 Welcome to our podcast series on the subject of Board Leadership and Governance. I'm Richard Calland, I'm a Fellow of the Institute for Senbilising Leadership at Cambridge and a Professor of Public Law at the University of Cape Town. In the series so far we began with Maria Jot, a Danish Asset Manager, Investor and a member of several boards in the European Union. Her perspective was around the importance of the board in terms of bringing together sustainability strategy with commercial strategy and the particular responsibility that that brings for board members. With Philippe Joubert, another Fellow of the Institute in the second of the series, I discussed the relationship between the board and the executive and how that has shifted over the years. Of course, Philippe brings not just an extraordinary range of expertise behind him and serving on many boards around the world. But he has this very powerful message about how the end of business as usual means that board leaders must really think differently about how they will help their companies, their organisations move into a very different era with huge demands, huge risks but also huge opportunities for those who get that transition right. In this third in our series of interviews, in this podcast series about Board Governance and Leadership, I'm joined by Victoria Hearth, who is a Fellow of the University of Cambridge Institute for Sustainability Leadership and also a Visiting Fellow of the University of Cambridge's Judge Business School. Victoria has an interesting history on the marketing side of business but also in the last 10 to 20 years on the sustainability side. She has a very particular and deep passionate perspective on the role that governance plays in bringing these things together. She believes that governance is the glue that binds purpose with strategy with execution. And I'm going to be discussing that in the context of what we see as the rising and extremely important role that board leaders can play in getting sustainability strategy right to ensure that organisations and companies can adapt to the extreme pressures of the current external world, climate change and all. Victoria, thank you very much for joining me for this third in this series of interviews in our podcast series on Board Leadership and Governance. And welcome, you're in Cyprus, I understand. I'm in Cape Town, South Africa, so we're speaking across a longitude and our access here of 6,000 miles but really good to have this opportunity to talk to you. Let's start with governance. What do you mean by governance? Because it means different things to different people. And when we talk about a board and its place in the governance system or ecosystem even, we need to think about that ecosystem before we actually hone in on the board. OK, so defining governance has always been one of those ongoing things and there's no one clear definition. In fact, you know, if we go to the codes that are out there, they tend to be sort of like a page of description about governance and I think that's the case for a reason. Of course, we had the cabri definition of direction and control but the definition of governance is something that we debated at length in the ISO governance committee that I chaired for five years. Some people didn't even want to create a standard unless we had a definition of governance. And then on the other hand, I was pointing out, well, aren't we going to be defining governance? And so at the end, we might know whether we can turn that into a pithy sentence. But ultimately, there are different ways in which you can describe what we're talking about here. But in terms of organizational governance, I think that I do have to defer to the global consensus that we arrived at, which is governance of organizations. It's a human based system by which an organization is directed, overseen and held accountable for achieving its defined purpose. So that is really the essence and in there. You have those two aspects of direction and what cabri called control that we debated that one at length and it was at the consensus is that we can talk about controls but actually we're talking about oversight here and in terms of hierarchical dominance rules based or a better term. And then of course accountability, which is all in cabri but it's really brought to the fore in the standard. So let me interrupt you briefly. We'll come back to those terms because they're really important and I found them extremely valuable in trying to frame what we mean by leadership and governance in a boardroom setting. I'll come back to that, but let's digress briefly and ISO standards ISO as an organization of what one might call soft law international global standards. Can you just tell us a bit about that? Some of our listeners might not be familiar with the ISO standards and your own particular role in developing that new standard, particularly ISO 37000. You're right. I think a lot of people have heard of ISO but don't necessarily understand it and my view cutting to the chase is that actually in the crisis of humanity we find ourselves in where we have a severe lack of global governance mechanisms ISO is one that we need to I think quickly understand and get behind and utilize because it's actually one of the best facilities we have for navigating what we are going through as a global community of humanity. And that's because it started in sort of the post-war period really existed as an organization before that but ultimately it is a series of 167 now I believe national member bodies which are sort of national sanctions standardization organizations. They're not part of government so they're one stage removed but you have that really critical connection with the government of a country. And so ISO is like a governing group where all of the sort of different member bodies come together and nation states can through that mechanism propose that a certain standard should become an ISO. So in essence both at the national level and the ISO level we're talking about a highly refined process of consensus building. That's really all that it is and I think it's important to remember that because then it makes a lot more sense when people think oh you know BSI blah blah blah that's the plug stuff or ISO you know 140001 that's quality. So there are certainly standards that have like raised into the consciousness but what we need to remember is this this is really about saying on any