Moderator David Conroy, managing director, Americas head of trade finance and cash management, Corporates, Global Transactions Banking, Deutsche Bank: Welcome everybody. For those of you who watched the Yankees and Phillies last night and those of us from New York who unfortunately watched the Phillies give it to the Yankees, you’ll realize that in the context of the Treasury & Risk magazine and Alexander Hamilton Awards, this is really the World Series of awards. Deutsche is really proud to sponsor this conference and this award in particular.

This award in itself is not for any specific area, as in baseball, best hitter, best pitcher, best fielder. This award really encompasses a number of different things across different, multiple plateaus of treasury management and what all of you do on a day-to-day basis, inclusive of liquidity management and credit risk management, working capital and enterprise risk management. So again, this is really the world champion of AHA awards this year.

It also happens to bridge two industries. If you think about the perfect storm, we’ve got an automotive company and a treasury function sitting between business units, customers, vendors and a financial services community that was in an incredible amount of turmoil. And so if you look at that perfect storm and what was achieved by our award winner today, Toyota Financial Services, you will see that it’s really a phenomenal accomplishment.

The theme around the award this year and what TFS has done is really around treasury driving organizational excellence in the context of our activities in the markets. I am responsible here in the Americas for the large corporate segment and we are seeing an incredibly high level of engagement with treasury in every company on a much more strategic level than ever across a number of disciplines.

Our response has to be aligned with that, so in the process for giving out this award relative to what we’re hearing in the market, the themes are very, very, consistent. Liquidity management, cash position and cash flow management are a priority for all of our corporates. Obviously, there is heightened risk management awareness in the market right now. Cost efficiency and rationalization are all big themes. At Deutsche, what we’re clearly focused on, not just for 2010 but for the next three years, is making sure that we continue to invest heavily in products, platforms, technology and infrastructure. We deal with companies and their counterparties in about 80 markets around the world.

In continuing to bring solutions and products to bear on these heightened areas of awareness in the corporate marketplace, I wanted to touch on a few themes before I introduce our recipient today.

Again, treasury is a driving force behind organizational excellence within a corporate franchise. The notion of treasury is an integral part of the business and, in fact, a strategic part of the business. If you think about treasury as sitting in the middle between markets, the financial community and financial institutions and the capital markets, and then sitting between that environment and business units that are trying to drive top line revenue growth and profitability, it’s a unique position.

As such, treasury is an organization within corporates that is positioned to provide a big theme that you’re going to hear about today from our presenter, transparency. Transparency between the markets, between the financial institutions, between the capital markets, and business units and their need to continue to drive business profitably and efficiently in the current market environment.

The Toyota Financial Services story is really about how treasury leveraged transparency to create efficiencies and help their business units in what is a very decentralized environment, and a tough vertical industry segment to drive business results across the enterprise. Before I introduce our speaker and before I give him his award, let me give you a little background on Wei Shi. I greeted him with the only Mandarin I know, which is “nehama,” and he responded positively. So I guess my Mandarin’s not that horrible. But let me read you his background.

Overall Excellence 2009 Transcript

Wei Shi is vice president of treasury and finance for Toyota Financial Services. In this role, he is responsible for treasury, financial planning functions including planning, budgeting, liquidity funding, derivatives systems, asset liability and capital management, evaluation cash management and  treasury operations. Clearly, he is a very busy man. Wei joined TFS in 2006 and brought with him extensive experience in the financial services industry.

He started his career in managing interest rate risk at Bank of America and moved on to the fixed-income arbitrage group at Solomon Brothers. He then traded fixed income derivatives at Goldman Sachs, and prior to joining Toyota, he served as senior vice president and assistant treasurer for Providian Financial, where he led groups winning Alexander Hamilton Awards in credit risk management and financial risk management. So this isn’t the first Oscar that this guy has received. He’s like the Jack Nicholson of AHA awards. He has got a lot of trophies in his house, apparently. Clearly, he is somebody who has done this before and done it very successfully.

Wei received his bachelor of science degree in electrical engineering from Fudan University in Shanghai and has also earned two advanced degrees: a master’s in electrical and computer engineering from Carnegie Mellon in Pittsburgh and a doctorate in finance from the University of California in Berkeley. Wei resides in Ranchos Palos Verdes, Calif., with his wife and two children.

So to receive the AHA Overall Excellence Award, I’d like to welcome Wei Shi to the podium.

We’re going to take you through a brief overview of what TFS has done, and then we’re going to have a moderated panel discussion, hopefully with a lot of interaction from you folks. Thank you.

Wei Shi, vice president of treasury and finance, Toyota Financial Services: First, I’d like to thank the magazine for the Overall Excellence Award. I know it must have been extra hard giving the prize to a financial services company from southern California. After all, Los Angeles is known more for its edgy entertainment than its cutting-edge finance.

We do have our own challenges running efficient treasury in L.A. They’re somewhat different. To begin with, you probably have more power outlets in your offices than we do. Technology excellence is an extra challenge when motherboard has a different meaning. And it’s hard just reading the screen with all that glare. And in L.A., liquidity risk management can be particularly unforgiving.

