Why financial risk is a leadership challenge

Lynn Norris:

Welcome to Navigating Beyond the Expected, a podcast from Truist Securities. Interest rates rise, currencies move, commodity prices fluctuate, and all of these changes pose some level of risk to a company's financial picture.

Many companies treat these kinds of financial risks as individual challenges to manage in the moment, but there's a more strategic approach to consider.

I'm your host, Lynn Norris, and my guest today is Jeff Messner, head of financial risk management at Truist Securities. Jeff works closely with companies that face a myriad of financial risks in today's often volatile markets, and he's going to help us think through risk management with a bit more intention. Welcome, Jeff.

Jeff Messner:

Hi, Lynn. Thank you for having me. Great to be here.

Lynn Norris:

All right, Jeff. When companies think about financial risk, where do you usually see them concentrating their attention?

Jeff Messner:

We normally see clients often start at a transaction level. They think about risk purely in the sense of how it impacts the transaction right in front of them. And what I mean by that is, maybe we see a company buying a piece of equipment from Germany, and they're thinking about how much that costs in euros versus how much that costs in dollars.

Or maybe a company's borrowing $100 million, and they're thinking, "Do I need to do an interest rate swap on that loan to convert those floating rate exposures to a fixed rate?"

Or maybe it's something big like a $1 billion public bond issuance, where you have Treasury pricing risk to set the coupon on that bond. That risk question often comes in, “What's the transaction right in front of me?” And a lot of times, because that focuses on the transaction, sometimes we often miss the bigger picture on how everything moves together and how there are forces at play.

And they're not thinking about, "Well, maybe those foreign payments I'm making every day—maybe there's a lot of currency risk in all of those payments. And while they might be small, they add up to a much bigger number than this event right in front of me."

Lynn Norris:

So it's not that companies aren't aware of their risk, it's just that they're thinking about it in narrow silos and not considering the whole balance sheet?

Jeff Messner:

Sometimes it's a timing issue. It's often, "I'm worried about the risk that's right in front of me. I'm worried about today, tomorrow, three months, six months." It's hard to think about what's the five and 10-year view, or how do maybe multiple exposures interplay. And while you might be exposed to interest rates going up on the liability side of your balance sheet, maybe you're exposed to interest rates going down on the asset side of your balance sheet. So there's often a lot of conversations to happen and a lot of different ways to analyze it.

Lynn Norris:

Wow, a lot to consider there. Why do you think risk management decisions feel so personal to the people making them?

Jeff Messner:

They feel personal because there's often a hard and sometimes long-term commitment decision to make around it. One of the things we often hear, when we're talking about these transactions, is the idea that “I don't want to put a hedging strategy in place because I'm actually speculating or I'm making a bet on where interest rates might go, where commodity prices might go, what the value of the dollar is doing.” It's pretty interesting.

We're ultimately talking about insurance-like discussions, right? These are risk management discussions. I often think of it this way. I don't know anyone who finishes their year-end and thinks, "Well, I had car insurance this year, and I didn't get into an accident and, aw shucks, I threw all that money away on my car insurance." No. It's more, “I want to be able to have a more thoughtful financial outcome in the event some unforeseen circumstance happens.”

When we think about financial risk, that's the right way to think about it. It's not about winning or losing on a hedging strategy. Likewise, it's not always about winning or losing on the underlying risk that we're managing. It's about creating more predictability and more intention around what those outcomes look like, managing that potential volatility, regardless of the market force that's causing it.

Lynn Norris:

It sounds to me like you have to wear a little bit of a counselor hat in that situation, then, to calm nerves, help people work through their emotional reaction to their strategies.

Jeff Messner:

There certainly can be some emotion in it. And part of the ingredients to success are finding ways to take that emotion out of it. I've been doing this for over 25 years. And when I think about who are the clients I've interacted with that have had the most successful approaches to risk management, it has been the ones that have removed that emotion. And it's hard, right? It's hard to look at that transaction or look at that strategy, or look at that decision to hedge or not to hedge. Do I do it on a Tuesday? Do I do it on a Thursday? What economic release is coming out, and is it going to move the market one direction or the other? That emotional aspect to it can sometimes get in the way and even cloud judgment.

The most successful clients that we've seen have taken a step back and taken a more strategic approach to it. It's thinking about what's my overall philosophy on risk management? What's my strategy? Do I have a formal policy in place? What does that policy tell me? So that, regardless of what's changing at the company, maybe there's an acquisition opportunity causing you to need some more capital; maybe your business mix has changed, and you have a new customer overseas that's changing your currency mix.

