Temasek Holdings: Building Sustainable Value
Ladies and gentlemen: Good afternoon.
Temasek at 30
On 25 June this year, Temasek Holdings will be 30 years old.
We were incorporated in 1974 to hold the Singapore government's investments in companies and businesses. As the monitoring arm of the minister for finance, we were responsible for tracking the performance of the various investments and companies, and for reviewing and appointing directors and chairmen to the boards of various companies to represent the government's interest as a shareholder.
This thoughtful move to interpose an investment holding company between the government and its investee companies also clearly separated the incidental role of government as an owner and shareholder, from its over-arching responsibility as policy maker and market regulator. A mandate was thus tacitly given for government owned companies to operate purely as commercial enterprises, and for Temasek to deliver value as an investment holding company.
Since then, much has come to pass, and Singapore too has evolved in that process.
Throughout, Temasek acted very much as a commercial entity, investing as well as divesting our stakes in companies, where it made commercial sense.
Natsteel is a case in point. Temasek first invested $2.9m in 1975, and fully divested its stake 11 years later in 1986. A further 12 years passed, before Temasek re-invested in Natsteel in 1998, convinced of the commercial merits for co-investing with Natsteel overseas in Brazil. Today, Temasek is again completely out from Natsteel as well as Natsteel Brasil, achieving an overall IRR return of 14% in the process, with net profits of $98 million. Perhaps we should have used a three-digit name, instead of 98 Holdings, for the general offer vehicle to help us get even better profits!
On its part, the government took care not to be involved in the business decisions of the government-linked companies, whether in the choice of aircraft that SIA buys, or in the overseas investment decisions of PSA or Singtel. This hands-off self-restraint enabled the Temasek companies to grow and thrive on sound commercial principles, unfettered by bureaucratic impositions or non-commercial government directives. This voluntary abstinence from direct involvement in the operational management of state-owned enterprise is a unique and admirable ownership stance that sets the Singapore state-owned enterprises apart from many of their counterparts in the world. Credit is overdue to the farsighted founding fathers of modern Singapore.
To-date, Temasek has given its shareholder a total return of more than 16% compounded annually over the last 30 years, based on dividend flow and growth in shareholders' funds. If we consider the market value of our investments, then the total shareholder returns to the government would be a compounded annual return of more than 18% over a 30-year period, including an average annual dividend yield of some 6.7%.
Our TSR or total shareholder return over the last 10 years were more than 13% based on dividends and market value of our shareholdings. While this is well below GE's TSR of 27% for the same period, it is comparable or better than some of the large international groups, which we benchmark ourselves against. Dividend yield to the Ministry of Finance over the last 10 years averaged a respectable 7% annually, partly bolstered by the return of proceeds from full or partial divestments of companies, large and small, from Singtel to CPG Corp.
Put another way, our total shareholder returns have been respectable. It mirrored the growth and development of the Singapore economy over the last 30 years. This is not a surprise, given that the major companies in the Temasek stable have been largely involved in the infrastructure and basic services, such as telecoms, power and airlines. Managed well, they should track the underlying economic growth.
By and large, Temasek companies have been well managed, for the simple reason that they operated on the principle of the best person for the job. This policy of meritocracy has provided our businesses with a deep core of capable and dedicated staff at all levels, often shaped by strong and bold leadership, and guided by independent, competent and commercially minded boards.
Even as we celebrate a successful 30 years of existence, our challenge as Temasek is to ensure that we continue to deliver robust TSR for the next 30 years to our shareholders. We can, and hope, to do better.
As Mr Dhanabalan declared in 1999, Temasek hopes to be an active shareholder. We also intend to be an active and careful investor.
To increase the probability of building sustainable value and returns for Temasek, we aim to ensure a sound philosophy and institutionalise robust policies in three aspects, namely:
Let me elaborate.
The Temasek Charter
The Temasek Charter is a living document.