topic what is it that the world agrees on a topic so hugely important facility. I've done a lot of work in standards building on sustainability for BSI around particularly sustainable communities and then I was the lead expert on sustainable city indicators which was a way of sorting out the mess of rankings of cities on sustainability by saying what a hundred best metrics and then I moved into the role of convener and actually co-convener of working group one within what's called a technical committee on governance of organizations so that started just as I got involved and any sort of technical committee that starts a country sort of proposes that and becomes the secretariat and in this case it was the UK so I was there designated convener or project manager for building this first international ISO standard in governance of organizations so it'd never been done before essentially ISO had done a lot in widgets in the old days trying to sort of harmonize trade and cut costs over time had started moving much more into the sort of behavioral decision making realm like environmental management or quality because there was a real demand for that so became also by that less tick boxing and more principle based as organizations were trying to standardize and move cultures through different ways of doing things and a lot of those are what we call management system standards so they really are plug and play and you have to conform to a certain structure so ISO 37000 fills a gap it seems to me listening to you in two ways one it's a soft law it's not legally binding it's voluntary it's guidance as you say but it helps fill the gap that international governments and the rule of law often struggles with which is to create transnational international standards that people can hold on to and therefore have consistency across geographical and different jurisdictions and the second gap is around exactly what governance means as a standard for an organization that is trying to deliver transformation and have the right rules of the game in place at this particular time in history now back to what you and your colleagues with this extraordinary multi-stakeholder consensus that you achieved which gives it real credibility I have to say in real legitimacy and I think adds to its value what you achieved was this set of words which I think is really helpful the first word in that long sentence is that the governance responsibility starts with the direction of the organization and then secondly the oversight and thirdly being accountable and we can break those down but the next bit of the sentence is also really important because it says to direct oversee and be accountable for achieving the defined purpose of the organization so the relationship in governance and purpose defined purpose I think is critical there can we add one other word strategy how would you see this triangle of governance strategy and purpose unfortunately I'm trying to get the standards to be made for free but you can get some detailed summaries online and you can see the whole governance framework that's in the system which has purpose at the centre but has ten other principles one of which is strategy and in the document itself it really unpicks quite clearly the role of strategy so for me having studied management since like 1995 and all the confusion around the terms of strategy and vision no wonder everyone's confused so I really like to try and boil things down because I think often we're all saying pretty much the same thing what we're saying is any organization is something you're trying to achieve to control your purpose and the parameters within which you achieve that now strategy is how you achieve your ends within those parameters and governance essentially sets the ends and sets the parameters so throughout the whole of the standard you'll see the term achieves the purpose in the way intended in order to achieve the purpose in the way intended and the way intended is the manner, the mode the parameters, the guidelines, the red lines whatever you want to talk about and actually this is probably something listeners might find really helpful as well my co-convening colleague Axel Kravatsky who together we chaired this process he's based in Twin Dunne Tobago and a real governance expert he really enlightened me when he brought to the table the fact that in effect the governing body is completely utterly accountable for the whole organisational system so you can take the starting position and really they start from doing everything and then they decide to delegate certain things now it's just normatively the case about what a CEO role is about what the executive role is and that sort of line between a governing body and executive but ultimately at all levels you'll be wearing hats a governing body hat and an executive hat especially if executives are sitting on the board and again that's something that tends to get lost so what matters then is that strategies this sort of normatively the bit where the governing body's role and the executive role sort of comes together so in the standard it's really really clear about strategy that the governing body need to set the strategic objectives that are justified against the purpose i.e. if this is our purpose these are the objectives that we think if met will achieve that purpose here is our governance policies around what we think are the parameters to do that executive go away and create strategy and again there are different ways of thinking about this some are very purists that say you know go off and create strategy governing body should have no role in that strategy because otherwise how can they truly hold executive to account for others that's much more of a blurry line and in the standard global consensus was one that said actually the governing body need to lean in to engage with the strategy certainly to be able to make sure that the governing levers that it's pulling are supporting the delivery of that strategy that they have in one way or another they will sign off So I tend to agree with you Victoria when one thinks about that word direct seems to be very hard for a governing body to direct an organisation without entering the sphere of strategy and the big strategic choices I mean if one thinks of strategy is really about identifying really difficult dilemmas tough choices if you like and resolving them by making a choice really that sort of guidance and direction