| Temasek Review 2011

The objective of creating sustainable wealth for our shareholder drives our investment strategy, capital allocation, performance measurement and incentive framework.

We measure our performance against a hurdle rate that takes into account the capital we use and the risks we take in our investments.

This measure of performance, which we call Wealth Added (WA), will only be positive if our returns exceed the risk-adjusted cost of capital.

We use the same measure to guide our investment strategy and capital allocation. For each investment, we evaluate and track its returns against its risk-adjusted hurdle rate. Investments in riskier sectors or riskier countries will have higher risk-adjusted hurdle rates.

This same measure is used to drive our incentive system. Our staff share in the WA results. When we deliver a positive WA, we have a positive bonus pool to distribute. When WA is negative, the resulting negative bonus pool leads to a clawback of deferred bonuses from prior years.

Creating Sustainable Wealth for our Shareholder

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To compute WA for our shareholder, we use the opening market value of our portfolio at the start of a financial year, as the capital employed. This is adjusted for any net capital movements such as dividends to shareholder or capital received.

We also account for the changes in our recurring operating costs taken in perpetuity.

For the year ended 31 March 2011, despite a positive return of 4.60% to our shareholder, our Wealth Added was S$8.8 billion below our aggregate risk-adjusted target.

Illustrative Example:

As can be seen in the above example, should returns fall below the WA hurdle, the WA can be negative even when the shareholder is enjoying a positive total return of $15 in Year 2.

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