Temasek’s next boss: Insider or outsider?

August 2, 2010
Singapore Democrats

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Costas Paris & Peter Stein
The Wasll Street Journal

Temasek says Ho Ching will stay as CEO for the foreseeable future.

The search for a new boss to run Singapore’s Temasek Holdings Pte. Ltd., one of the world’s most influential sovereign-wealth funds, will soon get under way. Within this small city-state, just who will take charge of its US$135 billion portfolio, an insider or an outsider, has become a deeply controversial question.

Many institutions in the middle of a leadership change struggle with the same question, but it is especially sensitive with a state-owned investment fund controlling so much national wealth, where a limited local talent pool means outsiders are often foreigners—and when a past effort to recruit abroad ended badly. CEO-designate Charles “Chip” W. Goodyear, an American and former chief executive of mining giant BHP Billiton Ltd., quit in July 2009, three months before he was scheduled to become Temasek’s first foreign boss.

While the two sides cited only “strategic differences” for the split, people familiar with the situation said Mr. Goodyear was unhappy with Temasek’s approach to investing and what he saw as a lack of accountability within the organization.

Some people within Temasek said they still feel it needs an outsider to shake up the business and bring in management practices more common at international investment companies that could ultimately boost returns. Observers said hiring foreign professionals to run sovereign-wealth funds in general could make it easier for them to do deals abroad where government connections can be problematic.

Temasek said Ho Ching, its current chief executive, will remain CEO for the foreseeable future. People familiar with Temasek’s operations said Hsieh Fu Hua, who begins work this month as the state investor’s new president and executive director, will be mainly responsible for identifying suitable candidates to succeed Ms. Ho, who is married to Singapore Prime Minister Lee Hsien Loong.

Simon Israel, an executive director at Temasek, said Mr. Hsieh’s “mandate is much broader” than looking at potential successors to Ms. Ho. Using foreign talent to fill top corporate posts is a hotly debated topic in Singapore, with a population of 3.7 million residents.

Singapore’s finance minister, Tharman Shanmugaratnam, told lawmakers last August that “ideally, we should have a Singaporean as the CEO,” noting also that the cabinet “considered very carefully and debated” the question of the CEO’s nationality.

Temasek’s Chairman S. Dhanabalan said after Mr. Goodyear’s departure that “it would be nice to have a non-Singaporean as a CEO because it will help underline that we are not controlled by the government.” Temasek describes itself not as a sovereign-wealth fund—a term its executives dislike—but rather as a professional investment company trying to maximize its long-term returns.

“It is quite a difficult one for them to decide on, especially given the kind of problems they had” with their previous effort to recruit a foreign CEO, said Victoria Barbary, a senior analyst at Monitor Group, a strategy consulting firm in London.

She believes both Singaporeans with an international financial or business background and foreign professionals who have spent time in Singapore and the region would make for logical candidates, though Temasek’s emphasis on deferred pay and clawbacks in case of future losses may discourage some finance professionals. “It’s a difficult environment for a non-Singaporean to come into,” she said.

Like other sovereign-wealth funds, Temasek has become an important source of long-term capital for companies and investors world-wide. It also boasts a solid track record as an investor, averaging a 17% annual return on its portfolio based on market value since the firm was founded in 1974.

But it has stumbled, too. Temasek invested heavily in Merrill Lynch and Barclays PLC during the early stages of the financial crisis, only to sell at a big loss near market lows. Temasek lost about US$4.6 billion from its investment in Merrill Lynch after Bank of America Corp. bought the Wall Street firm and Temasek sold off its 3.8% stake in BofA in early 2009. It also sold its 2% stake in Barclays, booking a loss of about US$850 million.

As the first foreigner ever named to become a Temasek CEO, Mr. Goodyear was expected to bring a fresh perspective when he joined the company in early 2009. He soon concluded Temasek lacked a strategy, making its investments on an ad hoc basis, people familiar with Temasek’s workings said. Mr. Goodyear “wanted to change this,” one person said.

Temasek’s investment decisions are approved by a committee, but Mr. Goodyear wanted committee members to say why certain investments did well or poorly in front of others so “that lessons are learned,” one of the people said. This suggestion “was unpopular with senior managing directors” on the investment committee, the person added.

Mr. Israel, himself a New Zealand native and a Singapore permanent resident, said there is “clear accountability at Temasek,” but people aren’t judged on a single investment.

http://online.wsj.com/article/SB10001424052748703787904575403273841137664.html?mod=WSJ_hpp_LEFTWhatsNewsCollection