On this chapter, will present an overview the factors that determine the important of treasury management in Well Capitalize Companies (WCCs) listed in Bursa Malaysia. It is followed by the problem statement regarding the practices of treasury. On top of that, the research question, the objectives, significance of this study, scope and organization of the project paper is presented.
Background
The Bursa Malaysia is an important member of the global stock market, with history stretching back almost 80 years. Instituted in 1930, the private Singapore Stockbrokers Association was the first sanctioned securities trading organization in Malaysia. The stock market Malaysia operations continued as the Stock Exchange of Malaysia after Singapore seceded from Malaysia in 1965. During 2004, the KLSE stock market was converted from a not for profit organization limited by the guarantee of its membership to entity limited by share. At this time, the stock market Malaysia exchanges had a market capitalization of US 189.0 billion and during in financial crisis 1997 held market capitalization of US 307 billion [1] .
One way to measure the size of a certain company is by looking at the market capitalization values. Market capitalization is obtained by multiplying the share price with number of share outstanding of a public company. In broadly terms, market capitalization values represent the degree of people evaluation on the company worth and considered an important element when assessing the stock pricing. Table 1.1 are the list of 10 largest Malaysia companies measured in terms of market capitalized, based on the share price as at 31 Dec 2009.
Table 1.1 list of 10 largest Malaysia companies in terms of market capitalized [2]
Stock
Market Capitalization (RM)
Sime Darby Bhd
53.9 billion
Maybank Bhd
48.6 billion
Cimb Bank Bhd
48.0 billion
Maxis Bhd
40.3 billion
Public Bank Bhd
39.9 billion
IOI Group Bhd
36.5 billion
Tenaga Nasional Bhd
36.5 billion
MISC Bhd
31.3 billion
Genting Bhd
27.2 billion
Axiata Group Bhd
25.8 billion
The current economic situation leads companies concern in financial management which various factors that might be taken, in order to overcome the problem treasury management, where the role and function are very important for short term cash fund management, also managing the business risk taking which today company facing and balancing companies account from daily basis activities.
As solutions to overcome the problem above, the function of treasury department in organization are important in managing those kind of work. As example, given during current market volatile those direct impacts on companies in a minute, treasury function can overcome the problem by safeguarding and stewardship of an organization financial assets and liabilities.
Cash is the life blood of any business, so the practices in managing treasury operation are important in order to sustain enough cash cycle to meet the liquidity needs, the duties and responsibilities of the treasury department providing valuable support to all key function as an opportunity to work at the heart of an organization, so that the maximize organized the asset and financial assets effectively can be accurately handle by the proper specific officer. In order to maximize the function of treasury department, well understanding by officer to be in line with a corporate treasury policy and practice.
In order to understand the responsibilities of both the treasury department and of those in the management process surrounding treasury it may be helpful to establish & definition of the core scope of treasury, in this study the guide by Association Corporate Treasurers (ACT) five wisdom pillars; this will also serve as a model for reference and characterization of treasury professional is extremely varied in cooperating a range of professional discipline, including money management, capital market, corporate finance, risk management, foreign exchange and managing the treasury function.
Thus, company policy is backbone of the operation, policy makers could examine and analyze the imbalance and interact operates among department to handle treasury operation. Indeed, treasury staff should given guidelines on their responsible for, how they should go about this and their boundaries in order to fulfilling for achievement and successful the companies target in the end.
1.2 Problem Statement
As cited by Masson (1995) a lot of companies seem to be unclear about what is the treasury management and how the treasury management in efficient operating in the corporation. In general, treasury management concerns all the actions and responsibilities related to the assets of the firm. Treasurers have overall financial responsibilities for the assets of the firm, including their purchase, financing and disposal (Masson, 1995).
In order to establish well function of treasury management within the organization, the evaluation functions they work with should consider treasury as an internal consultant with expertise in risk and finance. According to Teigen (2001) "in real business there may be many differing targets between cash management and other departments, such as marketing, purchasing, inventory management, production, and human resource management". As cited by Teigen (2001) there is Lack of a manual and standard treasury policy for treasury practitioner approach in treasury operation. Nevertheless, in research by McMahon (2006), there are significant treasury process criteria between treasury's authority and decision making clearly on procedure both top and bottom flow of corporate structure.
