Corporate Governance in the South African Public Agencies: Implications for Oversight and Accountability Mechanisms

Abstract

Government oversight mechanisms are imperative to sustain state-owned enterprises (SOEs) in an emerging economy like South Africa. This chapter explores corporate governance challenges and opportunities and their implications for oversight mechanisms and accountability in the South African SOEs. Corporate governance (CG) can be understood as the principles, rules, and practices in which the organizational systems are governed while also balancing the interests of the organizations and that of stakeholders such as senior managers, executives, customers, stakeholders, and government. CG can be applied as a management tool that serves interests that are neither purely public nor purely private while ensuring their growth and productivity. Governments devote tremendous attention and interest to enterprise risk management since the global economic collapse (ERM). Even though SOEs adopted CG to safeguard their growth path in performance and productivity, they have been observed as yielding negative productivity that is not cushioning the economy in the right direction, while also eliciting gaps in CG and risk management of SOEs. The contents of this chapter include the conceptual and theoretical approaches to CG and challenges in applying CG in an international, African, and local context. This chapter prioritizes the implications of compliance and oversight in the South-African SOEs.

1. Introduction

Corporate governance (CG) is not new in South Africa. Private sector is ahead of public agencies in the application of CG principles despite the absence of a legal prescript that supports it. The South-African government mandates state-owned enterprises (SOEs) to steer the direction of development efforts of its emerging economy while using diverse oversight mechanisms and policies in public agencies [1]. Therefore, the government functions under the assumption that SOEs must direct projects that advance the country’s mixed economy. The advancement of the economy through SOEs productivity is supported by a free market system globally, while the SOEs activities produce bottom-up, with effective results without the involvement of the state [2]. It can be pronounced that the SA mixed economy caters for both the private and public sectors, where the public sector goal is to support the welfare of the society. The global impact of COVID-19 and Omicron spreading affected the economy, and there is a probability that it will have a global impact on the economy in 2023 also.

This chapter argues that the systematic global and local challenges impact the South-African economy. Hence, SOEs are also affected by these challenges, and they are interconnected to socioeconomic and political environmental factors that constantly influence their decision-making. This serves as the foundation for the debate on the effectiveness of social democracy in which the interaction between the market and the state through agencies is apparent. According to Armitage, emerging economies are characterized by market-based transactions influenced by political, economic, and social factors emerging from business-dominated ownership of private investors. This situation is familiar to the South African economy that is expected to provide leverage to growing parastatals owned by the state. State-owned enterprises are emerging as agencies that are managed by a board of directors that have mixed interests. In the post-apartheid era, SOEs are anticipated to persuade economic growth and distribute real public services [3]. This chapter analyzes the application of codes of CG in SOEs, on the principles of Kings Reports, which support the notion of the state, shareholders, executive, and nonexecutive managers, clients, and communities as all guardians of accountability and good governance. This chapter also focuses mainly on the challenges in the application of corporate governance by the SOEs in South Africa.

This chapter adopted a qualitative research methodology for collecting and analyzing data. Data are mainly drawn from books, scholarly accredited journal articles, reports, policies, and legislation on CG. Despite the market’s current state of development and the proper alignment of the market and the state, state-owned and publicly run businesses are a working illustration of how the government uses business principles like efficiency to offer public goods and services. The SOE in South Africa are in the spotlight of public scrutiny due to their staggering performance, especially in the energy and transport sector. The SOE’s outlook is coupled with inconsistencies to achieve their mandates and goals that require them to balance their costs of operations with the production to provide services to their clients.

1.1 Research methodology and procedures

A qualitative document analysis was adopted. Qualitative research suits this chapter since it is based on the performance of SOEs as organizations with structures formed by policies and people who are observed and reported to perform in real-life situations. Brynard et al. ([4]:82) assert that the richness of document analysis lies in its nature of allowing the creation of themes from the transcribed filtered notes recorded from the documents being analyzed. This chapter adopted themes from current policy reports and articles on SOEs.

