Valuable lessons from Colgate on finance and globalization

Columbia Business School Journal (you can subscribe to it) has a nice account of how Colgate managed its risks in this crisis. Hans Pohlschroeder, Vice President of Treasury had spoken at the School.

He says:

Although many people might think of Colgate-Palmolive as an American company, this is far from the case. Although Colgate-Palmolive is headquartered in New York, it operates in 218 countries. Colgate-Palmolive is perhaps one of the most international U.S.-based companies Originally, the company had full-scale manufacturing operations in many different countries around the world, because high tariffs made it more cost-effective to produce locally.

However, trade liberalization over the past few decades has lowered the barriers to trade and created an environment where it is more cost-effective to centralize manufacturing and production. This trend has been augmented by technological increases that make it easier to produce large quantities of product in one manufacturing location. As a result, Colgate- Palmolive has transformed itself into an integrated global manufacturing chain, which in turn has helped lower costs and keep Colgate-Palmolive competitive and profitable. 

On Financial Risk Management he says:

the basic objective of financial risk management, which is to minimize the cost of capital and the impact of currency, commodity and interest-rate fluctuations on the operating cash flow of a company. He credits the success that Colgate-Palmolive has had in managing this risk successfully to a few basic principles that have allowed the company to avoid many of the pitfalls of the recent recession.

First, Colgate-Palmolive maintains a high credit rating (AA-) and prefers to perform hedges, such as swaps, with companies that have a similar or better credit rating. Second, all hedges must relate to specific, identifiable exposures. Third, it is important to remember that the treasury is not a profit center. Fourth, because of the previous principle, speculative and leveraged transactions are prohibited. Fifth, once established, hedges should not be traded, and hedges should be diversified over time. Sixth, it is useful to structure natural hedges with currencies and interest rates, and to maximize netting by directing all settlements to one day to save the spread (multilateral netting). Finally, implement institutional oversight to ensure that these policies are followed and that they are in line with the overall objectives of the organization.

Out of the six principles, it is 3rd and4th principles which were really forgotten in this crisis.  Treasuries became profit centres amidst high liquidity, low interest rates, easy profits etc. RBI had pointed Indian corporates other incomes as a % of total incomes had increased significantly. Most of them then burnt fingers via derivative losses etc. Banks also played a role by showing mostly the rosy side of these deals.

Treasury like finance is a facilitator, It should never override the main objective of the firm.

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