that are available. 

Craig Jeffery: 

When we think about it, the first answer for that is, what is the purpose of hedging for most corporate treasurers? We say it’s to bring your exposures in line with your risk appetite. So it’s not something speculative, et cetera. Now that’s helpful, but there’s a lot more detail behind that. You and I have talked about some of those elements behind what does that mean to bring in, in line with your risk appetite? What do you want to bear? What do you want to get off? So how would you take us to the next level beyond that type of definition? 

Tony Krabill: 

So risk appetite is, that’s a great term, and I’m glad you brought that up. That’s another way of saying, and probably a better way of saying what I was getting at which is, you have to ask your question of why? Why are you hedging? So if you think of something in terms of a catastrophic failure, yeah. If you have a risk that’s so big that it could actually cause you to violate a covenant or you would no longer be able to access the capital markets or even bankruptcy. 

Tony Krabill: 

When you look at that, in terms of our risk appetite, you’re willing to pay quite a bit in order to make that risk go away. But at the same time, if you have nuisance questions and it’s really more that you’re trying to redirect the conversation, maybe you handle that differently. Maybe you even handle that by not hedging, but having a program in place where you can better explain it. Maybe hedging is not required at all in that situation. But in order to be able to explain it, you have to do the work ahead of time to understand it. So hedging again comes at the end. That’s the easy part, but understanding the exposure is the hard part. 

Craig Jeffery: 

What do you do from here? What’s the next step? 

Tony Krabill: 

Yeah. This is the fun part where normally the investment bankers are going to swoop in and try to take all the credit. We’ve talked about up to this point it’s all been mostly the not fun part. It’s really hard. There’s a lot of resources and it’s not terribly fulfilling because you’re making a lot of mistakes along the way as you learn how all this fits together. But at this point, this is where it becomes the fun part, because now you’ve defined your problem. And now you can start lining up solutions against a problem. And everybody likes doing that because now you’re making rational and intentional decisions because you understand the problem. Whereas at the beginning, if all you understood were maybe some individual silos of exposure, it’s a lot more difficult to line up an overarching solution to the problem that you have. 

Craig Jeffery: 

So this concept of intentional choices, this is acting on the, your risk framework. Looking at your exposures, you’ve figured out why you’re doing it, what you’re going to do. You’re going to make intentional choices. Are those intentional choices about how to hedge or is that something else? 

Tony Krabill: 

How to hedge or even if to hedge. I mean, just to give you an example you could look at something as simple as how you set your budget rates, your FX rates for the year. So you could set those rates based on wherever they are on the day the budget is set, or you could set your budget rates based on the rate at which you’ve already hedged. So if you’ve already placed those hedges and all of your results for the next year are going to be translated at those FX rates, then you pretty well lock in for the year, what your exposure is taking the business risk off the table. 

Tony Krabill: 

But at that point you’re making an intentional decision about, do I want to hedge 25%? Do I want to hedge 50%, 100%, but it’s intentional now, it’s not an accident of the markets or timing or anything like that. You’ve thought it through and you’ve done it because now you can tell a complete story from beginning to end to yourselves and to your analysts. 

Craig Jeffery: 

So you mentioned some ranges of hedging, 50% of your exposure or 100%. As you think about those different levels, what are your thoughts on the capacity, the risk capacity, risk appetite and risk tolerance, those smaller concentric circles. How do you determine what you need to do or what you know to do? 

Tony Krabill: 

I always try to remind myself and remind others that hedging never solves your problem. All it does is delay your problem until the business has the opportunity to react to markets. So your business is going to adjust I presume. If currency moves against you, you should be able to in the short term raise prices or you’ll be required to lower prices in a bit more medium term. Maybe you have to adjust where you manufacture are more complex problems. But hedging can’t solve any of that. All it does is bridge you to what the next step is. So to understand what that is, and again, be intentional about those risks, you need to understand what your board, your leadership team and all your stakeholders really want. 

