Is Temasek operating a slush fund?

A slush fund in an organisation is a reserve set aside for purposes at best to moderate accounts by keeping some earnings out of a good year (pay less tax) and fudge the earnings of a bad year. At worst, it is money set aside for illicit purposes, such as for bribery, and in the case of political parties, for hiding contributions received. At its nefarious worst, it is used to inflate earnings by crediting revenue account and hiding the debit side in some 'asset' account, hoping for future year profits to square out the losses. Enron Corporation famously cooked their books by using a derivative trader's slush fund to report false earning for many years.

Temasek measures their annual earnings against a targeted benchmark which is the risk-adjusted returns. A hurdle rate is first determined. This is the rate that management accepts as a reasonable return given the risk involved. The rate differs for each class of portfolio and aggregated over all investments. When the earnings are more than the hurdle rate, the difference is the Wealth Added (WA). Of course, in a bad year, the WA can be negative.

The WA is the basis for a special staff compensation scheme. It is called the WA Bonus scheme open only to 3 top levels of managerial staffers including the CEO. The coffee lady, the driver, the clerks and other 'mediocres' (in the eyes of ruling elites) do not participate in this.

Part of the WA is set aside for this bonus. It's a complicated system that incorporates a deferred payout and clawback mechanism. In a good year, a WA bonus is declared and the charge to earnings is by way of provision to a WA Bank A/c. The full sum is not paid out immediately as a certain portion is retained to meet clawbacks of future years. The max that can be paid is estimated to be about 50% of the declared sum. In a bad year when the WA is negative, there is a clawback on the deferred bonus of prior years. A provision has the effect of reducing the net earnings whilst a clawback is a provision written back to P&L which boosters the bottom line.

This adjustment to the WA Bonus scheme impacts the P&L. There is no transparency to this adjustment, which is not surprising as executive compensation has been top national secret ever since Ho Ching, the wife of the Prime Minister, and the most powerful woman in the land, was installed as CEO. Here is an attempt at quantifying this adjustment.

(A) Disclosed in the annual report.
(B) Disclosed in annual report. This is risk-adjusted, or hurdle rate. Basically it is a reasonable rate of return that management want given the risk. It is built bottom-up and aggregated over all investments.
(C) Estimated by applying the risk hurdle rate (B) over invested portfolio value (A).
(D) Disclosed in the annual report.
(E) Net earnings (C+D) before tax before provision for WA bonus.
(F) Computed based on Net return of (E) - EBIT (G).
(G) Disclosed in annual report.

What does the above computation show?

In 2015 the risk-adjusted return of 8% over portfolio of $266B was only $21.28B. With net return of $46.78B there was wealth added of $25.5B. Since there was WA, then a WA Bonus was computed. What is the basis and how much was due to the participating managers, the public cannot compute. A provision is then made which was $25.58B charged to the accounts. What was charged to the accounts each year need not necessarily be the provision for that year as it could involve adjustments of other years. By charging this provision, the net earnings went down from $46.78B to $21.2B.

It should be noted that $25.58B is not bonus paid out. How much is paid out each year, the public will never know. Only a certain sum is paid out and the balance is deferred and retained in a pool (WA Bank A/c) available for clawback in future years. Take for example 2016 a negative net return of $25.34B caused a huge negative WA of $44.7B. A huge clawback of $40.04B from WA Bonus provision allowed Temasek to show a net proft before tax of $14.7B. Again in 2019 a low net return of $3.91B saw a negative WA of $18B. A clawback of $14.79 WA Bonus provision allowed Temasek to show a net profit before tax of $18.7B

Creative accounting is an ingenuous way of cooking the books by staying within the bounds of laws and regulations, and accounting standards, but actually straying from what was intended. It is left to the reader to form their own opinion, regardless of the legality, whether the WA Bonus scheme is a slush fund in a Rube Goldberg machine.

(Rube Goldberg machine is a contraption purposely engineered to handle a simple task into a very complicated process.)

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