Temasek’s future leadership needs clarity

All we are saying is give peace a price
1 October, 2009
IFR issuer profile: Olam
10 October, 2009

Asiamoney, October 2009

Author’s note: this is the filed version. For the published version, click here: Sovereign Wealth-r4 (2)

Those who saw Chip Goodyear in Singapore in July describe a man keen to get on with things, enthused by his pending new position. Still three months ahead of his start date as CEO of Singapore’s investment arm Temasek, but by now installed on the board, the former BHP Billiton chief had already met at least half of the major Temasek-held companies. “There was nothing to suggest anything was coming,” says one.

But by the afternoon of a July 21 board meeting, it was all over. A press release announced that, four months into the leadership transition, the board and Goodyear had “concluded and accepted that there are differences regarding certain strategic issues that could not be resolved” and terminated the handover. Ho Ching, Temasek’s CEO since January 2004, would not step down after all.

And that’s pretty much all that’s been said. When the issue came up for discussion in Singapore’s Parliament, finance minister Tharman Shanmugaratnam – the key representative of Temasek’s only shareholder, the ministry of finance – put it straightforwardly. “People do want to know. There’s curiosity,” he said, when asked about the circumstances of the departure. “It is a matter of public interest. But that is not sufficient reason to disclose information… It will not be advisable, nor in the interest of Temasek or Mr Goodyear, for us to have to comment further on it.”

Asiamoney had another go at it at the Temasek results briefing in September. Can you give a single example of something you won’t be doing that Chip Goodyear wanted to do, we asked? “I can’t think of anything,” said Ho Ching. Then why, we asked, is he not here, if there was no major strategic difference between you? “This is a matter between him and the board.” When Asiamoney contacted every member of that board, they passed inquiries back to Temasek itself and declined comment. Goodyear himself has spoken once, when asked about his departure at the CLSA investment conference in Hong Kong; “differences of strategic vision was the best way to put it,” he said.

So what was the point of difference?

Informed observers think it came down to a general acceptance that they were working at crossed purposes rather than a single practical point, and was about general principles of management, not a particular deal or event. The transition period was a long one, from Goodyear’s appointment to the Temasek board on February 1 and to CEO-designate on March 1, through to his intended succession of Ho on October 1; he was actively involved throughout this time, as executive director Simon Israel confirmed to Asiamoney in September. “When Chip came on board, as part of his integration into Temasek, he became involved in a number of ongoing initiatives, and played a leadership role until the time that he left us,” he says. Asked to be specific about any he initiated, Israel said: “Broad initiatives around organization, around processes, around how you make decisions.”

While the long transition period always looked curious, it was long enough time for it to become clear that the changes Goodyear wanted to make were different to those the board was comfortable with. It is understood that this varied from a general sense of increased discipline that Goodyear tried to bring, to specific recommendations about the senior management structure. In particular, many people believe that he wished to sell down holdings in some key Temasek-linked companies, and that this was a sticking point (particularly since past and present executives and directors of some of the bigger member companies, including DBS, Singapore Airlines, Singapore Telecommunications and the unlisted port operator PSA, are on Temasek’s nine-person independent board today).

There are other explanations being mooted. His enthusiasm to sell down financials and get into resources gets mentioned, but that was surely exactly what he was brought on board for in the first place given his resources background; there is a rumour a key Chinese institution objected to him because of his background with Australian mining, but that shouldn’t have had a big impact on an investor like Temasek; some say he hoped to introduce leverage into Temasek, which of itself would surely not be enough of a dispute to bring down the deal; and others believe the objection came from higher in Singapore’s hierarchy, but such a senior veto would surely have been made ahead of his installation. Instead a number of things appear to have contributed to a sense of divergent ambitions, which came to a head in the July 21 board meeting.

In practical terms, Goodyear’s departure is not likely to make all that much difference. Temasek had already set some clear directions for itself even before he joined, notably a new geographical allocation of 40:30:20:10, for Asia, Singapore, OECD and “other” (chiefly Latin America) respectively. This represents a move away from a previous target of one third Asia, one third Singapore and one third OECD – in other words, an overweighting of Asia and other emerging markets at the expense of the developed world. Doing that surely doesn’t need Goodyear’s expertise: while he’s known for his connections in China, his professional life has been spent in developed world corporations, albeit ones with significant emerging market expertise.