1.3 Research Questions
1. Is there a treasury officer or department managing treasury activities in a WCC's?
2. What are the scope/areas of treasury officer or department in a WCC's?
3. Does a WCC's have well established a treasury policy and manual?
4. Do a treasury policy manual have necessary factor for those WCC's who do not have a formal treasury policy?
1.4 The Objective of This Study
1. To find out whether the WCC's do emplaced formal treasury policy in their corporation.
2. To analyze treasury management duties and functions adopted by the WCC's against standard set by ACT.
3. To examine the current cash management practices in WCC's
4. To make a comparison, practices by different WCC's in managing the various type of financial exposure.
1.5 Significance of Study.
The final outcome from this study is meaningful and applicable in many aspects from various parties as follow:
1. Academicians who able to understand the theory together with new knowledge, apart from that, further research can take place into treasury management as part of business management.
2. Regulator and policy maker who creating the overall policy and guideline standardize framework, in order to achieving the treasury target and treasury activities to carry out the best solution in minimize the financial risk exposure.
3. Treasure practicing who have better understands of treasury management, as well as useful knowledge to enhance the practices and productive capacity.
4. The major participants and users are companies, who can be application the actual treasury practices, restructuring and well knows the function of treasury management by making or adjusting with appropriate new a treasury policies.
5. Intermediaries such as bank and financial institution which provide suggestion, source and place for financial facilities in order to generalize improved business infrastructure, as well as treasury activities with highest productivities and cost effective manner.
1.6 Scope of Study and Limitation of Study
Inadequate information and published data in Malaysia related in this topic are our limitation in accessing and understanding the treasury management in Malaysia. Beside that my study limited to companies listed in Burma Malaysia and were excluded the sample from listed WCC's companies which involve in finance institution that were set up complete treasury department.
CHAPTER 2
LITERATURE REVIEW
This chapter divided into two areas, first areas consists of definition of capitalization and history of capitalization in Malaysia. Second areas will covers on corporate treasury management which consist of definition, structure and roles, corporate cash management and risk management.
2.1 Definition and history of Capitalization in Malaysia
Ologunde, Elumilade and Asaolu (2006) say that complexcity ideology resulted in control and measurer to put the economic in equilibrium, factor such as market capitalization rate amongst others exert some impact on the development and growth of the economy. On top of that, Bakere (2000) defines capitalization rate as the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The size of the market capitalization and its growth rate pose a major influence on the growth and development of the economy. The determination of this rate is based on the forces of demand n supply of the stock.
The Malaysian economy in recent years has been characterized by a trend towards increased liberalization and greater openness to world trade, a higher degree of financial integration and greater financial development. The increased liberalization and openness have motivated a high rate of increase in cross border capital and direct investment flow. After the stock market liberalization in 1988, expension in the stock market capitalization of the KLSE was truly impressive. The ratio of market capitalization over Gross Domestic Product (GDP) was 60 percent in 1985, but increased to 132 percent by end of 2001 (Beck, 2003), comparable to that of developed countries and among the highest market capitalization ratios in the emerging market universe.
Gooptu (1993) investigation into portfolio flows to emerging markets revealed that stock market volatility has increased, he suggests that increased volatility may result from herding and rapid switching of portfolio between markets. He noted also that many emerging stock markets suffer from a shortage of good quality, large capitalization share which result in rapid overheating when domestic and international interest is stimulated by market liberalization.
2.2 Corporate Treasury Management
2.2.1 Definition of Corporate Treasury Management
Definition the treasury management by Masson (1995) "In general, treasury management concerns all the actions and responsibilities related to the assets of the firm. Treasurers have overall financial responsibilities for the assets of the firm, including their purchase, financing and disposal." In era of globalization and liberalization treasury management has increased in importance over and come to occupy a key in contemporary organizations. It is important because the natural concern of treasury function is bringing prudent and professional management to the company's financial assets. In an overview, treasury management responsibility flow from the chief financial officer and encompasses both long term and short term financial responsibilities of the firm.
On other hand, Association for Financial Professionals (AFP) defined treasury functions definition as corporate officer responsible for designing and implementing many of the firm's financing and investing activities. Meanwhile (Ogilvie, 1999) defined treasury is high concerned with the relationship between the entity and its financial stakeholders. In the study of Ogilvie (1999) the relationship included shareholders, fund lenders and taxation authorities; nevertheless financial controller provides the relationship with other stakeholders such as customers, suppliers and employees treasury management (or treasury operations).
