Dr Victoria Hurth, Independent Pracademic and Fellow, University of Cambridge Institute for Sustainability Leadership, explores how adopting purpose-driven governance, underpinned by standards such as ISO 37000 and PAS 808, can transform organisations and economies to achieve sustainability.

In a world grappling with the challenges of climate change, social inequality and resource depletion, the failure of governance has emerged as a primary cause of unsustainability. This article outlines how outdated governance systems prioritise short-term financial gains over long-term wellbeing for all.

What is sustainability?

It is easy to say that sustainability is complex and that many views of what it represents exist – however, it is also quite straightforward. We can conclude that sustainability is a state where our collective wellbeing is assured over the long term. This is the essence of the definition outlined in the Brundtland Report of 1987, which describes sustainability as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. Similarly, long-term wellbeing for all is also the collective goal of an economy, as economics is fundamentally about allocating resources in a way that maximises social wellbeing.

Whether this objective includes the wellbeing of only humans, or all life on earth, is a pinnacle philosophical question. Different positions are held, but many argue that prioritising human wellbeing, and viewing non-human life as only instrumental to it, is one of the reasons we have created an unsustainable world.

What is governance?

Before 2021, the global view of governance was embedded in a financialised view of the economy – predominantly based on or derived from stock exchange codes and designed around protecting shareholder investment as a result of lessons learned from scandals – the notable exception being the Organisation for Economic Co-operation and Development (OECD) guidelines, which are in fact targeted towards national regulators and not about organisational governance practice.

However, 2021 marked the end of a five-year process to create the world’s first benchmark standard in the governance of organisations, ISO 37000. The consensus-building process involved 77 countries and 25 liaison organisations, including the OECD, the United Nations Conference on Trade and Development and the Chartered Quality Institute. The guidance in this standard helps ensure that the global consensus on the governance of organisations puts purpose as central to governance decision-making, with 10 other foundational and enabling principles together forming a complete governance system that is aligned with a sustainable future.

There are many important leaps in clarity that were made in ISO 37000. However, perhaps one of the key contributions was to articulate the three key aspects of governance:

• direction: the first aspect of governance is the things you are trying to achieve as an organisation, your overarching purpose or objective, and the key limitations or red lines that need to be kept, which become decision-making parameters encoded in policy
• oversight: the second aspect of governance is about ensuring that the purpose and objective is being achieved within the parameters, and
• accountability: third, governance accounts to relevant others regarding whether, and how, the objectives have been achieved within the parameters and what corrective action will be taken, or why it is not reasonable to do so.

Governance logics

Diagram 1 is adapted from Herman Daly and Donella Meadows’ work at the macro-economic level. The adapted triangle connects the macro level with the meso level of organisational decision-making – the meso level being how the macro economy level is operationalised (not forgetting that governments are also organisations). This clearly reveals why our current way of organising the market economy naturally leads to unsustainability – in other words, an existential threat to our collective long-term wellbeing.

Logic 1: business-as-usual and short-term self-interest governance 

The economy is assumed to optimise collective long-term wellbeing as long as countries, companies and individuals act in their own self-interest. Consumers and citizens are assumed to act in a way that optimises their own wellbeing, and the market is the primary way in which this wellbeing is supplied. Companies within this logic (Logic 1) should focus their objectives not on the end goal of the economy, but on optimising financial capital capture from the market. As long as they act within the law, track competition and do not interfere with customer demand, but merely understand and respond to it, then they are doing their best job for collective long-term wellbeing. We assume that if they make lots of money for their members/shareholders, then they are providing wellbeing effectively, adding to the national accounts, which can be used for collective wellbeing and providing jobs, which allows citizens to purchase more wellbeing from the market.

We have been so confident in these assumptions that no one has been governing whether the macro objectives have been met or whether this innovation pathway works. Furthermore, we have assumed that the most important decision-making parameters are about ensuring the healthy stocks and flows of financial capital. At this level of logic, the health of the foundational non-financial capitals, the underlying social and environmental systems, and the stakeholders that gatekeep and steward these resources are not turned into decision-making parameters. As a result, this health is an uncosted and ungoverned asset that an organisation can freely abuse – to their own and others’ detriment. We have the wrong governance objective and parameters at both organisational and national levels. Long-term wellbeing for all – the value creation objective that we ultimately value and that we need to innovate for, particularly when this value is so under threat – is out of sight and the foundational resources that underpin this value are unaccounted for.

