Value Creation and Beyond:
FX Risk Management at Royal Philips N.V.
An Interview with Gabriel van de Luitgaarden, SVP, Head of Financial Risk and Pensions Management, Royal Philips N.V.
To what extent had your FX risk management requirements changed since you set up your previous FX hedging policies?
Philips has always had a very extensive global footprint and we conduct our business in over 45 currencies. The old FX hedging policy was created approximately 15 years ago when Philips was a very different company with a much broader business portfolio, a different (decentralised) management structure, different IT systems and, very importantly, a very different way of reporting and managing financial performance. Especially during the last four years Philips has been changing rapidly with a very strong focus on improvement of value creation and financial performance, with clear and challenging mid-term financial targets. We strongly believe that FX risk management must have a clear objective, i.e., it must contribute to value creation. A major overhaul was therefore appropriate and we created an FX risk management policy with a broader scope than only FX hedging.
How have you engaged with the business to understand and manage the FX impact of their activities?
We have intimately engaged with our businesses during all stages of the FX project. We have been working with the businesses to understand their real FX exposures. Our FX team developed an FX footprint model based on our accounting data warehouse, and the FX team has been working with the business finance managers and procurement managers to explore the FX exposures hiding underneath the accounting numbers. This has resulted in a new FX footprint model, showing the real sensitivity of our earnings to FX movements, both at Group level and at the level of individual businesses. We have worked with business management teams on this footprint to ensure that they have a comprehensive understanding and agree with this footprint.
How typical do you think your experiences are in the need to review FX hedging policies in comparison with other corporates?
I think our experiences are similar to other companies. Most global companies have experienced substantial FX volatility affecting their reported earnings and balance sheets over the last two years. In such an environment it makes sense to properly understand your exposures, quantify your risk and take educated decisions on risk appetite and cost effective ways to manage the risk in line with that risk appetite.