In, narrowly, the ACT defined the areas of corporate treasury in different angles to the financial institution as refers to "treasury activities which are carried in companies which use financial products to support their main business, usually a trading business". Basically the contrast to treasury activities carried by banks and financial institutions and in public sector by treasury professionals acting as advisers and consultants. The requirement for the functional skills of treasury management is therefore not limited to the corporate sector but is also to be found in the financial sector, in public sector organization of all types and in the academic sector.
Study carried by Philips (1997) mentions important of individual job responsible responsibilities in performed treasury jobs indicated that central to treasury management is a thorough understanding of the organization's objectives including related policies and procedure. In the research, he also found that the important for treasury job to master mathematic skills was high needed. On other hand, he also emphasizes that that skill in financial analysis for liquidity management was observed to be the most important.
As cited in Philips (1997), the demand on treasury professionals will intensify as treasurer evolves beyond traditional cash management activities into a more strategic role. Apart from that, Treasury Management Association (TMA) conducted a detail surveyed of the information needs by the treasury professional. The outcome illustrate that the top five informational needs were treasury management practices, cash management, cash forecasting, treasury operations, bank/financial relationship.
These findings on paragraph above, can concluded that the needs of employees should be provided training and skill enhancement in achieving this, Companies may required a dedicated training budget or allocation as well as management support for training those well round staff members are an asset to treasury department (Horcher, 2006) along with establishment of advanced college education and professional certification as key ingredients in the preparation of treasury professionals for their future role.
2.2.2 Structure and Roles of Treasury Department
In discussing the roles and functions of the treasury department as well as the scope attributed to it, we should reflect on how it has developed. In order to arrive at a model of the typical treasury we need, in particular, to recognize how the scope of treasury has changed over time. The progression of the function is central to understanding the issues with which treasurers are concerned, and how and by whom the responsibility for managing the treasury department was taken.
In order to establish well function of treasury management within the organization, The evaluation functions they work with should consider treasury as an internal consultant with expertise in risk and finance. According to Teigen (2001) "in real business there may be many differing targets between cash management and other departments, such as marketing, purchasing, inventory management, production, and human resource management". Therefore, there are evident that there exists a conflict between cash management and other department.
In research by McMahon (2006), there are significant treasury process criteria between treasury's authority and decision making clearly on procedure both top and bottom flow of corporate structure. The company structure from the treasurer department to be Board of Director (BOD) would be one way understanding for the activities role mid responsibilities appropriate to each department. But according to Belk (2004) the priority were not consider in US were conducted by treasurer and CFO and in United Kingdom where companies strategic decision making was generally taken by treasurer and BOD. As finding by Phillips (1997) strongly support that the treasure more engaged at the strategic level rather than transaction level, more than other position, except chief finance officer, as they were responsible for develop short strategic, monitoring compliance with guideline, and negotiating for financial services.
The treasury function exists in every business which full time conduct by treasure (Wai, 1992) though in small business it may form support department covering other functions, such as accounting or financial controller. Nevertheless, in some practices the treasury area is still seen as something of unclear working or responsibilities, due to globalization and liberalization a management function that has only recently been formalized. On other hand, many companies do not yet have a dedicated treasury team, it is not unusual to find such that treasury issues are dealt with by a variety of individuals within such organizations, compasses those involved ranging from the chairman, Board of director trough to relatively junior accounting offices.
2.2.3 Corporate Cash Management the Major Concerns
The role of cash management is to manage company's prepare cash position, monitor cash balance sheet, cash resources, coordinate financial function with account receivable and account payable. As in research by Maness and Zietlow (2005) and Ross (1999), cash management problem is closely related to the concept of liquidity problem as discussed in the corporate finance literature. Teigen (2001) defined cash management as a part of treasury management and main responsibilities of the central finance management team. Thus the concept of the organization structure, its ethos and objectives must be appreciated and understood prior to defining the requirement of the function itself.
It is clearly stated by researcher above that that a treasurer should be responsible for managing the cash position of the company efficiently. Broadly speaking said that the role of cash management is to plan, monitor and control the cash flow and the cash positions of a company maintain its liquidity (CIB, 2000). Nevertheless, CIB (2000) say that efficient cash management should be: (1) improve cash flow and, as a consequence, profitability. (2) Improve a company's security by reducing financial risk.
Cash management function are considered is the most important of treasury corporate, As Soenan (1989) studied on practices of treasury management in small open trading economy in Belgium, He found that banking relation was the major of respondent mostly small companies still dependent their cash management on their banker in forecasting cash position instead of employed internal finance officer within companies. Thus, the companies will select criteria and qualities standard of bank services on their making decision as classified into four group, namely; bank service, condition set by bank, special services and personnel relationship.
