City & Business: The growing parade of the closet gamblers

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The Independent Online
THE number of blue chip companies queueing up to confess they have, er, umm, how can they put this, lost money in the financial markets, is lengthening by the day. Like schoolboys admitting they didn't sensibly deposit auntie's postal order in the Bradford & Bingley but blew it instead on the 3.30 at Epsom, the guilty parties are shuffling forward.

Last week Glaxo joined the crowd outside the headmaster's study after dropping pounds 100m as a result of putting money in gilts and other, rather more fancy, investments. The loss had nothing to do with its business of developing and making drugs; it stemmed from mistakes in investing the pounds 2.5bn of cash it has accumulated over the years.

In April, Procter & Gamble announced a dollars 102m loss after speculating in complex derivatives contracts, its officials sheepishly admitting they did not really understand what they had got into. Metallgesellschaft of Germany and Allied Lyons in Britain have also come to grief on treasury operations.

These mistakes in treasury management are just the ones we hear about, the ones too big to cover up. Smaller losses can usually be disguised, offset by profits made elsewhere by treasury departments. All the signs suggest we're going to hear of more such losses, especially because of the collapse in gilts prices this year.

As corporations accumulate mountains of cash, the temptation to do more than put them on boring old deposit becomes greater and greater. Companies' treasury departments expand. They create special investment management divisions. They see the glorious array of goodies available in the derivatives market and they are led astray.

Sometimes these investments genuinely hedge companies against the risk of foreign exchange movements or raw material price increases. Sometimes companies take a view of future price movements and have a flutter.

Even the ultra-conservative Marks & Spencer sometimes borrows money not for its own purposes, but to on-lend to other companies, making a tidy turn in the process thanks to its impeccable triple-A credit rating.

All this is perfectly legitimate up to a point. There is a case for investing cash in a spread of assets, some of them riskier but carrying the prospect of greater reward. Indeed, you could argue that British Telecom, which plays safe and puts its entire pounds 2bn of cash on deposit, is not being adventurous enough.

The problem is that shareholders know next to nothing about how companies manage their cash. In the annual report, chairmen will wax lyrical about the new widget factory extension but their company's treasury operations - which are capable of generating a hundred times as much profit or loss - are dismissed in a single sentence. The tiny 'cash and short-term investments' line in the balance sheet can hide a multitude of sins.

Shareholders need to be told much more about the kinds of investments the company will contemplate. And boards need to understand much more about the risks their treasury rocket scientists may be exposing them to.

Of course, this overlooks the more fundamental question of whether companies should have cash piles in the first place. The answer is no. Ideally they should either invest the money in real productive capacity in industries they know and understand, or hand the money back to shareholders.

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