Tony Krabill: 

To figure that out, you’re going to have to sit down again and talk to people. I find that the investor relations department is a great first step. The people in that department generally have a pretty good understanding of what it is that your stakeholders are looking for. And if they don’t, you should work to provide some leadership there, to insert some of those questions into the calls that they’re having because they should know that. They should understand that and it’ll help guide you and it’ll help guide your management team. 

Tony Krabill: 

But you might have more serious things to think about than just getting to that kind of fine tuning of what your investors want. You might have at a very basic level some bankruptcy risks that you have to think about first. That’s typically not the case, so conversely it might just simply be some nuance that your management team wants to provide to the investors so that you’re not … The goal here is to not talk about FX. It’s to remove that risk so that your management team can stay focused, keep your stakeholders focused on your core business and not talk about these distractions really. You want to remove this as a distraction. 

Craig Jeffery: 

Now, exploring some new ground, but also tying it back to the beginning when we said it may take a little bit of work to set this up in a company. If this type of hedging program or risk management program hasn’t been put in place, there can be this downplaying the risk, or poo-pooing a risk. How do you make sure you get this message through the organization so they understand, so you don’t have those conversations of, hey, we would have been better off financially if we hadn’t put that hedge on, we lost money with the hedge, how do you get that through? 

Tony Krabill: 

Yeah, it’s a great question. And I do find that that very often happens because often the business leaders out at the business unit level, it’s very complicated and they don’t want to think about it because they’d rather think about how do you run a business? How do you run your working capital? How do you decide which Capex projects to do? This is a distraction. And so they would kind of rather it just go away. An answer to your question of how do you get that through the organization? I mentioned IR, Investor Relations, that’s a good place to start. 

Tony Krabill: 

Your company probably has someone who runs an Enterprise Risk Management or ERM program that consolidates risk. That person’s going to love to talk to you if you haven’t talked to them already. Again, you’re going to need to quantify it. So you’re going to need to have an understanding before you go talk to them. But that sort of an ERM focused program that most companies have today, this should be on the list if you’re a global company because that’s a risk to you. 

Tony Krabill: 

Your Financial Planning and Analysis group or FP&A, they’re a great ally to have because they’re in a constant state of trying to explain the results that are coming through. And if they shift around from quarter to quarter and they have to tell a story that while the Euro strengthened so it helped us. And then the next quarter, while the Euro strengthened then it hurt us, that drives them crazy as well. So getting them on board, they would love to be able to tell a clean story up through the organization from top to bottom, all the way up to the board. 

Tony Krabill: 

And then speaking of the board you’re going to need to be prepared to provide some leadership to your CFO and your board, if they haven’t been well-educated on this topic in the past. But the good news is all of these people dislike the idea of uncontrolled risks and they love the idea of someone bringing them a quantified risk with market solutions ready-made to line up against them to take some of this risk off the table. 

Craig Jeffery: 

But all these tie down to the, to some extent boil down to the risk appetite, the willingness to take on a certain level of risk. How do you go about setting that so there’s agreement in the organization? 

Tony Krabill: 

This is another area where investment bankers can actually be very helpful. If you have an aversion to them, you can certainly do a lot of this modeling internally. Depending on the size of your company you may not have those kinds of resources though. And the investment bankers will generally speaking do this for no real cost or no explicit cost at least, because yeah, I mean, they don’t do it for free in the end. But just that ability to build the relationship with you and understand what’s going on in your business, that’s an important value to them. 

Tony Krabill: 

So they can do a lot of this modeling depending on your relationship with them. But it’s not impossible to do it internally either. I’ve done everything from simple scenario analysis in Excel, kind of an upside based case downside, but Excel has a lot of powerful tools that you can do Monte Carlo modeling, if you feel like you’re that advanced. But all of these come back to, you’re going to need to set an expectation for how big can this risk be. And when you can define that for all those people, we talked about FP&A, CFO, board, investor relations. When you can define that and feel good about it, you’ve basically won the battle at that point. 

Craig Jeffery: 

We talked about a silo of risks or looking at risks that way. When you go about hedging, do you hedge on an individual exposure basis, which is easy for hedge accounting or do you look at it on a portfolio of exposures basis, which tends to be, or should be superior from an economic standpoint? How do you decide what’s going to be both effective and efficient and defensible? 