But enough about our problems. When told of the award, I asked, “What do I get for winning?” They said, “You get to make a speech.” Then I asked, “What do the other delegates get for not winning?” They said, “They have to listen to your speech.”

So I thought I’d talk about something that’s important to treasuries everywhere, not just in L.A. Treasuries in the modern corporation. When I started my career, the cynical view about treasury was that treasury gets noticed only when something bad happens. Things are much different now.

Treasurers everywhere have identifiededthe reinvention and rediscovery of treasury’s role. TFS is no exception to this. We have evolved from 2000 as a treasury of a small operation to that of the largest U.S. auto lender in 2008. We believe that treasury has a uniquely valuable position to the firm and a strategic role to play. Simply stated, treasury’s fundamental role is to enable effective decision-making and to decentralize it when sensible. We promote organizational excellence through transparency in rationalization.

Over 60 years ago, Frederick Hayek wrote a series of essays on information and decentralized decision-making. For this and some other work he won a Nobel Prize in Economics. Hayek was the first to point out that a central economy doesn’t match the efficiency of the open market economy. Today I’m applying his insights to the role of the treasury in the modern corporation.

Overall Excellence 2009 Transcript

The complex business with decisions made by headquarters is as inefficient as a central plan economy. Decisions made at the top may not be based on complete information, and may not be the best for every context. Yet, they become rules for the rank and file. When such rules drive people instead of the other way around, people lose the ability to reach rational solutions to specific problems. Local information is ignored. Creativity is stifled and business performance suffers.

Transparency enables rationalization. It makes all the information available to decision makers. Transparency also enables decentralized decision-making. Those in the field can then apply information at headquarters. Econ 101 teaches us that decisions are efficient only when all costs and benefits are considered. Treasury sits in between markets and business units. Therefore, we can make a firm’s full marginal cost transparent.

We communicate market information with business units through transfer pricing and performance measurement. Business units can then make decisions with local information and by using their own judgment. In short, treasury can bring open market efficiency into the company. We drive transparency and rationalization to promote three crucial elements of organizational excellence: Alignment. Empowerment. Integration.

What can happen without alignment?  Here we have two cars trying to fit into one tollbooth. Obviously, the drivers are misaligned. Both drivers assume that they have the right of way and make decisions based on one’s assumptions rather than facts. Misalignment in business occurs when information is missing and people make incorrect assumptions. If decisions are based on partial information and faulty assumptions, efficiency is lost and accidents can happen.

Treasury is uniquely positioned and capable of and responsible for promoting alignment. Through transfer pricing treasury disseminates marginal cost information to business units. This creates transparency, enables rationalization, and promotes alignment. Everyone moves together because everyone faces the same known marginal costs. Efficiency is achieved. But utilizing marginal costs alone is not sufficient. We also need a common language, common knowledge, shared information and shared understanding. But at the end of the day, every decision in the company is a value decision. A value decision is a finance decision. And finance is what we do in treasury. Our work directly promotes alignment, which is the key to the firm’s execution capability.

Some of you may recognize this from the movie “Airplane.”  Moving on to the second element. I mentioned empowerment. Let me first explain what it has to do with these two pilots. Studies show that flights are safer when the less experienced co-pilot is flying instead of the captain. Why? It seems counter-intuitive. Plane crashes may occur because co-pilots tend to be too deferential to their captains and too reluctant to speak up if they perceive a problem. Yet when the rules are reversed, the captain won’t hesitate to point out any problem and the flight is safer as a result. And of course we need two qualified pilots.

Empowerment entails movement. Movement requires efficient decision-making, which requires local information that is particular to time and place. This is the expertise of the field. In the case of a flight, a co-pilot often sees things that his captain does not. Companies recognize this phenomenon and encourage employees at all levels to speak up. TFS, for example, includes two questions in its annual associate opinion survey. The first question is, “Do we have open and honest discussion in my department?” And the second is, “Is it safe to speak up at TFS?”

Overall Excellence 2009 Transcript

Through transparency, treasury can play a key role in effectively enabling decentralized decision-making. Value is the only matrix that is additive. By making value transparent, treasury makes it safer to speak up. It makes things non- personal. Decisions backed by value based in a matrix are safe to discuss. But without that transparency, decisions become arbitrary, personal, politicized, and often people are less likely to speak up. Only when it is safe to speak up can we avoid a crash.

Centralized decision-making wastes critical information. It is inefficient because it ignores experience, judgment and facts on the ground in the workforce. Companies often say that people are their most valuable asset. Then they set up a centralized decision-making processes that ensure the asset becomes worthless. It is through transparency that we enable decentralized decision-making and efficiently use the human resources of the firm. Local judgment and experience are impossible to centralize. Information from headquarters, on the other hand, is possible to disseminate. Very often that information is kept in market prices and values.

Treasury can empower the field And the field can then make the best decisions on behalf of shareholders. If people are really our most valuable asset, then let us make information transparent. That will get decision-making right and enable rationalization at every level.