I would say should come indeed from the board now I'm using board you've been talking about the governing body because of course organisations come in all sorts of shapes and sizes some are for-profit some are not for-profit in the case of a for-profit generally the governing body is the board and the board of directors so let's hone in on that in a corporate setting what would you say would be the major implication of ISO 37000 for corporate boards now thinking about their leadership responsibilities their legal duties and their obligation to govern in a way that allows the organisation to achieve its purpose You probably know I'm not a fan of the terms not for-profit and for-profit because I think it basically belies what we really mean is profit maximisation and that's actually the thing that is being unpicked as we speak of course but I would say 37000 what it really does what makes it different to the other things that are out there so the closest before this I'd say would be the OECD guidelines which are also really important guidelines they're very much written for a regulatory audience what ISO 37000 does is really speak to organisations so organisations of any size or any type the issue is that you don't really have anything how to think about governance as a practice as a discipline about what are we really here to do you instead have these kind of scatterings and pockets of guidance in different stock exchanges different parts of the world and then some areas just with nothing in it so it really provides that bridging role but more than that what it does is I'd say it's the first time that we have something where the world came together and said what do we think is good governance of organisations for the organisations that we need that can deliver the value that's required the true value that's required and so when we understand that the discipline of governance whilst it goes back a couple of thousand years is actually really really young especially compared to management and that it's grown up in a time of business as usual in other words a very specific view of how we should run the economy that preferences financial capture for the shareholders sorry in writing both what do we think is the essence of good governance that's being born now but also doing it for any organisation which means that we had to get back to the conceptual roots this had to be relevant for a one person organisation or the largest corporate ever and so the lessons I think is similar across all of them what they say is governance is a specific discipline it needs to be understood as a set of key principles and functions that you need to undertake there are eleven that we can distill it down into and that these will not be unfamiliar at all in any way and we lean on the status quo but there will be ways of interpreting that the sort of bring to the fore what in other words otherwise was sort of hidden from view so putting an absolute emphasis on for example oversight what do we mean by it what's the world committee how should we think about that accountability both internal delegation and reporting and all the final details of that being really clear about what value as a governing body you are trying to create now that's something we've seen in integrated reporting and in this sort of multi-capital view but ISO 37000 gives it a name there's a principle there and it comes before strategy is one of those foundational principles although I have to say other than purpose there is an order there are foundational principles and supporting principles but also for example principle 11 on viability and performance over time that's something that especially in CISL will vary familiar with in terms of understanding the system of dependencies that sit around you understanding is to have enough stocks and flows of the right capitals at the right time in the right way again stuff that we know is critical if you're going to be governing any organization but ISO 37000 really brings it to the fore we talk about risk management and there's a brilliant ISO standard on risk management what this does is say well yeah but that risk management needs to be governed and including making sure that you're applying good risk management as a governing body to the functions that you are facilitating so I mean I could go on and on all I would say is a huge amount of rich detail in that and of course on your point about risk governance which I think is a very useful expression if you are accepting as you have to I think now in this era that as the board you are accountable for the organization that you govern that comes with very high level legal responsibilities and increasingly as public interest litigation particularly in the climate space opens up and extends across the world it opens up a huge sort of area of legal risk if you have not done your due diligence but more than due diligence if you haven't properly looked out of the window understood the context asked your executive the right questions at the right time and really as a board applied your mind properly to what the company is doing or not doing that's where we're moving into and I think we're a real juncture on ISO 37000 re-exposes that juncture I mean these are 11 really specific sets of principles and behaviors that all governing bodies even if you're a one person organization need to be doing and so if we take that as being the future in a way it tells us something about the kinds of organizations the world wants to bring about and how they're governed and then we look at the realities of the expectations of governing bodies remembering that that governance has really been focused on and if anyone here's me say middle of the triangle some of you know what I mean some of you don't but that sense that we have trapped organizations into really saying look don't worry it's a complex world out there but don't worry you just really mostly need to focus in on financial capital you need to account for it measure for it create strategy against it you know you'll be held accountable for it and then that's kind of broadened out slightly but what we're now saying is actually organizations take resources and transform them and you as a governing body are accountable to society really this is where we're going you're accountable to society for the resources that you use and how you use them and what as a result that you create in the world and ISO 37000 really sets out