What you're doing with this risk management strategy is you're just then saying, "My conditions changed. I have a strategy in place. Let's apply that to my new circumstances." You've taken the emotion out of it. The emotional part of it is really in thinking about the strategy, which can be done regardless of when the transaction occurs. That's a through-the-cycle exercise.

And that's really what we are here to do is: help our clients think about those questions, help them think through that process, and then ultimately execute instead of responding to some kind of emotional trigger.

Lynn Norris:

It sounds like then they need to have a good blend of discipline and judgment, and you're helping them with that. That's really important.

So let's talk a little bit more about that, about moving from a reactive transactional view of risk to a more intentional approach. And let's use interest rates as an example, since that's probably the most common exposure companies think about. How does the more holistic approach you're talking about differ from a transaction-by-transaction view?

Jeff Messner:

When we see clients look at transaction-by-transaction, they often get lost in the minutiae. And I think about my own personal portfolio. And I think about, okay, the S&P in the last five years is up 66%, or something like that. It's not about getting lost in, well, did I bottom-tick the market on one day? And at the end of the day, 65.9 and 66.1 doesn't really matter. What matters is, I have a strategy that I want to be invested in equities and I have my money working for me, and I have gains.

Risk management works the same way. So, to use your interest rate example, it's not addressing each borrowing and each loan individually. It's thinking about, what's my whole portfolio? Where are all the exposures on my balance sheet or my income statement? And how do they all interplay?

We often get a question on our desk of, what's the right mix between fixed and floating debt? And there is no right answer for any company. We often see our companies come back with maybe not 100% one direction or 100% the other direction is right. 50/50 feels good. Let's go to 50/50.

Lynn Norris:

Right.

Jeff Messner:

And then, you have another question and another few comments, and all of a sudden 50/50 starts to look like 60/40 and 70/30 because, all right, well, I'm a little bit more conservative, or I'm a little bit more cyclical and want some more of one exposure versus the other. So it's all those little nuanced things in terms of getting to that next level type dialogue. That's not just about “what's the transaction right in front of me?” It's “How do I think about risk holistically?”

Lynn Norris:                                                                                                                                

And it's using those hedging ideas or other strategies as individual tools to manage the whole process then?

Jeff Messner:

Correct. There is a whole menu of alternatives and options that clients can use to ultimately get to their goals. I think the harder part is figuring out what that goal is in the first place. Figuring out, hey, what is our strategic goal of our targeted fixed versus floating mix? Or, if we have exposure to the euro, how much of my euro exposure do I want hedged at three months, or six months, or one year forward?

It's having those discussions and getting to those answers, because then the actual execution strategies and the products that we put in place, that's the easier part. And candidly, that can be the more fun part too. But without having that strategic base, and that fundamental sort of core of why you're doing it in the first place, it's really easy to armchair quarterback things, and that's never a good approach to risk management at the end of the day.

Lynn Norris:

Sure. Well, if an executive listening now is starting to recognize themselves and their company when you describe the transactional risk management approach, where should they start? How can they start that shift to the more intentional framework? There's a lot to consider. What's first?

Jeff Messner:

The easiest thing to do is just have a conversation. I've been doing this for a while. I have yet to see what too early looks like for that conversation, but I have seen what too late looks like.

And being reactive to markets often finds people kind of in an uncomfortable position. So, for example, we often see everyone focus on energy prices. That's a market that's really exposed to big swings up and big swings down, based upon weather events, based upon geopolitical situations that might kind of skew energy one way or the other.

Let's focus on diesel fuel, for example. That's something that can be a sticker shock at the pump. And a lot of companies that we work with might be exposed to putting fuel in trucks, or heavy equipment, or whatever it might be. The company that doesn't have that hedging program in place might be living through a situation—we're in one of those shocks, one of those high energy price environments—and, all of a sudden, they're sitting there forced to explain what's going on: “How am I going to react to this? How am I going to explain this away?”

And often we'll get inbounds, and we'll have discussions with companies where they're saying, "help." And that's kind of what that too late might feel like. The time to have those conversations is now, so that you're ready to put a plan in place, as opposed to waiting for that next big event to have in the market and try to react and respond and figure out what's going on and scrambling. That's not the right approach to risk management.

So what does that business leader do? It's just a conversation to start having some of those probing questions and figure out what those goals might look like. It doesn't have to be scary. Sometimes that's an hour-long conversation. Sometimes it's a five-minute conversation. It's really how much they want to put into it, and we can help them along the way.

Lynn Norris:

Risk management isn't something you want to do under a huge amount of pressure.