Also, while Goodyear was expected to bring a lot of knowledge about the resources industry to Temasek, the company has been actively getting involved in that area anyway. In June it paid S$438 million for a 13.8% stake in Olam International, which is chiefly a soft commodities business. It has also bought a stake in the unlisted Chinese iron ore producer Lung Ming, in partnership with the Beijing-based private equity vehicle Hopu Investments; 15.4% of the Brazilian oilfield services company, San Antonio International; and 19.5% of Korea’s EKN, which as a manufacturer of compressed natural gas cylinders is an indirect commodities play too. New offices have been opened in Mexico and Brazil in the last 12 months and are likely to focus on energy and resource investments.

Observers who follow these funds closely are consequently not concerned about the change from an execution perspective. Edwin Truman, senior fellow at the Peter G Peterson Institute for International Economics, says the situation “is nice copy, but if you hire a new CEO into a complex organisation like Temasek and it turns out his or her image or vision of what they want to do turns out not to be consistent with what the board wants, the sensible thing is not to try to live with the problem but cut your losses and go your own way.”

Instead, the loss to Temasek in the Goodyear situation is in how it looks. To understand that you have to see why he was appointed in the first place.

In most respects Ho Ching is agreed to have done a good job since stepping up to the CEO position in January 2004. If we start judgement on her tenure in March 2004, when she entered her first new financial year in the job, Temasek has delivered 83% cumulative returns between then and July 2009, compared to 58% for the MSCI Asia Pacific ex-Japan and -3% for the MSCI World. There’s room to quibble with Temasek numbers, since 28% of its assets are unlisted and therefore hard to value accurately, but broadly performance has been impressive.

Ho has overseen some troubling episodes: the acquisition of a majority stake in Thailand’s Shin Corp, controlled by the Shinawatra family, put it into a major political storm in Thailand when Shinawatra lost power there, and the political associations of Temasek as an arm of the Singapore government can clearly fuel antagonism in southeast Asia. Then came the Merrill and Barclays purchases. Temasek was far from being alone as a sovereign wealth fund that bought into foreign investment banks at the wrong time, but what set it apart was selling out again, at or near the bottom of the market, and so incurring several billion dollars of losses (it’s not clear exactly when the sales were made and therefore the precise loss). Other investors, notably Singapore’s other sovereign fund GIC, have held their nerve and made money from Western banks – GIC realised a $1.6 billion profit on a sale of Citi stock in September. There may be some redeeming circumstances – around the same time as the bank sales, Temasek put money into a number of rights issues including CapitaLand, which has almost trebled since then and so may have represented a better use of those funds than sticking with troubled banks. But the bank sales were clearly the investment low point under Ho.

Yet the handful of people prepared to comment on Temasek (and there really aren’t many: Asiamoney approached nine international banks to comment on the Temasek result and all declined, mostly within seconds of getting the request and often with some incredulity) defend Temasek on performance grounds. “I think they went through what every other money or fund manager experienced,” says David Cohen, an analyst at Action Economics in Singapore. “Maybe they had their own embarrassment with Merrill Lynch, that’s probably the one they wish they could take back. But they’ve rebounded with everyone else.” Temasek’s full-year numbers for 2009 (i.e. up to March 31) looked ugly, with a 42% loss in net portfolio value in a year from S$185 billion to S$130 billion and a 66% drop in group net profit from S$18 billion to S$6 billion. But its portfolio is already back up at S$172 billion as at the end of July 31 – so 93% of its 2008 high. In the long run this is going to look like a blip.

So performance was not the reason Ho was to be replaced with Goodyear – besides which Ho says the board has been evaluating short and long-term potential successors every year since 2005 anyway, well before the Merrill investment. Instead, this is about governance and – more than anything – appearance.

Understanding this requires a detailed look at some of the changes that have taken place at Temasek in recent years, and particularly under Ho’s watch. Although Temasek compares favourably with many of the world’s sovereign wealth funds in terms of transparency (the Peterson Institute’s most recent ranking in 2008 placed it 18th of 34 sovereign wealth funds overall, 15th on governance and 11th on accountability and transparency), and publishes far more information in its 100-page annual reviews than it is required to as a private company, there is a complication. Although Ho has improved transparency, accountability and professionalism at Temasek, it doesn’t look great that she is married to prime minister Lee Hsien Loong.

“They have to be apolitical but then they have the prime minister’s wife running the fund – I think it’s a little bit awkward,” says Cohen, though he doubts it impacts the fund’s management. Simon Israel addressed this issue in an interview with the author in 2007. “I think that’s a fair question,” he said then. “It’s a fact that Ho Ching is the wife of the prime minister. But… at the end of the day Ho Ching is answerable to the board of Temasek and I want to emphasise the independence of that board. The board signs off on the major strategic investment decisions. There is absolutely no link to the government.”

But the appearance of cosiness with the government may have been one of the reasons Temasek wanted to appoint Goodyear, because even if the group was in truth being managed independently, it looked better to have someone else in charge – and a western foreigner with a background in private sector enterprise, so much the better.