It is our first attempt in 30 years to outline in broad terms our relationship and focus vis a vis government as a shareholder. It spells out our emphasis on businesses with international potential, and our intent to exit businesses that do not fit our interest to create and maximize long term shareholder value.
The core of the Temasek charter is to spell out our interest to work with our investee companies in developing, fostering or nurturing sound value systems, business focus, human capital, sustainable growth and strategic development. We believe these to be the critical platforms for building and developing lasting and successful international companies, to underpin our interest in achieving sustainable value. They also serve as a common framework for us to work with our fellow shareholders to create and enhance sustainable returns.
Our relationship with our shareholder(s)
In terms of our relationship with government as our shareholder, I would like to note two points.
First, Temasek holds and manages its investments for the long term benefit of Singapore, as distinct from the Singapore government per se. To use a corporate analogy, we could regard the Government of the day as a shareholder representative, which is chosen at every election. The ultimate shareholders of Temasek are the past, present and future generations of Singapore.
This analogy is consistent with Temasek's position as one of the three 5th schedule companies under the constitutional provisions for the Elected President.
Appointments to the board or CEO positions of a 5th schedule company or statutory board are subject to the approval of the Elected President. The implication is that the Temasek board and CEO have a responsibility to safeguard the value and assets of the company against profligate or value destroying government directives. In other words, we have a responsibility to preserve and create value not just for the present generation but also the future generations of Singapore.
Second, the addendum to the Temasek charter outlined examples of companies or businesses, which government deems to need ownership or control of, for specific policy or strategic reasons. For these companies, Temasek will continue its traditional role as a responsible steward to ensure sound management and financial discipline.
Beyond these, Temasek will act to enhance long term value, and will not divest for divestment's sake. We don't intend to raid the larder, nor sell the family jewels. We will jealously guard our interest, and invest, rationalize, consolidate or divest where it makes sense, and where we can achieve clear sustainable value.
To this end, we will look to institutionalise a framework for ourselves to maintain discipline and deliver value. Apart from the transformation that we have gone through over the last 5 years, I am pleased to note that we have recently obtained board approval and shareholder endorsement for a credit rating of Temasek. We hope to do this sometime this year or next. This will be part of a measured process of opening up and demystifying Temasek. More importantly, such changes will help reinforce and sustain focus and financial discipline.
Meanwhile, our priorities will be on our investments and our portfolio companies, and our capability and capacity to create and deliver value.
Temasek as an active shareholder
Like the government, Temasek does not believe in getting involved in the operational decisions of its investee companies.
We believe the best way for Temasek to add value to our companies is to ensure that we constitute high quality, commercially experienced and diverse boards to complement outstanding business leadership and dedicated staff. In our minds, outstanding leadership is not simply consistency and discipline in operational delivery, but also a passion and commitment to people inside and outside the company, in particular their staff and the customers of the company.
In short, we believe in finding the best people to lead, and in getting ourselves out of the way of honest, capable and competent people.
However, where there is a need, we have not hesitated to engage the boards and management as active shareholders to ensure that we preserve value and create a sustainable position for our companies. Other than that, we limit ourselves to the issues of value systems, business focus, human capital, sustainable growth and strategic development.
In general, we are, and have been, very fortunate to have active board members who take their responsibilities seriously, some at considerable personal sacrifice. Several have been contributing and acting with deep commitment, no different than if they had economic ownership of their companies. To these chairmen, and board directors, we owe a great debt of gratitude and thanks for the success of our companies.
Just as a small example of what Mr Dhanabalan would describe as promoting good governance, we have made known our expectations to the boards of our key companies that they should actively review the performance of their CEOs through executive sessions without the presence of management.
Such sessions should also regularly review succession options from internal and external sources for the immediate, medium and longer term. Such processes formalise the framework for building professionalism and meritocracy in business leadership and management. It enables the board to work openly and proactively with their management to put in place a robust and deep bench of talents from around the world.