In study by Helliar and Dunne (2000) say that bank play important role in corporation cash managing which is highly interrelated with managerial function within the firm. The study on roles of treasury management in the past was focus on how bank and financial institution are related to the corporate cash management forecasting and treasury function had concentrated on fund management. As meantion by Helliar and Dunne (2000) the most common approach used by companies had been a fair open ended specification of requirement for as cash management solution for bank list.
Apart from cash management as primary function, inventory management, management of short term liabilities and credit management are important roles as part of working capital. As in Lee (2001) "cash management involves the administration of liquid assets and liabilities, and the raising of funds to finance a business". Therefore, it is crucial to ensure that business remain liquid position and able to meet payment obligations. In research by Boer (1999) saying that cash cap is simple concept that financial officers could used to convince operating managers to pay sufficient attentions to cash flow.
Besides that, the firm would plan strategic based on cash position as mention by Briggs and Singh (2000) and Opler (1999), whereby if a firm decides to hold small amounts of cash, the firm has to sell assets to money market or capital market. In scenario of firm hold more excess cash, it will incur opportunity costs of money. By using the model trade off by Opler (1999) studied, Ferreira and Vilela (2004) studies on why do firm hold cash? (Evidence from EMU countries). The paper looks on determinants of cash balance for firm using panel data for period 1987-2000. The outcome indicated that the amount of cash held by firms is positively affected by investment opportunity and negatively affected by the amount of liquid asset substitutes.
2.2.4 Corporate Treasury in Managing Risk Exposure
Provost (2000) study on derivatives usage n financial risk management in large and small economic, the sample of 334 firms had been selected to demonstrate that risk management practice. The outcome of the study shown that large firm more developed in many respect given the usage of the financial risk management. In the study also find that swaps, forward, and OTC option dominate the type of derivatives used to control interest rate risks and foreign exchange risks.
Ceuster (2002) suggest that small firm or subsidiary firm also using derivative as tools to hedge the risks. Meanwhile Abolhassan (2000) say that using of derivatives for corporate risk management decision, the outcome from the research find that large firm make greater use of derivatives than small firm. As Wai (1992), Belk (2002) and Abollhasan (2000) defined center treasury as the rigorous elimination of risk, this will lead to all exposures being hedged as soon as they identified. In no circumstances is a cost center treasury allowed to carry open positions, and there will be no suggestion that such a treasury should in any way contributed to the costs of its operation.
On top of that, Belk (2002) conducted interview focus on Foreign Exchange in area of structure of centralized or decentralized. In the research by using semi structure depth interview survey method data collected from Multi National Companies (MNC) in UK, US and German. The outcome of the research is UK MNC shown high degree of centralized foreign exchange process which parallel to the effect of size on centralized decision making.
CHAPTER 3
METHODOLOGY
In this chapter divides into two sections, the first section compasses research design, sampling data, questionnaire study and data collection procedure. On second section proposes the descriptive method for the data base analysis and briefing "the ACT five pillar of treasury wisdom".
3.1Research Design
3.1.1 The Definition of Well Capitalize Companies
Market capitalization is a measurement of size of a business enterprise equal to the share price times the number shares outstanding of a public company. As owing stock represents ownership of the company, including all its equity capitalization could represent the public opinion of a company net worth and is a determining factor in stock valuation (Wikipedia). Traditionally companies are divided into large capitalization, middle capitalization and small capitalization. As mention by Wikipedia size of capitalize are as follow:
Table 3.1 Size of market capitalization [3]
Type of capitalization
Size of market capitalization
Mega capitalization
Over $200 billion
Large capitalization
$ 10 billion - 200 billio
Middle capitalization
$2 billion -$10 billion
Small capitalization
$300 million - $2 billion
Figure 3.1 Definitions of respondent in this studied
If Yes
Company is a 1st Tier of WCC's
Do the company Market Capitalization is more than RM10 billion
Company listed Main Market Bursa Malaysia
If No
If Yes
Company is a 1st Tier GLCs
Do the GLCs have effective unit ownership more than 20%?
