Bancorp Treasury Services Limited

Make Risk Count.

GOVERNANCE GAPS GENERATING NZ BUSINESS TIME BOMB

28 August 2009

Significant financial risk management knowledge gaps on many New Zealand boards have created a time bomb that could detonate among New Zealand businesses. Independent financial risk managers Bancorp Treasury Services warns that, if not closed, this knowledge gap could jeopardise New Zealand’s economic recovery.

Executive Director Earl White says financial governance issues were a significant factor in many international business failures and New Zealand could face the same risks.

“It’s vital that all board members understand how to identify, manage and mitigate financial risk for bottom-line success,� says Mr White. “A combination of heavy workloads, volatile markets and the highly specialised nature of financial risk management can result in an over-reliance on the CFO or a single board member to understand financial risk and flag issues.�

Board reports could also be improved, to decrease high levels of unnecessary and tactical details and better focus critical ‘red flag’ business factors, such as funding and liquidity risk.

“Board reports must maintain a policy compliance mentality and increase focus on more strategic issues. If a board is only going to monitor treasury compliance, once things get to the point of non-compliance then it’s usually all over.�

Mr White acknowledged that there were many excellent boards in New Zealand but said it was important for directors to admit if they needed help with understanding financial risk. Assistance or education is available via the Institute of Directors or professionally qualified independent third parties.

He said it was also important to ensure boards were structured so as to avoid knowledge gaps that could jeopardise the long term success, or even survival of the business.

“Raising directors’ awareness and education will result in boards knowing the right questions to ask. These should be asked at all times and not just when a problem arises because it’s probably too late by then.�

Salient questions to ask include: * What is the company’s credit profile? * How is the business tracking against loan covenants now and what ratios are projected for the next 12 to 18 months? * When is the next financing / refinancing requirement? * Is the organisation starting negotiations on a timely basis (at least six months before the funding requirement) for maturing borrowings and also projected increased requirements? * Is any capital expenditure been contracted for which is not currently covered by committed funding arrangements and is there a contingency plan if funding isn’t available? * Are any macro credit issues developing in the industry sector?

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