Jeff Messner:

That's the whole point at the end of the day, right? It's about trying to create some predictable outcomes around those unforeseen events, instead of having the event happen to you and then not being in control.

Lynn Norris:

Isn't it also more expensive? Aren't there costs associated with putting off your planning?

Jeff Messner:

Well, it certainly can be. I think the whole value in a financial risk management strategy is being able to create that predictability around outcomes, and be positioned for those events in a positive way, versus having to react to them in a negative way.

So, back to my example of energy prices, the company that had that hedging program in place, they don't like energy prices where they are, but they're probably feeling a lot better than the person that didn't, and all of a sudden is paying full freight at the pump, and explaining away, "Hey, why was profitability down this quarter?"

"Well, because we had this unforeseen shock in diesel prices that we have to manage, and we can only pass some of it through." Where the company that had the hedging program in place was, "No, we know what our costs are. They're the same as they were last quarter. We had our hedging program in place."

Lynn Norris:

So how have you seen this tendency to put off risk as low priority until it doesn't come up in real executive decision-making?

Jeff Messner:

I think where we see it a lot is how it starts to influence future behaviors. We are having a lot more conversations around hedging interest rates, even at today's levels, where, relative to the last few years, they feel high.

So the main driving behavior is the risk management dialogue becomes a lot more topical again, and that tends to last for a really long time. There's an institutional memory around, “I'm the CFO that had to explain why we weren't hedged when interest rates went from less than 1% to 5% plus. I'm the CFO that had to hedge that example of, we weren't prepared for a shock in fuel prices, and we have a significant fuel exposure. I'm the business owner that had to explain why all of a sudden it's more expensive for me to source inputs, because I'm buying them from overseas and the dollar's not as strong as it used to be.”

So, in some ways, that reaction can be a good thing because it forces people to maybe be a little bit more proactive around thinking about risk management for when it happens the next time.

Lynn Norris:

I'm sure many CFOs want to have as few of those conversations as possible. So Jeff, being proactive sounds straightforward in theory, but in practice, it can be hard to build that discipline into an organization. When you and your team get involved with a client, how do you help them start to build that kind of discipline?

Jeff Messner:

Step number one is just asking questions. It's not a lot different from personal financial planning, in a way. If you're sitting down with a personal financial planner for the first time, I would hope that person isn't all of a sudden just walking in the room going, "Well, here are the 10 stocks you need to buy," or "Here's the life insurance policy I need to sell you,"—that type of thing. That's not a good relationship.

Step number one is, what are your goals? What are your long-term plans? In some ways, financial risk management isn't that different in that it's our job to understand what a company's goals might be and to ask those probing questions. There's no right answer for everyone. It's a bespoke solution for every client out there, and it's really about being intentional.

The right answer for a company might be to have a massive hedging program in place to meet their goals. The right answer for a company might be to not really have a program in place because they are intentionally making a decision around certain financial risks. It's around being intentional. They might get there naturally, and they change over time. What might make sense today could look different tomorrow as a company gets bigger, as a company gets smaller, as their leverage position changes, as their client mix changes. It's a dynamic process. It's about having conversations and revisiting those goals and strategies over time. It's not always just set it and forget it.

Lynn Norris:

A lot of institutions can execute a hedging transaction. So, where do you feel like your team can add real value to the process?

Jeff Messner:

I think the value comes into how those conversations occur, how we help clients set those strategies, how we ultimately think about how all of the products available work together in concert to meet those goals.

So I'll give you an example. We were working with a company that was in the power generation business, and they were using a lot of natural gas. And at the end of the day, all of the products available to hedge exposure to natural gas, they all kind of do the same thing. Pardon the pun, they're a little commoditized. But it's in the delivery of those products in terms of how we can think about how they work together and meet the client's need, ultimately get to the right answer.

And what we found is the first response we got was, "I don't need to talk to you. I already have my exposures hedged. We're in the futures market. We've got it taken care of ourselves." And that's technically a correct answer, but after some more questions, what we figured out was: Okay, yes, but those futures positions you've established require a large amount of collateral to be posted against them, and that's actually eating into your liquidity, and it's getting very, very expensive for you to manage your gas exposure that way. "Hey, we think we've got a better way to skin this cat. And if you use us in some of the products that we think make a little bit more sense, we can save you a lot of money and help solve some of those liquidity issues for you."

But how we got to that answer ultimately made a huge impact on how the company manages its balance sheet and liquidity on a day-to-day basis.

Lynn Norris:

We've talked to a number of your colleagues at Truist about the one-team approach that you all bring to your work every day. So, how does that breadth of knowledge across all kinds of sectors and products, how is that helping you to assist clients and companies when they're making their decisions about when to use certain instruments, and how and why? Talk to me about the advantage that brings.