Tony Krabill: 

Yeah. And you’re exactly right. It should be, and that’s always the answer. And I find that investment bankers love Value At Risk or VAR because the answer is, it should be the best way to hedge. The problem is by the time should be becomes reality, it could already be the case that your company’s been downgraded or some uncorrelated risk has caused your management team to be forced out. Now, those are extreme scenarios and not every company has that level of risk. Maybe your risks are much lower, so that’s a question to ask. 

Tony Krabill: 

If you’ve defined your risk appetite and said, here’s our worst case scenario and we absolutely cannot tolerate that, then you better not use value at risk which is kind of a portfolio management way of doing it because one year of uncorrelated risk, the investment bankers and the statisticians can tell you, yeah, that shouldn’t have happened, but it just did and that doesn’t help you, so that’s a scenario where you may want to hedge everything one by one. 

Tony Krabill: 

But if it’s more of a nuisance problem and it’s something that you feel pretty good and your board gives you that kind of leeway to say, it’s okay if things move in an uncorrelated way for a year or two, because it’s less expensive. Let’s say you have some kind of nasty exposures, currencies that are very difficult to hedge or maybe even impossible to hedge. Maybe there’s a value at risk solution that helps you take the edge off of that and still get most years a pretty good answer, because the alternative is, hedging everything would be so expensive is to be prohibitive. 

Craig Jeffery: 

Sometimes you have people saying, we would have done better if we hadn’t hedged. There’s a cost to this insurance. You’re in the business of some type of risk. If your company also has a high risk tolerance and a fair amount of risk, shouldn’t you just avoid, do an end run around this and forget about this work because now you’re not going to be paying for that insurance. Would you just be doing better? 

Tony Krabill: 

I disagree with that line of thinking because this work is really needed either way. And I’m making the assumption here that the people listening to this work at a global company or some company that has significant enough risks, that it actually kind of matters. I mean, if the exposures are really small, then maybe not. But typically speaking, if you have any exposure worth talking about, then the work is needed either way. And here’s why I say that. You may choose to not risk and the great part about, excuse me, to not hedge. 

Tony Krabill: 

But the great part about that is your once again being intentional about that decision, and you can look back and say, we did this on purpose. But how do you know if that was a good answer or not if you haven’t done the work? If you can’t measure and say, here’s the result of not hedging, and here’s the result of hedging, you have to have the data to compare that against. If you just walk away and say, “Oh, it’s a lot of work. We don’t need it. We probably would be better off not hedging.” Well, you might be right, but you won’t know that unless you have a treasury department, typically who spends the resources to know the answer to these questions. 

Tony Krabill: 

And what happens in year two or year three or year four, when your business changes a little bit. Maybe in year one, you’re buying all of your inputs in US dollars and selling in US dollars. And in year two, you get a new supplier who wants to charge you in Euro or wants to supply you in dollars but the price is indexed to Euro. If you don’t have that program in place where you’ve already done the legwork, you’re already tracking it, you’re already working it, then you’re not going to have the resources to be able to answer that question. Now in year two, in my example, you’re going to start on that journey and you might not solve it until year four, at which point you might have some serious impacts to your business. 

Craig Jeffery: 

Okay. So when you look at this concept of making the hedging decisions, are there other key concepts or thoughts that you pass on as important to your organizations or you advise others on? 

Tony Krabill: 

Yes. Asking for a risk of budget is something that I think is very important. Again, all dependent on the size of the risks and how much hedging you think you may have to do, but don’t forget. While hedging, even hedging the majors or hedging major interest rate exposures, even those are extremely inexpensive. They’re still not free. And particularly if you start to move into some more complex, either currencies or concepts. Once you’ve reached the point where maybe you want to do some more creative things like using options or some more complex strategies, those come with a cost. 

