Boards should get ready to explain ‘why’ amid new SGX rules

A BOARD paper can be carefully drafted, thoroughly reviewed and properly approved. Yet one question can remain unanswered through that process, and deserves more attention: Why is this the right decision for this company?

Knowing that shareholders will ask that question can improve the conversation before anyone votes.

That is the promise of Singapore Exchange Regulation’s (SGX RegCo) new disclosure rules, announced on Sep 23.

Their significance lies not simply in requiring companies to disclose more, but in requiring boards to explain more clearly the reasoning behind important choices – from remuneration and dividends to investor engagement – while preserving room for commercial judgment.

Singapore’s governance framework has long combined mandatory requirements with the flexibility of “comply or explain”, which gives companies room to depart from prescribed practices, provided they give a reason.

The new rules bring a useful discipline to the familiar debate about carrots and sticks: requiring boards to explain their choices. When boards know they must do so publicly, they have a stronger reason to examine their decisions carefully in private.

The gap between having and explaining

SGX RegCo’s review of FY2025 annual reports published up to May 31, 2026, offers a helpful starting point.

More than 90 per cent of issuers incorporate financial indicators into remuneration frameworks, but only 47 per cent disclose which indicators they use.

Eight in 10 disclose the objectives and principles of their investor relations policies. Yet only a minority describe their shareholder-engagement activities.

These figures suggest that much of the groundwork is already there. The question is whether shareholders can see enough to understand how these governance structures work.

Saying that pay is linked to performance is a start. Explaining what counts as performance, and why, gives investors something to assess. Similarly, a commitment to shareholder engagement means more when a company describes what it has heard and how it has responded.

The new rules address this gap. They take effect on Jan 1, 2027, with annual report requirements applying to financial years commencing on or after that date.

Issuers must describe the key financial and non-financial performance indicators used to determine executive remuneration and explain their alignment with long-term value creation.

They must also disclose dividend and investor relations policies and key shareholder-engagement activities, while maintaining an investor-engagement website or a dedicated section within their already existing website.

A better conversation around the table

Of interest is what preparing these disclosures could do to the discussion in the boardroom.

SGX RegCo does not prescribe a dividend payout ratio or choose a board’s remuneration metrics. Directors retain discretion. But they must be better prepared to explain how they have exercised it.

Take a company retaining profits for growth. That may be entirely sensible. The useful discussion is about the opportunities ahead, the returns expected and how shareholders will know whether their capital has been put to good use.

Or consider remuneration. If a company says it is building for the long term, do the measures used to reward management support that ambition?

Looking at these explanations together can reveal inconsistencies that are less obvious when each disclosure is prepared separately. Strategy, incentives and capital allocation should make sense alongside one another.

For boards, a practical starting point is to ask for the explanation with the proposal. If the reasoning is difficult to articulate, it is worth pausing to understand why. Sometimes the language needs work. Sometimes the thinking does.

That pause can be valuable. It gives directors an opportunity to improve the decision while there is still time to change it.

How culture moves

Of course, rules alone cannot produce this change. Today’s new disclosure can become tomorrow’s boilerplate. We could end up with longer annual reports and much the same boardroom conversations.

The chair has an important and influential part to play. Asking “What are we not seeing?” and making it comfortable for someone to offer a different view can deepen a discussion. Compliance with the same rules can look very different around different board tables.

The SID Chairpersons Guild, launched in January with support from the Monetary Authority of Singapore and SGX Group, offers opportunities for learning and peer support. There is value in hearing how fellow directors approach difficult judgments.

Capability matters too. SGX’s Value Unlock programme helps issuers develop and communicate strategies for sustainable shareholder value. Some shortcomings reflect limitations in skills or resources. Raising the disclosure standard works better when companies are also helped to meet it.

This adds an important nuance to the carrot-and-stick debate. Not every deficiency reflects unwillingness. Sometimes the constraint is capability. Building the capacity to make and communicate better decisions can matter as much as raising the regulatory floor.

Investors also have an important role. Disclosures become consequential when shareholders question inconsistencies and follow through on what companies have said they will do.

That scrutiny should leave room for well-judged risks. A sound decision can produce a disappointing result. Equally, boards must be willing to acknowledge when assumptions have proved wrong. Credibility grows when explanation includes what has been learnt.

The test begins before the vote

This is why the choice between carrot and stick is too narrow. Regulation sets expectations, capability helps companies respond and scrutiny gives their explanations repercussions. Together, these can gradually change what boards expect of themselves.

Boards can delegate the drafting of an annual report. They remain responsible for the judgment it describes. The test will be whether the question shifts from “What must we disclose?” to “Why have we made this choice, and can we explain it clearly?”

Singapore has spent decades building the framework for good governance. The opportunity now is to deepen what happens within it.

The carrot encourages. The stick compels. Having to explain ourselves – the space between the two – works more subtly and, possibly, more powerfully.

When explanation becomes part of the conversation before approval, disclosure begins to influence how decisions are made. That is where a meaningful change in governance culture can begin.

The writer is chairman of SGListCos and a senior accredited director of the Singapore Institute of Directors. The views expressed are his own.