Ethical failures are to blame for the poor state of our SOEs
The research is in: state-owned enterprises function as poorly as public-sector organisations, write Paul Vorster and Nicole Konstatinopoulos
SA is in trouble. State-owned enterprises (SOEs), which have the responsibility to ensure that crucial services are provided to enable the critical functioning of the economy, are failing. One doesn’t have to look far to see the dire effect of load-shedding, ineffective rail infrastructure, or the numerous incidents of public looting and mismanagement at SOEs responsible for financial investment and development.
SAA, Prasa, Transnet, Eskom, Denel, the SABC and many others are fighting for their financial sustainability and have reneged on their core mandates. Many of these institutions blame strategic, financial or operational risks for their state of affairs. However, the one thing that all these organisations have in common is a lack of an ethical culture.
Almost all these SOEs have been embroiled in ethical failures, usually from a governance of ethics standpoint and have been implicated in state capture; wasteful expenditure; employee intimidation; procurement fraud; employee and leadership incompetence; and the inability to meet the core mandates for which they were initially formed.
The King IV Report on Corporate Governance for SA indicates that corporate governance is the exercise of ethical and effective leadership towards the achievement of an ethical culture and sustained good performance. While the cultivation of an ethical culture is a tall order, some organisations seem to be grasping the concept better than others.
Ethical organisations seem to have certain characteristics that organisations with poor ethical cultures do not have. Through differential analysis, certain dimensions of ethical culture have emerged, including:
- Ethics accountability (the degree to which employees are held accountable for their conduct and decision-making and whether fair and transparent sanctions are enforced for unethical conduct).
- Employee commitment to ethics (the degree to which non-managerial employees are committed to doing the right thing and understand the importance of ethics for business and sustainability).
- Middle-management commitment to ethics (the degree to which mid-level and line-management are committed to doing the right thing, understand the importance of ethics for business and sustainability, and act as ethical role-models for non-managerial employees).
- Leadership commitment to ethics (the degree to which top management is committed to doing the right thing, understands the importance of ethics for business and sustainability, acts as ethical role-models and exercises good governance).
- Ethics talk (the degree to which an environment is created in which employees can openly discuss ethics and ethical consequences of actions and business decisions).
- Ethical treatment of people (the degree to which employees feel they are treated with respect, dignity and fairness in the organisation).
- Ethics awareness (the degree to which employees are aware that ethics is important for business).
The Ethics Institute analysed the profiles of SOEs, public- and private-sector organisations to better understand the current state of affairs within and between these sectors within the SA economy. The Ethical Culture Maturity Indicator, a validated and benchmarked survey, was used to evaluate the ethical culture maturity of organisations across these sectors.
This survey measures the abovementioned constructs and benchmarks these to SOEs, public- and private-sector organisations.
A total of nine SOEs, 13 public-sector organisations, and 19 private-sector organisations were surveyed. Data was gathered from mid-2016 to January 2020. Organisations were stratified to ensure that ethically affected organisations (organisations with ethical failures) were included in all organisational samples. The data was also statistically evaluated for outliers and the mean scores for each sector were then calculated and compared.
The average scores across each sector indicate that the private-sector average for an ethical culture was higher than for public-sector organisations and SOEs. The difference between public-sector organisations and SOEs was negligible and not statistically significant. This indicates that SOEs are not much different regarding their ethical culture when compared to the public sector, but different in comparison to the private sector.
Lack of leadership commitment
These results indicate a dire situation. It appears, from an ethical culture perspective, that SOEs have more in common with public-sector organisations than they do with those in the private sector, despite the structural dissimilarities between SOEs and public-sector organisations. Unfortunately, these results indicate that SOEs may, in fact, function as (in)effectively as most public-sector organisations from an ethical oversight and ethical culture perspective.
The biggest differences between the SOEs and the private sector was for leadership commitment to ethics, ethics talk and ethical treatment of employees, which were all substantially weaker for SOEs in comparison to private-sector organisations
SOEs need to change the way they operate and meet their mandates in an ethical manner to remain relevant and execute the critical supporting role they play
While direct comparisons between SOEs and the public and private sectors are useful, it is also important to evaluate what ethical culture within SOEs looks like. The biggest differences noted between SOEs with stronger ethical cultures and those with weaker ones were for ethics awareness, leadership commitment, and ethics accountability.
Therefore, SOEs with weaker ethical culture are likely to have a general disregard for the importance of ethics, which manifests in poor leadership commitment to ethics, the absence of consequence for either ethical or unethical conduct, and a lack of ethics awareness.
On the positive side, these ethical culture differences may point to a possible solution for the state SOEs find themselves in. Put simply, SOEs need to change the way they operate and meet their mandates in an ethical manner to remain relevant and execute the critical supporting role they play towards the SA economy.
Simply privatising SOEs may not necessarily be the answer. In their current state, privatisation may result in failure. What is needed before privatisation is good corporate governance and a focus on building an ethical culture.
SOEs can go a long way to reach this goal by ensuring improved and legitimate leadership commitment to ethics; improving ethics awareness among employees at every level; treating employees with respect, fairness and dignity; and ensuring that employees are held accountable for their behaviour. The recipe is simple, however, the application will need some work.
Ethics is stakeholder-focused and about meeting the goals of the organisation in a manner that is responsible and sustainable. SOEs need to get this right and focus here first. At the heart of getting there is acting ethically and ensuring that ethical cultures are cultivated.
• Dr Vorster is a research specialist at The Ethics Institute, and Konstatinopoulos is an intern at The Ethics Institute.