Tony Krabill: 

And if you don’t ask for a risk budget, which is really just a fancy way of saying, it’s just like you would have when you’re removing your risk of fire or flood or tornado, those insurance policies come with a cost. Well, if you’re hedging, you should have a risk budget as well. The budget for the premiums to hedge those risks is generally not free, and it’s sometimes even non-intuitive. But you only understand that after you do your work and I’ll give you an example. Maybe in your particular company, you are long Russian ruble against the dollar. If you’re going to hedge that exposure out a full year, that’s going to be very expensive. 

Tony Krabill: 

The forward points on that tend to be fairly high, and that’s going to go through other income and expense typically depending on what your accountants say. But at the same time, maybe your short Turkish Lira. Well selling Turkish Lira forward, you’re going to earn points, so that’s going to be a positive. And of course there’s many examples of this. Those are just two examples. So if you understand your exposures, then you can say, here’s the amount of the risk budget that I need. And then the following year, if those exposures are changing, you can ask for a larger or smaller risk budget. 

Craig Jeffery: 

Anything else here on this topic? 

Tony Krabill: 

The other thing I would mention and this maybe gets a little further into the weeds, but at what level of the organization are you going to choose to hedge at? So you should plan to engage with your tax department because taxing authorities around the world are getting more curious on this topic and more touchy about it. So when I say, at what level, are you going to hedge at your corporate entity and hold all the gains and losses from those hedges within corporate, or are you going to hedge at the level of your business unit or the country, for example? Are you going to hedge inside of Russia? Are you going to hedge inside of a Japan or China? Those are questions you’re going to need to ask yourself. And there’s going to be major tax implications potentially, so you’re going to want to talk to those people. 

Tony Krabill: 

At a high level, I would also say plan to take a lot of people to lunch. That’s a key concept here, because you’re going to need a lot of friends. You’re going to need to talk to a lot of business leaders to understand all of these things. You’re going to need to talk to the tax department, FP&A, investor relations. All these people we’ve talked about. It’s a broad ERM type of thought process. That’s not just within treasury. You’re going to have to go definitely outside of your four walls to do this. 

Craig Jeffery: 

If a business unit done particularly well, it’s because of their business acumen. But if there’s a problem it’s due to the treasury’s hedging, extra costs or-? 

Tony Krabill: 

I’ve definitely experienced that. And it’s really just human nature. If your business unit is doing really well, then it’s just human nature to say it’s because we’re so good at what we do. But when things go poorly, it’s human nature to search around and try to figure out why are things going wrong? And FX is going to be at the top of that list. So when are going bad, they’re going to blame FX, but when FX helps them, it’s not that there’s unethical sort of behavior going on or anything like that. It’s just a matter of human nature. When things are going well, they won’t dig too deep and look to see, did FX help us? 

Tony Krabill: 

If you’ve set the expectation that everything’s going to be done, FX neutral and your leadership team is on board and you’ve gotten buy in, then everyone understands the exposures. We’ve all studied them. They all agree and they’re their exposures. They’re not yours, your treasury. It’s the business units exposure. So if they can’t explain them to you, that’s a problem. If they do explain them to you, and you all agree, if the Euro moves this way, it hurts you. If the Euro moves that way, it helps you, then you should all be on the same page. It’s their data. You’re just consolidating it and understanding it for the total company. 

Tony Krabill: 

So that also helps once you get that level of buy-in, that this isn’t being foisted on them by treasury from some model that they don’t understand. It’s their data, it’s not your data. So that definitely brings more buy-in year after year, as they start to see, okay, this might hurt me in any given year if it’s taking away currency gains that I really didn’t deserve. But I’ve never found anyone who said, I deserve that currency gain. It’s more usually that they say, yeah, I understand currency helped me this year, I get it. And next year, when currency hurts me, I expect you to be standing right now on my shoulder telling the CFO, it wasn’t my fault. 

Craig Jeffery: 

Yeah, or I would have done better without those expenses for hedging and protecting against the loss. 

Tony Krabill: 

Well, yeah and you got a budget for that. If it’s going to be at the business unit level, then make sure don’t surprise them midway through the year with a half million-dollar charge for hedging that they weren’t expecting. So make sure they know that if the risk budgets being allocated down to their business unit, that they’re ready for that and budget for it. 

OUTRO: 

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