Some of these views and expectations on governance from Temasek as well as from the various TLCs have also been put forth to the various authorities and agencies involved in setting guidelines for governance. In such submissions, we do not take the purist or theoretical view, but we hope to provide a balanced and considered view of practical and effective governance based on substance and principles, rather than a mechanical insistence on form. In this way, we hope to create space for businesses as well as boards and managements to make their own considered judgement and adapt governance principles to their needs in accordance with their priorities and their specific quirks.
In terms of the process for CEO succession, our participation extends to searching for names and possibilities to add to the search pool. The boards themselves constitute their search committees, define the selection criteria, and make the CEO choice themselves. We will clear the underbrush if needed, to ensure that the boards can exercise this single most important responsibility with full authority and clarity.
Our focus on board governance is not an end in itself, but one of the means to ensure that there is sustainable future.
As mentioned earlier, our TLCs have grown and prospered because government took care not to get involved in the operational or commercial decisions of its companies. Many companies around the world, whether family or government owned, have failed because there is no separation between ownership and management responsibilities.
For example, unlike most national airlines in the world, SIA does not go to Temasek, much less the government, on commercial decisions such as the aircraft they buy or the routes they fly. True, the government contributed to SIA's success as a sound regulator, and as chief negotiator for bilateral air rights. However, it is totally at SIA's discretion whether particular routes make commercial sense for SIA from a short or long term business perspective. As Mr Pillay, former Chairman of SIA, likes to explain modestly, his key contribution to SIA's success was to keep government out of SIA's business.
Perhaps benign neglect is a good strategy for all governments when it comes to their direct involvement in companies and businesses.
But really, the success story of so many of our TLCs is really the story of a dedicated and capable people, of bold men and women and visionary leadership, past and present, coupled with the trust and delivery of honest dedicated staff at all levels. It is a story very much like the story of Singapore itself. The integrity, commitment, competence and hunger to achieve and build for our children have driven our people to create very good companies on the back of Singapore's success. From the pilots who fly, to the quay crane operators who move container boxes, from the engineer working on his computer screen to the accountant working her numbers late into the night, from CEO to tea lady, they have not just put in their sweat capital, but also their emotional capital to build great companies. Clearly, as shareholders, we owe these fine men and women our thanks.
However, as fund managers will qualify in their promotional materials, past success is no guarantee for future gains.
The world is changing. Singapore is part of an increasingly open and highly competitive world. There is no way we can isolate or insulate ourselves from the tidal shifts of globalisation. Our businesses need to ask themselves, what they hope to be when they grow up. If they think they are already grown up, they will need to figure out how to stay young and fit, to take on newcomers or to move into the next league championship. As leaders, we need to ask of ourselves, our people and our businesses - "Where can we make a difference?", and "Where can we achieve sustainable advantage and turn that into sustainable value?".
This transformation will not be easy. It will take hearts and minds, as well as guts and hands, to think, to act and to drive change. Companies in Asia are already rapidly transforming, in all aspects, from efficient operations to sleek designs. A top resort playground of American movie stars was surprised to find not just highly competitive linen and silverware from India, but also really world class standards in terms of quality, delivery and designs. A top US IT company is putting a Chinese company on their radar screen as the competitor to watch. Companies which believed in their own hype are lulled by false confidence and will be swamped by the rising tide.
It will take leadership and the full-hearted support and open-minded objectivity of all the staff for any company to achieve a successful transformation. It will also take patience, thoughtful care and meticulous effort on the part of everyone involved. There are no short cuts to building lasting companies.
Such transformation needs to be institutionalised too on an architecture of excellence. One such institutional building block is the framework of economic value-add, economic profit or EVA. The power of EVA is not simply the potential for staff to share the wealth creation with shareholders and to align long term interest. It is more importantly a mindset change towards ownership, and is really a strategic tool to empower staff at all levels, releasing and multiplying their energies. Coupled with systems and processes such as balanced score-card, 6-sigma, and a well rounded staff development and incentive system, companies and businesses can transform into dynamos humming in pride and performance, constantly learning, innovating and adapting.
