At a lunch in Singapore yesterday Ho Ching, executive director and chief executive officer of Temasek Holdings, discussed Temasek's investment allocation strategy, compensation practices and current thinking about a new CEO after Chip Goodyear's shock exit a few days ago.
She emphasised that Temasek is a long-term investor, driven by enhancing long-term value. "We don't intend to raid the larder, nor sell the family jewels, for short-term gains," said Ho. "We will jealously guard our interests, and will invest, rationalise, consolidate or divest where it makes sense."
Ho was nostalgic, referring both to her earlier speech at the same forum, the Institute of Policy Studies corporate associates lunch five years earlier when Temasek celebrated its 30th anniversary, as well as the principles underlying Temasek's creation.
"We unfolded and refined our investment strategy in public view, even while we were simultaneously transforming our portfolio," said Ho. She went on to highlight that in 2004 Temasek started publishing an annual review, even though as an exempt private company the Singapore-headquartered investment firm was not required to do so.
Ho said the decision to publish the review was driven not by transparency per se but "to instil the discipline, the professionalism and the open willingness to be tested and measured".
The recent announcement by Temasek that CEO-designate Chip Goodyear would not be taking the top job at Temasek was on the agenda.
"We have applied the highest practical standards of governance upon ourselves, no different from our expectations of our portfolio companies," said Ho. She went on to explain that in 2004 itself Temasek had been open about the need for succession planning and the first review of options was done in 2005. Thereafter Temasek continued to annually review names of internal as well as external candidates for promotion to key posts.
Through the review process, Temasek identified Goodyear. "It is unfortunate that both the board and Chip recently came to the amicable and mutual conclusion that it was best not to proceed with the CEO transition," said Ho, going on to explain that succession review at the firm was an ongoing process "regardless of who takes the helm as CEO".
Speculation has been rife that Temasek would prefer to appoint a CEO from within the firm. Ho did not directly refer to current thinking to identify a new successor but did say "one over-riding priority is to expose, train, build up and empower all our staff" and added that Temasek's staff "are the core foundation for Temasek over the long term".
Ho said the decision to rebalance the portfolio from one weighted towards Singapore companies was part of an evolving investment strategy.
"This projected portfolio shift was not a target cast in stone, but a broad sketch of our risk appetite," said Ho. Ho said the re-allocation, which resulted in a doubling of Asia exposure, factored in both Temasek's existing portfolio particularly of Singapore blue-chips, which she termed "stable and low risk" as well as the firm's confidence in the long-term prospects of Asia.
"We understand that growth will not be a straight line trajectory," said Ho. "We can expect bumps along the way, but the longer term potential remains strong." Ho clarified that longer term meant 20 years or even up to 30 years in this context.
Looking ahead Temasek expects that 30% of its portfolio will be invested in Singapore, 40% in the rest of Asia, 20% in OECD countries and 10% in new areas like Latin America, Africa and others. In line with this thinking, Temasek opened offices in Mexico City and Sao Paulo last year.
"How do we nurture a 'think-owner, act-owner' DNA in Temasek?" said Ho of another challenge Temasek has grappled with. Ho dwelt on compensation as part of this issue and said compensation can be an emotional subject and has no perfect solutions. Temasek has tried to create a compensation structure which reinforces a team culture, "puts the institution before self, emphasises long-term over short-term, and aligns employee interests with that of the shareholder".
Temasek's compensation structure incorporates two dimensions: time such as short, medium and long-term pay-out horizons; and the different levels of difficulty to earn out the incentives.
Incentive compensation for senior managers is deferred between three and 12 years, with some of it subject to market risks, and the rise and fall of Temasek's total shareholder returns. The rest is subject to a "no-floor claw-back" which means that deferred incentive compensation could be withheld if Temasek delivers below its cost of capital target.
Only if Temasek earns a return above its cost of capital target does it share the gains with employees. Returns or losses below Temasek's risk adjusted cost of capital hurdle means it will distribute negative bonuses, which was the situation last year and will be this year as well.
"From CEO to office attendants, all our staff were allocated negative bonuses," said Ho.
Ho was philosophical in her summing up comparing the Temasek journey to that of a ship which has to navigate choppy waters, adjust sails, tack off-course and which "may even have to jettison some load, repair some damage or cut some rigging". She concluded that on the journey discipline would be maintained to achieve the aim of bringing all passengers safely home.