Design Treasury Governance Policy

---
name: design-treasury-governance-policy
description: Use when a company's corporate treasury function manages cash, debt, hedging, or counterparty relationships without formal board-level authorization limits — establishing defined authority thresholds for treasury decisions, approved counterparty and instrument lists, and board or committee oversight of treasury risk, rather than leaving treasury decisions to management discretion with no defined governance boundary.
source: Association for Financial Professionals (AFP), treasury governance and policy guidance
tags: [finance, corporate, treasury-governance, hedging-policy, counterparty-risk, board-oversight]
related: [design-model-risk-management-framework, design-fortress-balance-sheet-strategy, design-decision-rights-framework]
---

# Design Treasury Governance Policy

Establish defined authority thresholds for treasury decisions, approved counterparty and instrument lists, and board or committee oversight of treasury risk — rather than leaving cash management, debt, hedging, and counterparty decisions to management discretion with no defined governance boundary.

## Why This Is Best Practice

**Adopted by:** The Association for Financial Professionals documents structured treasury governance — defined authority limits, approved counterparty lists, and board-level policy oversight — as standard practice among well-governed corporate treasury functions, distinguishing companies with mature treasury governance from those where treasury decisions are made informally by whichever finance executive is available.
**Impact:** Companies without defined treasury authority limits and approved counterparty/instrument lists are documented to experience concentrated counterparty exposure and inappropriate risk-taking in hedging activity that a defined governance framework specifically constrains — treasury losses at several companies have been traced to hedging activity that exceeded what the board (had it been asked) would have authorized, precisely because no defined authorization framework required that authorization to be sought.
**Why best:** Treasury decisions — which counterparty to trade with, how much hedging risk to take, how much cash to hold in which instruments — carry genuine financial consequence at a scale that warrants defined governance boundaries, similar to other major financial decisions; leaving these decisions to informal management discretion with no defined limits or board oversight removes exactly the check that formal governance provides for other consequential financial commitments.

Sources: Association for Financial Professionals (AFP), treasury governance, policy, and risk management guidance

## Steps

### Step 1: Define authority thresholds for treasury decisions

Define specific dollar-value or risk-magnitude thresholds above which treasury decisions require escalated approval — a CFO-level threshold, and above that, board or board-committee approval — so treasury staff have clear, unambiguous limits on what they can authorize independently.

### Step 2: Maintain an approved counterparty list with defined credit criteria

Maintain a specific, approved list of counterparties (banks, brokers, other financial institutions) the treasury function is authorized to transact with, based on defined credit-quality criteria, and require a formal exception process for any transaction with an unapproved counterparty.

### Step 3: Define approved instruments and hedging objectives

Define which specific financial instruments the treasury function is authorized to use (money market instruments, specific hedging instruments for interest rate or currency risk) and the objective those instruments serve — hedging existing exposure, not speculative position-taking — since an undefined instrument scope risks treasury activity drifting from risk management into speculation.

### Step 4: Establish board or committee oversight of treasury risk

Establish periodic reporting from treasury to the board or a designated committee (often the audit or finance committee) on treasury risk exposure, hedging activity, and counterparty concentration, so the board maintains genuine visibility into treasury risk rather than delegating it entirely without any oversight mechanism.

### Step 5: Review and update the policy as the company's financial profile evolves

Review the treasury governance policy periodically, since authority thresholds, approved counterparty lists, and appropriate hedging objectives can all become outdated as the company's scale, debt structure, and risk profile change over time.

## Rules

- Define specific, unambiguous authority thresholds for treasury decisions, escalating to board or committee approval above defined levels.
- Maintain an approved counterparty list based on defined credit criteria, with a formal exception process for any deviation.
- Define approved instruments and hedging objectives explicitly, ensuring treasury activity serves risk management, not speculative position-taking.
- Establish periodic board or committee reporting on treasury risk, not delegated oversight with no visibility mechanism.

## Examples

**Defined thresholds preventing an unauthorized risk concentration:** A treasury team's proposed hedging transaction exceeds the defined authority threshold requiring board committee approval. The committee's review reveals the proposed hedge would create a counterparty concentration exceeding the approved policy limits, and the transaction is restructured across multiple approved counterparties instead — a check the defined threshold specifically required before the transaction proceeded.

**Undefined governance permitting drift (illustrative caution):** A different company's treasury function, without defined instrument or objective limits, gradually shifts from pure interest-rate hedging toward directional bets on rate movements — a drift from risk management into speculation that a defined "hedging existing exposure only" policy boundary would have prevented from occurring without explicit board awareness and approval.

## Common Mistakes

- **Leaving treasury authority thresholds undefined, allowing decisions to be made at management discretion regardless of magnitude** — this removes the governance check that formal thresholds are specifically designed to provide.
- **Maintaining no approved counterparty list, or allowing exceptions without a formal process** — this risks concentrated exposure to a single counterparty's creditworthiness without deliberate awareness of that concentration.
- **Failing to define approved instruments and hedging objectives explicitly** — undefined scope risks treasury activity drifting from risk management toward speculative position-taking.
- **Providing no periodic board or committee reporting on treasury risk** — delegating treasury decisions without any oversight mechanism removes the board's visibility into a genuinely consequential risk area.

## When NOT to Use

- For a very small company with minimal treasury activity (limited cash, no debt or hedging program) where formal governance infrastructure is disproportionate to actual treasury complexity.
- As a substitute for the company's broader capital structure and risk management framework — treasury governance addresses the specific operational execution of treasury decisions; broader capital structure strategy is a related but distinct practice (see `design-fortress-balance-sheet-strategy`).
- For a treasury function with no counterparty, hedging, or material cash management activity — apply governance rigor proportionate to actual treasury complexity and risk exposure.

> **Finance disclaimer:** This skill encodes professional best practices for educational purposes. It is not financial advice. Consult a licensed financial advisor before making investment decisions.