A few days ago, when speaking to an audience of professionals in the field about the mission of the finance executive at the present time, I remembered the song by Aldir Blanc and João Bosco, O drunk and a equilibrista. In the moment of professional transition in which I go from university professor to financial executive, I see the management of financial strategy as an exercise of balance in the midst of turmoil.
The song's authors compare the Carlitos-like drunk to the Brazilian hope of "marias and clarisses". They hope that, with the support of the umbrella, the tightrope walker's hope may not get hurt in his crossings on the tightrope, since every artist knows that the show must go on. Hope is a tightrope walker, and the drunk balances himself so he doesn't fall. But both are in balance. The balance of hope has direction, has destiny. The drunk balances himself to walk, aimlessly, suffering. The balancing act is elegant. The drunk may be happy, but he is sad. Thus, the equilibrium of the economy seeks the direction of theoretical foundations, while the financial executive operates in a reality of uncertain trajectories, as if intoxicated.
On the part of the economy, balance. Through this concept, economic science seeks to explain the behavior of real-world variables, such as the most basic law that postulates the determination of prices by the interaction between supply and demand. Fundamentals provide explanations for expectations of price changes. But only for homogeneous products, in competitive markets, and with free information. Here the world gets drunk. Other examples: GDP grows with changes in capital and labor; investment determines capital growth and demographic growth defines the size of the workforce; potential output determines the rate of unemployment compatible with price stability. This is the realm of the tightrope. Like these, there are many other examples of models through which economic theory seeks to explain reality through the concept of equilibrium.
On the other side of the world lives the finance professional, for whom balance is just a concept, not reality. It operates with the articulation of economic agents that use information asymmetry to enable the relationship between flows and stocks. Thus, the relationship between savings and investment, which involves a multiplicity of agents, who decide based on different motivations, and at different moments in time. So too are financial intermediaries, who adjust resource flows. Or even arbitrage that, through intermediation gains, makes the financial sector grow.
The economist analyzes data and tries to interpret it, to predict future behavior and explain the past. Break-even points are easier to model, which makes them attractive as a theoretical option. The finance executive identifies opportunities to act, mobilizes agents who are out of balance, and with asymmetric access to information. It seeks to make arbitrage gains viable, optimizing system intervention. He acts more than he analyses.
All the decisions of the finance executive refer to the dichotomy between risk and return. Although the specific contours of each operation change, the final decision always requires a balance between the monetary value of the return and the likelihood of the conditions for carrying out the business. This dichotomy is reflected in five areas.
a) In working capital management there are two examples. One of them, the granting of credits: payments and receipts: many customers crucially depend on our products, in the same way that the company depends on them for the flow of production. The decision to grant credit or not is based on the assessment of the credit risk to customers in the light of the volumes transacted and the need to keep the outlets alive. Another example comes from the management of surplus cash: it is necessary to consider the need to maintain assets denominated in foreign currency, as a hedge against possible exchange rate fluctuations, in view of the possibility of earning greater gains with assets denominated in local currency.
b) In the guarantee of solvency, through the adjustment of inflows and outflows, that is, the decision between earning greater gains with assets with longer maturities, against the need to keep sufficient cash in hand to cover possible contingencies in the short term. Also avoid mismatches between inputs and outputs, which can lead the company to financial insolvency, even if the business is economically viable.
c) In financing through growth. Debt profile with investment: leverage. Assets constituted through debt must be carried out on time and in a way that preserves strategic indebtedness goals. This means weighing the cost of indebtedness as a function of the term, in view of the possibility of intercurrences that delay the maturation of investments.
d) Return to shareholders. Use of profits: means considering the possibility of obtaining an increase in the market value of the company with its own capital, that is, by reinvesting the profits to obtain greater future profits, compared to the alternative of increasing the company's market value by remunerating the shareholders, distributing profits in the form of dividends and expanding through debt.
e) Corporate governance: Transparency: means considering the returns resulting from informing investors as much as possible about the risk of breaking the secrecy necessary for conducting business; Decision-making processes: means weighing the costs of implementing impersonal decision-making routines against the risk of using information asymmetry for individual behaviors of an opportunistic nature; Regulatory adequacy: again means considering the costs to implement and obtain decision-making processes against the risk of non-adherence to the requirements of regulatory agents such as ANP, SOX, etc. That is, the company works within a given world (boundary conditions).
The drunkard's walk is random and motivated by inner choices, sometimes without external meaning. The drunk has his logic, his goals and his motivations. Sometimes he looks like he's going to fall, but he balances and finds his way.
The tightrope walker uses the umbrella to help walk the tightrope. It has a unique course, determined by the rope. Your challenge is to maintain the direction and overcome gravity and movements that try to bring you down. She is elegant and creates apprehensions for those who watch. Your training is your certainty.
Both balances are necessary: technique, direction, objective. But the balance would only be an individual challenge if there weren't the dream, the motivation, the desire, the will to take the boat to other directions. Combining the two dimensions of balance, it seems to me, is the chief challenge for the finance executive.
José Sérgio Gabrielli is Petrobras' CFO and Investor Relations Officer