Jeff Messner:

I think the advantage there is that we're not having these discussions in a vacuum. And what I mean by that is, it's really easy to think of this risk management as just, "Oh, this is kind of something done on the side, and I can get to it when I get to it. And yeah, Jeff or somebody from his team, I'll sit in my office and talk to me about it, and maybe we'll do something, maybe we won't," and then off he goes.

The real secret sauce is, not necessarily just thinking about risk management in that vacuum, but thinking about how does the risk management strategy fit the overall financial goals we're trying to help a company meet? Maybe it's an acquisition, and then it's, well, how do we fund that acquisition? And then, oh, based upon how we fund that acquisition, the client has a risk management goal in place, and that's going to get them a little bit off kilter versus those goals.

And now it's one big conversation about, here's your financial goal, here's how we create the liquidity, here's how we fund it, and here's the risk management strategy that goes alongside. We're talking about one solution, as opposed to kind of attacking all these little problems piecemeal. And it's being able to work together as a team with all the different product partners at Truist and our relationship management and our credit risk managers, having all those discussions together helps us get to the right answer, and ultimately helps our client meet their goals, versus just trying to kind of look at everything in a very siloed approach.

Lynn Norris:

That's a very powerful solution. So, all right, if there is one thing you want a leadership team to remember about managing risk, what would it be?

Jeff Messner:

Lynn, I think that one thing is, just be intentional about it. Do things on purpose or don't do things on purpose. Look, I know some of these products can be scary and intimidating, and they've got a lot of different moving parts to them. And that's ultimately why people like me and my team are here, to help guide management teams through how to deploy these and whether they work or whether they don't for the different situations.

But risk management doesn't have to be scary. Sometimes the best answer is a very, very simple solution, but the experts, the really successful ones, they're being thoughtful and intentional about it.

Lynn Norris:

Well, risk management can be an intimidating challenge for a lot of companies, but you've really helped us to understand how to tackle it. So thank you, Jeff.

Jeff Messner:

Thank you, Lynn. This has been a blast.

Lynn Norris:

All right. But before I let you go, I just have a few more questions for you so we can get to know you a little bit better, but I want you to answer them rapid-fire style. Okay? Are you ready?

Jeff Messner:

I'm ready.

Lynn Norris:

All right. What movie have you already seen, but you'd watch again right now?

Jeff Messner:

Top Gun: Maverick.

Lynn Norris:

For me, it's The Three Amigos. I just watched it again.

What one word defines success for you?

Jeff Messner:

Happiness.

Lynn Norris:

And what's one small habit you have that makes your day run better?

Jeff Messner:

I am an inbox zero guy. I have to go through emails, and organize them and get them all somewhere where they need to go. It stresses me out if I've got a big inbox. I've got to tackle it throughout the day and get it perfectly clean.

Lynn Norris:

Oh, I wish I could be inbox zero. I think I'm at inbox 40 million, but I understand. All right. What's one professional skill you've had to work hard to develop?

Jeff Messner:

Probably taking time to question and reassess whether we're on the right path, to not get too attached to a decision we've made in the past, or I've made in the past, and understand that circumstances change, things change, there may be a better solution, and you need to be flexible.

Lynn Norris:

That is a great mindset, for sure. A good skill to have. I have one more, and you can take more time with this one if you'd like. What's one way you try to go beyond the expected, in work or in life?

Jeff Messner:

I try to give back where I can. I've started a new little adventure recently. I used to spend a lot of time focused on youth sports in my free time, and coaching my kids, and they've effectively aged out of my expertise. So I've been trying to figure out other ways I can stay active in the community. And I've come out of retirement and have, once again, become a youth baseball umpire.

So that's one way I just try to stay involved in my community, give back a little bit. It's fun to get out there on a Saturday or Sunday on the ball field with some kids and have a little fun with some baseball.

Lynn Norris:

Oh, that sounds like a lot of fun. Well, that was excellent, Jeff. Thank you for being here on Navigating Beyond the Expected. I hope we'll get to have you back soon.

Jeff Messner:

Thanks, Lynn. This has been a lot of fun. I appreciate it.

Lynn Norris:                                                                                                                     

Listeners, thank you for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. Subscribe today so you never miss an episode and check out more Beyond the Expected insights, videos, and articles at truist.com/beyond. You can also subscribe to I've Been Meaning to Do That, the podcast from Truist Wealth at truist.com/dothat.

I'm Lynn Norris. We'll see you next time.

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