How can we get the painter to remove the road kill before painting the lines is the question. Decentralizing decision-making rights without full transparency leads to the principle problem. It is the problem of getting people to act like owners when they are not. “No one washes a rental car.” Firms need to decentralize decisions but make a trip back when decision makers are not acting like owners.

Treasury, through transfer pricing and performance measurement, provides the relevant market information to decision makers and their bosses so that there is clear accountability. This way, decision makers can and must take into account the full costs and benefits of their activities. It makes it harder for bad decisions to be made and for value destroying activities to persist.

Integration. Integration is how things come together to maximize shareholder value. This is a Toyota way. This is Toyota’s vision of value management. Transfer pricing and performance measurement unite people and make information transparent to all. With transparency, people can rationalize decision-making without relying on wrong assumptions. With transparency, the firm can decentralize decision-making. The firm knows that the managers will act in the interest of shareholders because, if they don’t, that there are no results will quickly be apparent to all.

Transparency empowers a field while helping management minimize the the problem. This allows all of the combined judgment, wisdom, experience and local knowledge that are widely distributed throughout the firm to be efficiently utilized. And this is how treasury promotes organizational excellence.

Thanks for listening and thanks again for the award.

Overall Excellence 2009 Transcript

Questions and Answers:

Moderator David Conroy:  That’s fantastic, Wei Shi. And a good ending note. I’d like to open it up to question and dialogue from the audience. Tremendous case study and accomplishments have gone back to what I talked about initially, particularly in this environment and this industry -- just a phenomenal achievement by TFS. Any questions from the corporate practitioners or the banks in the audience? We have one here.

Q: Your message is really about this idea of centralized or decentralized. Your success seems to be about the idea of yes, you can centralize the policy, but decentralization of how to apply those policies. In the last few years we saw a lot of companies looking to really centralize their treasury operations into certain locations and having only them making decisions. So it’s more about the mindset.

Wei Shi, Toyota Financial Services: Yes. Centralization versus decentralization really depends on whether the decision relies on local information or not. The objective is always about transparency, and that promotes rationalization. For example, one of our technology entries used the word “centralization” of our banking services. Really the objective there is simply transparency, because we make our banking services cost transparent to all. Instead of having a strictly one-on-one relationship where it’s hard for you to choose between banks, centralizing the banking services platform allows that transparency and therefore promotes rationalization. Obviously, rationalization is objective. Centralization versus decentralization depends on what work better enables rationalization.

Moderator David Conroy: Wei Shi and I were talking about this and the lead-up to this. We have within the bank clearly defined policies, procedures and compliance credit risk management “rules” that we go by. I think the same holds true from what I’ve learned about TFS. The rules don’t always sit where the customer sits In a decentralized business model environment such as the one that TFs has been running, this whole notion of transparency plays a big role. In the bank right now, one of the big focuses we have within transaction banking is to ensure that the information and the transparency of information and track record and experience is made available to all, particularly in credit risk management discussions. Right now we are very, very active in the financial supply chain space. Everybody needs working capital, everybody needs alternative liquidity to debt. In many instances, if a local country were taking on those decisions independent of the transparency that we can provide for our credit risk management system and our transaction-based systems, they make a one-to-one credit decision that really doesn’t make a good deal of sense.

I think the task for us is how to provide that information, make that information transparent so that decision at the local level where the business is being done is credit enhanced or educated to the degree that it needs to be based on the information that the central processes put in place.

In terms of treasury driving organizational excellence, you mentioned three key things: alignment, empowerment and integration. Why these three things? I think transparency runs horizontally underneath all of them.

Wei Shi, Toyota Financial Services: In our mind, alignment is about state and position. Empowerment is about movement and energy. And integration is about purpose and direction. So to us these are three crucial elements of organizational excellence. You need all of them. Why? Because you may be aligned but be stuck in a place getting nowhere. You may be empowered but going in the wrong direction. When you have all three -- alignment, empowerment and integration all together --that ensures everything and everyone is driving toward the same direction to maximize shareholder value.

Moderator David Conroy: Wei Shi, with all these great achievements and everything that TFs has done, I wanted to ask you two things. Number one: Treasury as a profit center or cost center? And then number two: How does treasury as a function measure performance?

Wei Shi, Toyota Financial Services:  Maybe I’ll use the word “value center” to describe every business unit whether it’s customer-facing or not. In other words, whether we directly engage in customer activities or not, we always need performance measurement. If you do not have proper performance measurement in terms of value, then it’s a free pass to introduce risk for no purpose under the guise of not being a profit center. So that’s our philosophy. We think that every center, every business unit, is a value center.

Moderator David Conroy: I have one last question for you. I always ask this one when talking to treasury people. What keeps you up at night?

Wei Shi, Toyota Financial Services: Pretty much nothing, other than public speaking maybe.

Moderator David Conroy: Wei Shi, thank you. Thank you all, and congratulations to Toyota Financial Services.


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