Ethical failures to blame for the poor state of SOEs

by Dr. Paul Vorster and Nicole Konstantinopoulos| Published on 26 February 2020 for The Ethics Institute monthly newsletter

South Africa 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 South African economy, are failing. One doesn’t have to look far to see the dire effect of blackouts (i.e., loadshedding), ineffective rail infrastructure, or the numerous incidents of public looting and mismanagement at SOEs responsible for financial investment and development.

South African Airways (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 and/or operational risks for their current state of affairs. However, the one thing that all these organisations have in common is a lack of basic ethics oversight and management.

Almost all of 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. It is interesting then that ethics risk is still viewed as different from strategic, operational and financial risk. One could convincingly argue that these organisations and their operational, strategic and financial failures are strongly correlated with their ethical failures, perhaps even caused by them.

The King IV Report on Corporate Governance for South Africa emphasised that it is the responsibility of the governing body (i.e. the board) of any organisation to ensure effective leadership based on an ethical foundation. The King IV report went even further, indicating that corporate governance is the exercise of ethical and effective leadership by the governing body towards the achievement of an ethical culture, good performance, effective control, and legitimacy.

The establisment of an ethical culture is a tall order. King IV emphasises that organisations should not just be legally compliant, but should create an ethical culture that allows the organisation to meet the legitimate expectations of its stakeholders. It speaks to living the values of the organisation, having empathy for stakeholders, and adding to the development of the economy in a responsible and sustainable manner.

In essence,  effective organisations have certain things that  ineffective organisations do not. This could be viewed as ethical maturity or having an ethical culture. Differential analysis of ethical versus unethical organisations have provided a shopping list of things necessary for an ethical culture to thrive (i.e., dimensions of ethical culture). These include:

  • Ethics accountability and responsibility: 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 (senior management) commitment to ethics: The degree to which top management are committed to doing the right thing, understand the importance of ethics for business and sustainability, act as ethical role-models and exercise good governance.
  • Ethics talk: The degree to which an environment is created where 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.

Research indicates that these aspects are crucial for organisations to be sustainable over the long-term. Organisations that emphasise these factors do not suffer from ineffective leadership and are much less likely to be involved in ethical failures or public scandals.

But, the question remains, how are SOEs faring in terms of ensuring an ethical culture? How do they compare to other sectors of the economy in terms of their ethical culture?

The Ethics Institute recently embarked on a profile analysis looking at the data of SOEs,  public sector organisations and private sector organisations to better understand what the current state of ethical culture is within and between these sectors of the South African economy. The Ethical Culture Maturity Indicator (ECMI), a validated and benchmarked survey, was used to evaluate the ethical culture maturity of organisations across these sectors.

Scores range from 0 to 100 with a higher score indicating a more mature ethical culture and a lower score indicating a lack of the ethical culture dimensions mentioned earlier. The overall comparison scores for the three sectors can be viewed in Figure 1.

Figure 1

Comparison of ethical culture across the private sector, SOEs and the public sector

Figure 1.PNG

It can be noted from Figure 1 that the private sector average for an ethical culture is somewhat higher than for public sector organisations and SOEs respectively. A moderate statistical difference was noted between private sector organisations and SOEs and the public sector respectively. Differences between the ethical culture of 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 in South Africa.

These results indicate a dire situation. The structure of SOEs, which are nominally in line with many private sector organisations are meant to ensure more agility and oversight for these organisations essentially freeing them from the problems encountered in the public sector. 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.

Figure 2 displays the results of the differences between private sector organisations, SOEs and public sector organisations on the essential dimensions required for an ethical culture.

Figure 2

Comparison of ethical culture dimensions across private sector, public sector and SOEs

Figure 2.PNG

It can be noted from Figure 2 that SOEs have more in common with public sector organisations than they do with private sector organisations, despite the structural similarities that they have with the private sector. Whilst all differences are statistically significant and indicate moderate differences in effect, the biggest differences between the SOEs and the private sector was for leadership commitment to ethics; ethics talk and ethical treatment of employees.

These results indicate that in comparison to the private sector, SOEs have substantially lower leadership commitment to ethics. Additionally, employees feel less respected, unfairly treated and less open to discuss ethics and the ethical implications of business decisions than in the private sector.

Looking closely at the profile of SOEs it can be noted that they obtained their lowest scores on ethical treatment of employees and on holding employees accountable and responsible for their behaviour and decisions. These results could indicate why SOEs are failing.

If employees are not held accountable for their behaviour and if they feel unfairly treated a low morale environment with possibly condoned unethical practices may prevail. Behavioural research has also demonstrated how counterproductive work behaviour (i.e., antisocial behaviour, theft, disrespecting or misusing organisational time and resources etc.) may prevail in organisations where employees feel mistreated or unfairly treated. Accountability failures are clearly problematic as the organisation does not enforce what correct and productive behaviour is. This may not only result in ethical lapses, but also negatively affect the effectiveness and productivity of the organisation.

Although direct comparisons between SOEs  and the public and private sectors are useful, it is also important to evaluate what the ethical culture within the SOE sector looks like. For example, what are ethically effective SOEs doing differently when compared to their less effective counterparts.The differences between top performing SOEs and bottom performing SOEs regarding ethical culture are inicated in Figure 3.

 

Figure 3.

Ethical culture comparison between top and bottom peforming SOEs

Figure 3.PNG

The biggest differences noted between SOEs with stronger ethical cultures and those with weaker ethical cultures was for ethics awareness followed by leadership commitment to ethics and ethics accountability. Although large differences were encountered between most culture dimensions these were the biggest differences.

This indicates that SOEs with weak ethical cultures do not have a general awareness regarding the importance of ethics for business, have leaders that are not visibly committed to good ethical conduct, and do not hold employees accountable for unethical behaviour. Ethically ineffective SOEs seem to have a flagrant disregard for the importance of ethics.

On the positive side, these ethical culture differences may point to a possible solution for the dire state SOEs find themselves in. Recently, rating agencies and the World Bank called for structural reform of the SOE sector in South Africa. Put simply, SOEs need to change the way they operate and meet their mandates to remain relevant and execute the critical supporting role they play towards the effective functioning of the South African economy.

SOEs can go a long way to reach this goal by ensuring improved and legitimate leadership commitment to ethics, improve ethics awareness amongst employees at every level, treat employees with respect, fairness and dignity, and ensure that employees are held accountable for their behaviour. The recipe is simple, the application will need some work.

Simply privatising SOEs may not necessarily be the answer. In their current state, privatisation may result in failure. SOEs are not well geared to the private sector and are not yet ready for the direct feedback from the markets in which they operate. Due to their insulation from direct market pressures, and their stakeholders, they have not adopted a stakeholder focus (i.e., meeting the legitimate expectations of those dependent on their services).

To simply privatise now could mean that these organisations would be unable to compete and operate effectively. In short, the shock of privatisation may result in the death of these organisations. What is needed before privatisation is considered is the need for good corporate governance and a focus on building ethical cultures. 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. Perhaps once they are off life support (i.e., government bailouts) they will be able to meet their mandates and compete in the private sector. At the heart of getting there is acting ethically and ensuring that ethical cultures are cultivated.

 

Paul circleDr Paul Vorster is a Research Specialist at The Ethics Institute. He holds a doctorate of Industrial Psychology, which he attained from the University of Johannesburg. 

 

Nicole circleNicole Konstantinopoulos is an Intern at The Ethics Institute. She is currently completing her  MCom in Industrial Psychology at the University of Pretoria.