A recent spate of derivatives losses has fanned fears that corporate treasurers are under growing pressure to generate profits, leading to the type of risky bets that backfired on Procter & Gamble CO. and others.
In an era of corporate downsizing and cost cutting, treasury departments must justify their existence by contributing to the bottom line, or so the thinking goes.
Risk management consultants estimate that 15% to 20% of corporate treasury departments are run as profit centers, as opposed to operating as traditional cost centers.
But Robert J. Baldoni, managing director of Emcor, a consulting firm in Irvington, N.Y., said corporations are in fact moving away from the profit-center approach.
Instead, he said, companies are gravitating to what's known as a "service center" concept, in which the treasury department manages the risks associated with currency and interest rate fluctuations and the like, without creating new exposures.
"That's the clear trend today," said Mr. Baldoni, who held various treasury posts at Sperry Corp., Texaco Inc., and General Electric Co. before joining Emcor in 1986.
Like other risk management consultants, Emcor essentially serves as a middleman between the users and providers of derivative products.
In its most aggressive form, a profit-oriented treasury department actively trades and takes market positions that have no connection with the company's underlying operations.
Calls for Better Accounting
The retreat from the profitcenter approach started well before the highly publicized fiascos at P&G, Gibson Greetings, Air Products and Chemicals Inc. and others over the past month or so, Mr. Baldoni indicated.
The losses have prompted calls in Washington for better accounting and disclosure rules for derivative users and dealers alike.
Still, the incidence of derivative-related losses seems fairly light, particularly given the recent volatility in the markets.
If Mr. Baldoni is right about the trend toward a service-center approach to treasury operations, it might help explain why the derivative losses were limited to relatively few companies.
Experts, though, point out that a profit-center approach isn't inherently risky if the proper controls are in place.
'Inconsistent' with Policy
P&G, of course, said the two leveraged swap contracts on which it took a $157 million pretax loss were "inconsistent" with company policy. The company also does not regard its treasury department as a profit center, according to a P&G spokeswoman.
Whatever the case, the swaps clearly were not designed to offset or hedge an existing risk. Rather, experts agreed, they expressed a view - incorrect, as it turned out - about the direction of interest rates, for the sole purpose of generating a profit.
Apart from Mr. Baldoni, a number of experts were reluctant to say whether there is any clear trend either toward or away from the profit-center approach to running corporate treasury departments.
"I don't know, to be honest with you," admitted one consultant.
But Robert Mitchell, vice president and treasurer of PHH Corp., Hunt Valley, Md., said he agrees with Mr. Baldoni that companies are probably moving away from the profit-center approach.
The trend now among treasurers, Mr. Mitchell said, is to "deliver services to your company at a more effective cost."
Said Fredrick Chapey, managing director of Chase Manhattan Corp.'s derivatives business: "Treasurers are under pressure to perform, but not necessarily as profit centers."