Even as Temasek continues to make its own investments into promising companies and businesses, we will continue to work and learn with our existing TLCs to challenge ourselves and to transform, to think and to partner, to create and to stretch, in order to give ourselves the best chance for long term success. But from time to time, don't be surprised if Temasek invests into an emerging competitor, or makes its own judgement, which may differ from those of our TLCs.
Temasek as an active investor
Apart from our engagement with our investee companies as shareholders, we have also held up a mirror to ourselves at Temasek. We have set about re-inventing ourselves, reinforcing the positives and discarding or correcting the negatives. In the process, we have refocused our investment themes into three broad thrusts:
A common theme that cuts across all boundaries will be our interest in companies and businesses with distinctive IP, competitive strengths and potential to grow regionally or globally.
Let me elaborate a little on our interest in Asian services.
First, at the macro level, we are bullish about the medium to long term prospects for Asia. While the 1997 financial crisis has severely set back many of the Asian economies, the macro indicators point to a steady recovery. Not only are foreign reserves at record highs from Pakistan to China, from Thailand to Indonesia, inflation and interest rates have come down sharply. Companies within many of these economies from India to Korea have not only restructured, but have dramatically transformed themselves into internationally competitive players, adopting and adapting best practices such as lean manufacturing, or fast quarterly closing of their financial numbers. They are pushing the envelop not just against domestic competitors but also taking on international leaders. This learning takes place constantly, across industries and geographies. As an example, the staff of leading private bank in India, ICICI, has an average age of below 30 years old, and ICICI hires service quality managers from the airline industry to develop and sustain a strong service culture among its branches and staff.
Second, with the recovery and growth in Asia, comes the rise of the middle class, and the emergence of consumer sophistication. This will be a common engine of growth across Asia.
Third, there is a shared view among most governments and populations, that market economies and free trade bring benefits. While still sporadic in some countries, the heavy weights like China and India are pushing ahead with liberalisation, restructuring and reform. There is no turning back.
In the short term, we will still need to watch the impact of the US, while Europe and Japan continue their gradual revitalisation. But in general, we see broad-based recovery and growth in Asia, with increasing demands in the consumer sector and also in supporting sectors such as energy and resources.
In such a scenario, we believe there is an opportunity to invest into the services such as the banking and finance sector as a leveraged proxy to ride on the broad recovery of the respective economies. The other services of interest would be telecommunications, healthcare and education, which ride on the emergence of the middle class.
This interest to contribute to and participate in Asia's growth has been the driver of our recent direct investments into the banking sector in Indonesia. Apart from the services sectors, we also look at opportunities to invest in companies whether in Singapore, Asia or the world, focusing on those who have the potential to grow beyond their domestic markets, through distinctive capabilities and competitive advantage. Even better, if they come with top class management.
Each investment we make must stand on its own merits, including our existing portfolio of TLCs. We are fully open to diluting our stakes in our existing TLCs to minority positions, especially if it creates an opportunity for us to enhance our long term returns. Likewise, we are happy to take both minority or majority stakes in promising companies with international potential in the sectors of our interest.
Just as many of our TLCs have grown offshore with a large part of income and profits now derived from offshore operations and investments, the Temasek portfolio will in time reflect our presence and interest in Asia and further afield. This portfolio in turn will reflect the dynamism and vibrancy of Asia as a whole.
In short, we will work to transform our portfolio from a proxy for the Singapore GDP, into a balanced GNP portfolio leveraging on the growth and promise of Singapore, Asean, Asia and the world.
This will not be a short trip. Through this journey, Temasek will continually maximise its potential to create sustainable value for its shareholders, thereby contributing to the present and future generations of humanity, in and outside of Singapore through successful enterprise.
