ORGANIZATION OF THE FINANCE FUNCTION
ORGANIZATION OF THE FINANCE FUNCTION
To optimize the flow of funds worldwide, the MNE must determine the proper parent-subsidiary relationship with respect to the finance function. There are three distinct patterns of parent-subsidiary relationships: (1) complete decentralization at the subsidiary level, (2) complete centralization at the parent level, and (3) varying degrees of centralization.4 It is important to understand that the treasury function is fairly broad, and not all decisions are dealt with the same way. Some functions, such as foreign-exchange risk management, may be centralized; others, such as short-term financing decisions, may be decentralized. Thus the centralization/decentralization concept can refer to the general orientation of the treasury function or its separate components.
In a decentralized situation the subsidiary is independent of the parent.
parent receives reports but generally issues only minor guidelines, espe- daily when foreign sales comprise a small part of total sales and when the
parent staff is relatively unfamiliar with the foreign environment. Centralization--the par- In a centralized situation the parent staff dominates planning and deci-
sion making, whereas the subsidiary carries out orders. The idea behind this approach is that the more sophisticated parent staff understands the intricacies of moving funds across many national boundaries in order to serve the needs of the whole system at the greatest profit. Olivetti centralizes its hedging strategy at the corporate level so that management can be concerned with operating rather than foreign-exchange decisions. However, Olivetti does not centralize all of its treasury decisions.
The third approach, varying degrees of centralization, attempts to use the best aspects of centralization and decentralization by achieving high levels of financial sophistication on both parent and subsidiary levels. Because of this expertise, the subsidiary staff is better able to act within specified guidelines.
The parent staff coordinates system activities and monitors results. To maintain close proximity to foreign financial-information sources, many firms have organized regional financial decision-making centers. The parent staff continues to issue guidelines for decision making and coordinates the entire system, but the financial organization and management functions are turned over to the regional organizations.
Coca-Cola has devised a system that involves cooperation between the parent and local operations. The decision to hedge or not to hedge is a function of cooperation between the Atlanta-based centralized treasury group (Coca-Cola's world headquarters are located in Atlanta) and local management. Corporate staff makes sure that local management understands the risks and potential hedging strategies, and both groups determine the strategies that will be adopted. Although the corporate staff has the expertise, local management understands the local environment much better and can help corporate staff understand risks and design strategies. Coca-Cola has treasury service managers at headquarters that speak to the international group presidents on a weekly basis and to local operations on a daily basis. That gives the local managers direct access to treasury expertise and also helps headquarters get a better feel for the local situation.5
General Motors is another company that combines centralization with decentralization. GM centralizes some of the treasury functions to concentrate expertise, increase clout in financial markets, and reduce transactions costs due to centralized cash flows. However, it realizes that local expertise is necessary to understand local situations and to react quickly to events. While the corporate treasury function is located in New York, it has a European center in Brussels, and each overseas subsidiary also has its local treasurer that establishes banking relationships, etc. However, the regional or corporate treasury still provides significant input, and regional actions are subject to HQ policies and limits.6
To optimize the flow of funds worldwide, the MNE must determine the proper parent-subsidiary relationship with respect to the finance function. There are three distinct patterns of parent-subsidiary relationships: (1) complete decentralization at the subsidiary level, (2) complete centralization at the parent level, and (3) varying degrees of centralization.4 It is important to understand that the treasury function is fairly broad, and not all decisions are dealt with the same way. Some functions, such as foreign-exchange risk management, may be centralized; others, such as short-term financing decisions, may be decentralized. Thus the centralization/decentralization concept can refer to the general orientation of the treasury function or its separate components.
In a decentralized situation the subsidiary is independent of the parent.
parent receives reports but generally issues only minor guidelines, espe- daily when foreign sales comprise a small part of total sales and when the
parent staff is relatively unfamiliar with the foreign environment. Centralization--the par- In a centralized situation the parent staff dominates planning and deci-
sion making, whereas the subsidiary carries out orders. The idea behind this approach is that the more sophisticated parent staff understands the intricacies of moving funds across many national boundaries in order to serve the needs of the whole system at the greatest profit. Olivetti centralizes its hedging strategy at the corporate level so that management can be concerned with operating rather than foreign-exchange decisions. However, Olivetti does not centralize all of its treasury decisions.
The third approach, varying degrees of centralization, attempts to use the best aspects of centralization and decentralization by achieving high levels of financial sophistication on both parent and subsidiary levels. Because of this expertise, the subsidiary staff is better able to act within specified guidelines.
The parent staff coordinates system activities and monitors results. To maintain close proximity to foreign financial-information sources, many firms have organized regional financial decision-making centers. The parent staff continues to issue guidelines for decision making and coordinates the entire system, but the financial organization and management functions are turned over to the regional organizations.
Coca-Cola has devised a system that involves cooperation between the parent and local operations. The decision to hedge or not to hedge is a function of cooperation between the Atlanta-based centralized treasury group (Coca-Cola's world headquarters are located in Atlanta) and local management. Corporate staff makes sure that local management understands the risks and potential hedging strategies, and both groups determine the strategies that will be adopted. Although the corporate staff has the expertise, local management understands the local environment much better and can help corporate staff understand risks and design strategies. Coca-Cola has treasury service managers at headquarters that speak to the international group presidents on a weekly basis and to local operations on a daily basis. That gives the local managers direct access to treasury expertise and also helps headquarters get a better feel for the local situation.5
General Motors is another company that combines centralization with decentralization. GM centralizes some of the treasury functions to concentrate expertise, increase clout in financial markets, and reduce transactions costs due to centralized cash flows. However, it realizes that local expertise is necessary to understand local situations and to react quickly to events. While the corporate treasury function is located in New York, it has a European center in Brussels, and each overseas subsidiary also has its local treasurer that establishes banking relationships, etc. However, the regional or corporate treasury still provides significant input, and regional actions are subject to HQ policies and limits.6
Comments
Post a Comment