Logic 2: business-as-usual and long-term self-interest governance

Some companies take into account the issues at the bottom of the triangle (the E and the S of ESG) and are moving to long-term self-interest as the basis for making decisions (see Diagram 2). This, though, still keeps innovation constrained to what will make the most money, rather than finding creative ways to solve problems of collective long-term wellbeing that make sufficient stocks and flows of financial capital. In effect, what happens is that the governance parameters that fence how decisions are made move down to encompass the health of all the dependencies. For many organisations, they are just starting out on their journey from Logic 1 to Logic 2 and are only aware of some of the resources, stakeholders and systems that they are dependent on, and how badly degraded many of these are.

Logic 3: purpose-driven, long-term other-serving interest governance

If the objective of an economy is ultimately to optimise wellbeing for all over time, but what is being produced is the opposite, then we clearly have a quality issue. If bad-quality governance has caused unsustainability, then good-quality governance can fix it and can ensure that the market economy delivers what it is supposed to, which is long-term wellbeing for all.

A purpose-driven organisation (see Diagram 3) is one that is fully governed for an objective that is an optimal strategic contribution to long-term wellbeing for all, and is within decision-making parameters that ensure the health of financial capital and foundational capitals – such as human, social and natural capitals – as well as the stakeholders and underlying social and environmental systems. They are not just ‘doing no harm’, but exist to innovate to drive long-term collective wellbeing. With a strong and sustainable governance framework, countries and companies can clear out the unnecessary bureaucracy that dictates strategy.

ISO 37000 on the governance of organisations, along with PAS 808 – the first national standard in Purpose-Driven Organisations – provide the practical guidelines and accountability frameworks for how to reform the market economy. PAS 808 now forms the working draft for a two-year development to create a new standard for Purpose-Driven Organisations, namely ISO 37011, which will become the world’s first consensus view on the governance behaviours that direct, oversee and provide accountability for an organisation that is fully aligned with long-term wellbeing for all.

How can Hong Kong progress towards Logic 2 and Logic 3?

We need to consciously and urgently use the existing momentum to transform to sustainable market economies on a global basis. This is a shift that needs to happen on three levels (see Diagram 4).

At the macro level, we need to move from a GDP-focused economy towards an economy whose goal is long-term wellbeing for all people and the planet, which is operationalised within healthy thresholds of social and environmental systems.

At the meso level, the shift needs to be driven by purpose-driven, rather than profit-driven, organisations, which are companies whose reason to exist is ‘an optimal strategic contribution to long-term wellbeing for all people and the planet’. There is a hugely expanding range of such organisations globally.

At the micro level, we need to advocate for meaningful work and meaningful lives. Instead of being financially driven, humans empowered to be fully human can serve the wellbeing economy and hence receive wellbeing returns, both during the process and as an outcome.

Hong Kong’s Innovation and Technology Commission, which provides a range of standard-related services, is currently an observing member of the ISO process to develop ISO 37011. It would be excellent to see Hong Kong become a full participating member and to set up a mirror committee to feed directly into the work of ISO 37011 on Purpose-Driven Organisations.

The alternative is that we risk losing the market economy entirely. When things get tough, as they did during the pandemic – and things are only going to get tougher – then there is a real chance that we will give up the freedoms of the market to a small group of centrally situated decision-makers. Another option is that we drown innovation in bureaucracy as we try to close all the harmful loopholes in the hyper-financialised economy, rather than reform it. We have a choice – we just need to recognise this and get on with creating the quality governance the world needs.

Dr Victoria Hurth, Independent Pracademic and Fellow

University of Cambridge Institute for Sustainability Leadership

Dr Victoria Hurth is an Independent Pracademic, executive advisor and Fellow of the University of Cambridge Institute for Sustainability Leadership. Dr Hurth advised the UN on the methodology for SDG 12.6.1 (sustainability reporting), co-led the five-year development of the global ISO standard in the governance of organisations (ISO 37000), was Technical Author for the first national standard in Purpose- Driven Organisations and is currently Project Leader of the development of an equivalent ISO (ISO 37011). In Asia, Dr Hurth collaborates with The Purpose Business, an Asia-based sustainability consultancy with a focus on helping businesses embed purpose into business strategy, governance and decision-making. In 2024, together with The Purpose Business, she co-facilitated several Masterclass sessions for business leaders on how purpose-driven governance can unlock sustainability and business success.