Aprerequisite for returning ailing state-owned enterprises (SOEs) to good health is to transform their corrupt, inefficient and unaccountable business models into ethical ones. Out-of-control corruption, inefficiency and poor balance sheets have stunted economic growth, undermined confidence in the economy and diverted funds away from essential public services.

The first task in building an ethics-based business model for SOEs is to reform their organisational culture, which is characterised by corruption, inefficiency and incompetence.

The organisational culture of SOEs is largely influenced by the tone set by the governing executives of a country, especially the president. Capturing SOEs for self-enrichment, patronage appointments and asset stripping became the norm under the Jacob Zuma presidency. A new ethical organisational culture will have to be set in the national government that was absent during the Zuma presidency. President Cyril Ramaphosa will have to provide the lead in providing the ethical leadership — setting the so-called ethical tone at the top.

The environment in which SOEs operate — politically and within the government and society — largely determines the extent of good corporate behaviour of these companies. The erosion of ethics in SOEs is directly related to the backslide in ethics in the ANC, public service and society broadly.

Family structure fractured 

Ethical failures in the ANC and among its leaders and elected representatives have plunged the public service, private sector and society into an ethics vacuum. This can be seen in astonishing ethics breaches even in supposedly moral institutions such as churches and supposedly solid professions such as auditing and medicine.

Furthermore, for many South Africans the family structure, in which ethics foundations are usually laid, has been fractured and is therefore unable to set the ethical foundations. The apartheid migrant work system, whether on the mines or farms, the forced dislocation of families to the bantustans or townships and the personal insecurity and daily humiliation experienced by so many broke the structure of most black families.

The black public school system, in which ethics, morality and democratic values could have been inculcated, all but collapsed in the post-apartheid era.

This makes it more important than before for the president to set the ethical tone for the country at the top in the executive, ANC and in his own personal behaviour, to set an example of ethical values at the individual level.

Ethical leaders at the heads of SOEs are also crucial. Crony, party-political and corrupt appointments at executive and board level have eroded the ethical organisational culture of many SOEs. There must be an overhaul of the boards and executive ranks of these organisations to bring in competent, honest and skilled professionals.

Incompetent SOE leaders tend to appoint equally incompetent, corrupt and ineffective juniors who make life miserable for more conscientious employees.

Politicians, managers of the government departments overseeing SOEs and managers working for suppliers should not be appointed to SOE boards. Very few SOEs have credible conflict-of-interest policies and when they have, they tend to be poorly implemented and enforced. This must change.

Conflicts of interests by management and boards have to be declared for every key decision-maker. This must be made publicly available and accessible, including being published in the annual report. Outside gifts to SOE employees should be banned.

Procurement at SOEs is a major source of corruption. Black economic empowerment rules are particularly manipulated for corrupt ends. Members of procurement committees should be appointed on merit, for their expertise and honesty. They must not only declare conflicts of interest at every meeting but must neither be allowed to participate in discussions if they are conflicted nor vote on conflicted issues. Value for public money, rather than the cheapest price, should be at the heart of procurement by the state and the companies it controls.

Performance management at SOEs must also be ethics based. SOE promotions, incentives and bonuses must be based on merit and must be fair and honest. Ethics must be included in the performance of SOE boards, executives and ordinary employees. SOE boards and executives have often been fantastically rewarded just for turning up at work, even when the organisations they presided over had to be bailed out with public funds.

There have to be consequences for inefficiency, mediocrity and incompetence. Ethical behaviour must be rewarded and corrupt behaviour punished. This will signal a clear change towards ethical conduct.

SOEs must report their finances, activities and strategies more ethically. Most SOEs appear to bury financial irregularities, inefficiency and poor performance in their reporting. The public consequently see the gravity of the organisational failures only when it is too late and SOEs are already seeking financial lifeboats.

Some auditing companies have been abetting SOE corruption by obscuring corrupt activities of SOEs in their auditing reports. Audit professional bodies and regulators will have to come down hard on such errant auditors. Auditor-General Kimi Makwetu has rightly decided his office will terminate its contracts with auditors KPMG and Nkonki, with a condition to review the decision pending feedback from the companies, because of the unprofessional conduct of their auditor employees.

SOEs must furthermore treat their customers, suppliers and stakeholders ethically. The arrogance, indifference and callousness of many SOEs towards their customers, suppliers and stakeholders is astonishing. Far too many suppliers to SOEs have, for example, been forced into bankruptcy because the SOEs cannot be bothered to pay them on time. Because many SOEs are monopolies, with captured customers, and assume they will be bailed out by the government if they run into trouble, they do not appear to care about service quality.

Customer surveys 

SOEs must devise their own ethics codes and enforce them. As part of the ethical clean-up all employees must be made to sign new performance contracts that put ethics at the heart of their work.

Independent customer surveys of the quality of SOE services must be included in performance management. SOEs must encourage whistleblowing as an additional oversight mechanism.

Parliament must get better at holding SOE executives and boards accountable for ethical performance. In recent months it has done so in special hearings on state capture and this must continue. However, Parliament lacks the capacity to take action against SOE managers and board members who have been found to be behaving unethically.

Civil society organisations, consumers and citizens should better monitor the delivery of services by SOEs and ensure that board and executive appointments as well as contracts are transparent. They should protest against poor performance more regularly.

SOEs must open their annual general meetings to citizens, civil society organisations and the media. As "shareholders", by virtue of paying taxes, civil society organisations, consumers and citizens must become activists and attend SOE annual general meetings to pressure managements to govern ethically.

The state and private financiers should follow the example of the Development Bank of Southern Africa and Futuregrowth Asset Management by refusing to lend to SOEs until they clean up their acts.

• Gumede is an associate professor at the Wits University School of Governance. He was adviser to the presidential review committee on SOEs.