that future the current reality is built for a different world in a different time and one that frankly is dragging the whole that you down with it so if we don't realize that this is not just tweaking some governance behaviors this is about rethinking what is the role of a director of a governing body and how should we be thinking them as part of the organization I think we are going to struggle because if we're going to put money and effort anywhere really we shouldn't be betting on horses we should be creating really strong governance frames within which we can free innovation from rules and constraints and bets so Victoria that puts governance right at the center of the transformational journey that the world needs to take right now and very very urgently and I think you're absolutely right in saying that it's often seen as kind of tinkering around the edges fiddling with the decision making but if it's seen in those limited terms then it really is going to be fiddling whilst Rome burns literally and that's not helpful so decision makers with that legal responsibility at the head of any organization have got to take governance extremely seriously and think through the implications for their decision making I've got one last question which is around power I know that you from earlier conversations we've had you expect as do I that boards should step up to this high level responsibility but it assumes that they have the wherewithal the power and of course the inclination to do so I've spent much more time in my life experience with governance working in public governance rather than private governance and it seems to me there's an analogy here with the relationship between the legislative branch of government and the executive branch of government in theory and in most constitutions the legislative branch has more power and authority it elects a points and has a responsibility and an obligation and an opportunity to oversee and hold to account the executive but in reality the power tends to sit very much with the executive so also with companies that the real power sits with the executive and are we not perhaps being unrealistic in our expectations of what a board can achieve we've arrived at a situation where the power tends to sit with the executive but that's not what the system is designed to do actually so I think what we have over time is we have successful CEOs often who then move into the board level or executives that become executive directors and fail to understand that when they enter that governing body they become part of a unitary decision making unit and so over time what that means is that as those executives who have been used to having maybe boards rather stance certain decisions not as too many questions unless it comes to finance they then themselves perpetuate that system and just assume that if it's not broke don't fix it if you've got a CEO that looks like they're doing a good job why would you worry too much I know the characterizing here I know there are lots of boards that don't operate like that but ultimately we are going to have to move to a different level of understanding the role of the governing body and in a way this is nothing new it's just remembering what's already there in the system because if we are accounting for the right kind of CEO and the right kind of senior executives that just happen to be there the idea that governing body will pick up the worst issues we're never going to be able to make the level of transformation I mean even just stopping the harm let alone innovating for the good because that's another key thing that we've seen happening in governance is we know that governance is not just about compliance but it's about performance but historically and again because of business as usual thinking it's become very much about that compliance agenda so then this is where the disconnected strategy has come and why this is starting to be re-remembered because what we're also remembering again is the fact that any organization and especially our large businesses they're not just those groups of people that we endow with the possibility to take our resources and transform them but they are our hope for innovating the solutions to the deep problems that we now have so first and foremost an organization is there to innovate something useful and so that brings in that performance part it brings in that strategy part and it means the governing body need to step up just one thing I wanted to add there basically sustainability unsustainability is the biggest governance failure ever because ultimately the economy will supposed to be delivering well-being for society taking resources and transforming them for that we then outsource that to a set of assumptions that have actually taken us in another direction no one was governing whether those assumptions actually were delivering the well-being for society and we've proxied for well-being outcomes to a short-term measure of GDP now ultimately society in any functioning dem democracy is the ultimate governing body we choose the government that comes in as a governing body on our behalf to govern and then in turn that governing body of government govern the organizations that exist at the moment we have governance failures on all those levels now if we busy ourselves with strategy and execution without being clear about our direction overseeing that and being accountable at all those levels from citizens government down to organizations we're not going to do it we're going to feel quite nice that we've done a few nice things but we're not actually going to achieve it and we're going to waste our time so for me governance has to be where the majority of the energies put we can't leave it by chance that we happen to have a few good CEOs so governance is part of the failure in human management of the economy that has got us into the crisis we now face but governance is part of the solution because good governance better governance by boards will unlock this trap we've set for ourselves and unleash a very different transformational and progressive approach to how we create value in the economy Victoria thank you very much indeed for your expertise and your leadership in the realm of the ISO standards particularly ISO 37000 which I think is so valuable and thank you also for your passion for governance and for sharing your expertise and your insights on this addition of the Board Leadership Podcast