Company from GLCs has stakeholder
If Yes
Company is a 2nd Tier of WCC's
Do the company Market Capitalization is more than RM1 billion
If No
Excluded
In fulfillment for this study, There are two reference reasons in this survey namely: (i) researcher needs to increase the total number of sample respondents. (ii) The market capitalization must above RM 1 billion, as new framework under Bursa Malaysia top 100 companies will be average as indicator to Bursa Malaysia Index. Under new framework is aimed at allowing efficient access to capital and investment, as well as making Bursa Malaysia as more attractive platform for investor.
3.1.2 Sampling Framework
The sample covered on this study is company listed in Bursa Malaysia as describe above (see figure 3.1). The main sources of company information such as stakeholder, companies address is obtained from latest company annual report (as at Dec 2009).
The researcher will randomly pick 100 companies listed in main market in Bursa Malaysia. The total 100 companies were included of our sampling size on this studied which will dividend into tier 1 or tier 2 accordingly to the market capitalization as at Dec 2009. The selection of this sample survey was covered various industrial sectors such as Trading, Services, Construction and Plantation, but will excluded financial institution as sample.
3.1.3 Data Collection Procedure
Data are collect from secondary sources such as research had been done as well as primary data to enhance and up-to-date the latest treasury practice in WCC's. In this research will employ the questionnaire method as primary data. The questionnaire direct to person such as Finance Director or Financial Controller.
3.1.4 Questionnaire and Major Variable
The source of this questionnaire was adapted from previous studied "2005 Corporate Treasury Management Research" [4] in broadly, the all question broadly cover five the main information, namely:
1. Companies profile
2. Managing financial risk exposure
3. Financial function and treasury activities
4. Treasury policy and manual
5. Technology and system use
3.2 Methodologies and ACT Standard Comparison
3.2. 1 Descriptive Statistical
In my study, will employ descriptive method in analyze data and interpret result after receiving raw data as well as secondary data. Descriptive statistics are used to describe the basic features of the data in my study. In my study, simple data summaries about WCC's company profile and their current practices to generate graphics analysis, they form the basis of virtually every quantitative analysis of data.
As my study is employ the descriptive statistics, which are typically distinguished from inferential statistics. The different between descriptive and inferential statistic are to reach conclusion that extend beyond the immediate data alone compared to infer from sample WCC's data in this study. I would like to indentify the three characteristic variables in my study.
1. The Distribution. It is summary of the frequency of individual values or ranges of values for a variable. Way to describe the distribution of company size by annual revenue, treasury department and listing the number or percent of company status. Frequency distribution can be depicted in a graph, this type of graph is often referred to as a histogram or bar chart.
2. Central Tendency. Is the way distribution on an estimate of the "center" of a value. There are three major types of estimates of central tendency the Mean, the median and the mode.
3. Dispersion. Is refers to the spread of the values around the central tendency. There are two common measures of dispersion, the range and the standard deviation (The range is simply the highest value minus the lowest value). The Standard Deviation shows the relation that set of scores has to the mean of the sample which is more accurate and detailed estimate of dispersion because an outlier can greatly exaggerate the range, the outcome can reach some conclusions about specific scores in our distribution.
3.2.2 ACT Five Wisdom Pillars Benchmark Model.
The Association of Corporate Treasurers (ACT) established in the United Kingdom (UK) in 1979, where it is centre of excellence for professional in treasury. At the moment the organization with 18 regional groups based in UK and oversea, with over 3,500 members. The main objective of establishment is to encourage the study and practice of corporate treasury management, on top of that it offers extensive training opportunities on treasury field. Those passed the exam held by Act will award Certificate in International Cash Management (Cert CM).
In order to have specific minimum standard on treasury practices, we use the ACT five pillars as a benchmark model where will compasses the role and duties for corporate treasury department. The five pillars consist of corporate finance management, capital market and funding, money market, risk management and managing the treasury functions. These five pillars built on the foundation of a number of financial disciplines in managing and understanding to operate treasury management in corporation. Once the data is collected from primary and secondary source, will group it under five pillars as detail below:
Table 3.2 Categories Sub Financial Functions into Each Pillar
Pillars
Sub-Financial Function Into Each Pillars
1st Pillar: Corporate Finance Management
Financing, Investing, Dividend Policy, Balance Sheet Planning.
2nd Pillar: Capital Market And Funding
Banking Relation, Equity Management, Bank Reconciliation Debt Management
3rd Pillar: Money Market
Domestic Cash, International Cash, Cash Forecasting, A/C Receivable/Payable
4th Pillar: Risk Management
Foreign Exchange, Interest Rate, Commodity, Liquidity
5th pillar: Managing the treasury functions
Treasury policy, treasury system
