Temasek Report 2010

The founding of Temasek is rooted in robust risk-taking, which is inherent in our business as an investor.

Our Board provides overall guidance and policy direction on the risk management framework and functions. Together with our CEO and senior management team, they determine the risk management objectives and policies and promote a culture of risk awareness and balanced risk-taking.

This culture is reinforced through a risk-sharing compensation philosophy which puts the institution above the individual, emphasises long term over short term, and aligns employee and shareholder interests through the ups and downs of business cycles as co-owners.

Enterprise risks, including the management of financial risks, are factored into our day-to-day decision making as an investment company, under the supervision of our CEO and senior management team.

In our continual upgrade of institutional capability, we have extended our risk management information systems to sharpen decision making in volatile markets. In particular, we have instituted forward-looking simulation techniques to better define risk-reward boundaries at portfolio and transaction levels.

Enterprise Risk

First and foremost, our risk framework provides for the effective management of risks for specific investment decisions. These include risks on Valuation & Price, Country, Political, Reputation, Legal & Regulatory, Tax, Funding, and Key Management.

Strategic, Financial and Operational risks, faced by the company as a whole, are managed at the enterprise level.

Each risk category has a designated owner. Our investment teams and corporate units such as Legal & Regulations, Finance, Human Resources, Strategic Relations, Corporate Affairs, IT, Operations and Risk Management manage specific transaction or enterprise risk elements under their respective domains.

Relevant approval authorities have been established and company policies and standard operating procedures have been documented to drive our end-to-end process controls. These procedures also cover our reporting requirements to the Board, Board Committees and senior management to apprise them of relevant risk issues.

Value-at-Risk

Value-at-Risk or VaR is a statistical estimate of the potential decline in portfolio value over a given period, based on historical market behaviour.

(As at 31 Mar)

VaR is commonly used by financial institutions as an internal risk metric to measure their risk exposures on a daily basis. It may not be comparable across institutions as each may have its own internal assumptions and parameters. Nonetheless, VaR numbers are useful risk markers within the same institution under normal market conditions.

As a long-term investor, we have chosen to compute an annual VaR ¹ for Temasek rather than a daily VaR, in order to give our stakeholders a sense of how our portfolio might decline in value over a 12-month period.

As at 31 March 2010, our annual VaR was about S$25 billion. This means a one-in-six chance of our portfolio value declining by S$25 billion or more within the next 12 months, assuming constant portfolio composition. Conversely, this also means a five-in-six chance of a gain in value, or a decline of at most S$25 billion. While this VaR number is comparable to last year, it represents 14% of our portfolio value as at 31 March 2010, down from 22% a year ago.

Internal Audit

Our Internal Audit (IA) unit reports to our Board Audit Committee.

IA conducts periodic reviews of Temasek’s key control processes for all our offices and undertakes special reviews requested by the Board or senior management. The main objective is to ensure that our internal controls are well designed and effective across geographies, and that control awareness and compliance are high amongst staff.

IA is consulted on internal control matters prior to major system implementations or operating process changes so that their control node recommendations are incorporated by the systems architects into new systems or processes.

Legal & Regulations

Our Legal & Regulations unit is organised around the core functions of transactional and advisory support, and regulatory and internal compliance.

Acceptable legal risk parameters are defined and institutionalised by our legal risk management framework, and complemented by policies, processes and systems to provide effective and consistent management of legal risks. For example, our policy permits only personnel authorised by Board resolution to enter into derivatives transactions within defined scopes and limits on behalf of the designated entities.

Regulatory compliance is supported by robust securities tracking systems including automated systems for Singapore and Hong Kong. Regulatory requirements are continually reviewed and updated to track changes in law or regulations.

The conduct of our staff is governed by the Temasek Code of Ethics & Conduct and its related policies. These include policies on Gifts & Entertainment, Prohibition Against Insider Trading & Market Manipulation, and Whistle Blowing.