This, again, is important to see in the context of the time. In 2007, when Temasek was clearly looking in earnest for potential successors, there was growing concern about sovereign wealth funds, as more and more Middle Eastern and Chinese institutions bought western assets. In the US and European Union there was growing pressure to increase scrutiny of these funds. So Temasek started to get the message out that it was very different to its counterparts in the Gulf which disclose nothing at all, in the hope that if more rigorous regulation were to come into effect, it would differentiate between them.

It is interesting that the decision of Goodyear and Temasek to part ways has come at a time when this sovereign wealth debate has faded into the background through the global financial crisis. Regulators have other things to worry about and it will be a while before attention returns to this theme. At the same time, it has started to become clear that Singapore would prefer a Singaporean boss for Temasek. Tharman made some telling remarks in parliament. “The question of whether the CEO of Temasek should be a Singaporean is not a trivial one. It is one which Cabinet considered very carefully and debated on before arriving at a decision,” he said. “I would say that ideally we should have a Singaporean as a CEO.”

That remark appears to run at odds with claims of Temasek’s independence, though he subsequently qualified it: “The board knows our preferences, but it knows also that the government wants to ensure that Temasek gets the best person for the job each time it looks for potential CEO successor…. To restrict their choices would also be sending a signal, not just to Singaporeans but more importantly to the countries in which Temasek invests in, that there is an element of political decision making in the way Temasek is run. We do not want to send this signal.”

There’s nothing particularly unusual in this – most sovereign wealth funds are run by nationals – but it does suggest Singapore is not thrilled by its experience with foreign techniques, and that the urgency to bring them in, with their appearance of governance and worldliness, has diminished. This is not surprising in the aftermath of a global financial crisis that was triggered and exacerbated by supposedly well-governed western institutions like Merrill Lynch. Goodyear’s old employer before BHP, Kidder Peabody, is now part of UBS, which didn’t exactly cover itself in glory in the crisis.

It also raises the question about what happens next with succession – because it doesn’t look good for any corporation to find itself in a leadership vacuum, with a CEO who was about to depart stepping back in until a better successor is found. This is at the heart of the Goodyear situation: Temasek would look so much better if the whole thing had never happened, rather than a situation in which it has appeared to move forwards then back before ending up with the same team it started with.

And this apparent shift in attitude towards foreigners may have an impact on one person in particular.

Because, after all, why wouldn’t Simon Israel be the next CEO? He made his name as the Asia Pacific chairman of Danone Group over 10 years, after 22 years at Sara Lee Corporation across Asia. He’s been working inside Temasek as executive director day in day out for more than three years and is as much a local in Singapore as any foreigner will ever be – he chairs the Singapore Tourism Board and a locally based multinational, Asia Pacific Breweries, is a director of three of Singapore’s blue chips (Fraser and Neave, Neptune Orient and SingTel), and is on the business advisory board of the Lee Kong Chian Business School at the Singapore Management University. He has taken citizenship. Perhaps most importantly, he is respected within and without the organisation and is a perfect bridge between Temasek and the western enterprises – be they government, corporation or media – who seek to understand it.

He may not want the job. But if Temasek want a quick and logical way out of this perception of uncertainty, and to allow Ho to step aside as she appears to wish to do, it’s staring them in the face. That is, unless the Goodyear experience has really burnt the bridges with Temasek to such a degree that there’s no longer room for a foreign leader.

BOX: A questioning voice

One outcome of the Chip Goodyear situation has been an uncommon vibrancy of discussion in parliament. The most outspoken has been Inderjit Singh, a member of the ruling People’s Action Party, deputy government whip and the member for Ang Mo Kio in Singapore’s residential heartlands.

He tells Asiamoney he believes Temasek “did what it had to do” and handled its information flow “the way a professional organization should”, but thinks the government’s response has been insufficient. “I think the minister for finance should have given a better explanation to parliament. The only public channel for us to know what is happening to our reserves is parliament… These days Singaporeans would like to have more questions answered.”

Singh feels the Goodyear situation “has definitely created a dent on Temasek’s reputation because when Chip was selected we were all told how thorough the process was and that every board member was involved in interviewing Chip. Then despite this so-called very comprehensive search and selection process, it failed so quickly. So the first question everyone has is, how good really are the processes in Temasek and how well is the board managing Temasek?” Singh asked in parliament if the minister would ask Temasek to review its selection process “so that they don’t make the same mistake again… Unless the people know more about what went wrong, they will continue to speculate and have doubts about the processes in Temasek and between the Ministry of Finance and Temasek.”

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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