Literature was surveyed from other international and local cases that have applied CG in state entities and parastatals. Secondary data were drawn from various books, articles from accredited journals, commissioned studies reports, and government policies. The King I, II, III, and IV Reports and the OECD Network [5] Reports on CG were also sourced to understand CG. Data were first organized and filtered to exclude all the irrelevant topics. Content and discourse analyses enabled the researcher to produce themes on the gaps in the application of CG. There is an advantage of using document analysis that adds value to this study because it evaluates physical and electronic documents to interpret them. Therefore, it improves the understanding of the content and context of information generated from secondary data and delivers them. Some of the significant steps in the document analysis of this study included the following:

This study followed a procedure that is tabulated in Table 1, with steps sourced from the analysis of documents and policies about the performance of SOEs in post-apartheid South Africa. Policy analysis was built by Taylor [7], has subsequently built over a systematic theoretical framework, and elaborates on the content and context of the literature which must be analyzed and organized into themes that relate to facts about the policy implications. Government policies and reports on policy outcomes provide information about the outcomes of policy implementation and the application of CG. Users of information must share and disseminate information on CG with credibility. Scholars in the field of management studies and others interrogated the literature and provided in-depth analysis to be learned by other scholars and users of information worldwide. It has also been noticed that information has also been questioned and validated to allow scholars to analyze information from various standpoints to allow future research.

1. List of resources.	During the research planning, various sources were identified. Sources were identified based on the following reasons: 1. Medium – documents were sources including magazines, newspapers, and government bulletins.; 2. Genre – genre was observed as based on politics, social issues, and political agendas.; 3. Including criteria – such as news websites and section comments on local papers.; 4. Parameters – parameters that indicate the date, location, demarcation of eras on administration, and range.
2. Organizing information	The researcher established two components for organizing as a set of categories and units of meaning: Sets of categories are features of the material and a unit of meaning refers to aspects you are targeting to use in your texts, such as images, phrases, and words.; The researcher decided to include conceptual categories such as board ethical governance, board of directors, agency, accountability, and some category of objectives identified in the literature review.
3. Note important facts	Information was highlighted and annotated while avoiding tampering with the unique documents. Copies were filed by the researcher for future research once the study was done.
4. Ensuring authenticity	It is important to guide against biases and identify reliable sources used to aid this research; so the author observed trustworthiness before utilizing their information [4].; The researcher listed and cited copyright information, for instance, where sources are frequently provided in the documentation of authoritative sources. By validating elements like the following, one was sure a document is trustworthy: Credibility; Dependability; Conformability; Transferability; Authenticity
5. Check biases	Biases imply that there was less creativity on the side of the author/researcher. It is important to use relevant information that is not distorted and inaccurate.; In this chapter, people’s opinions were cited to avoid plagiarism.; Even though it can be difficult to analyze data in document analysis, the author of this chapter avoided biasedness, plagiarism, and cultural bias.
6. Ask questions	Asking questions to learn more about the history of the document and how the resources might aid your study will help you undertake document analysis effectively.; When evaluating material to acquire crucial details, researchers frequently ask the who, what, when, where, and why questions.
7. Evaluate and analyze	When all the above steps were done, there was a framework for approaching document analysis. Data were interpreted to produce findings that are used and discussed in this chapter.

Table 1.

Document analysis trajectory.

Source: Adopted from Bowen [6].

1.2 Oversight roles of executive institutions

The term “oversight” refers to the informal and formal, strategic, vigilant, and organized examination and monitoring used by legislators to examine compliance to laws and accountability, budget requirements, and how strictly legal prescripts and the 1996 Constitution of the Republic of South Africa are followed. Legislative bodies are required by oversight to monitor the daily exercise of power by the national, provincial, and local executive branches. As part of the oversight, there is monitoring done of onsite inspections, ad hoc parliamentary and legislative inquiries, review and approval of municipal and government spending, the establishment of standing committees that cover a range of policy areas and are independent of the executive. The requirement that ministers regularly provide Parliament with information, such as annual departmental reports, and the provision of a question period for lawmakers during official proceedings are typical oversight mechanisms and techniques.

When it comes to SOEs, portfolio committees and executive institutions played a prominent role in the oversight of SOEs. Concerning the South African government, the oversight role is constitutionally arranged, among the three spheres of government. At the national level, the oversight is divided among the three powerhouses of the legislature, executive, and judicial houses.

1.3 Corporate governance conceptualization and application

The concept of “corporate governance” has been framed as the act of how organizations direct and oversee their activities. CG is applied through systems of governance with various stakeholders and members of the board with diverse interests. Various activities include the functioning of the board, the council’s arrangements for effective leadership, stewardship, auditing, administration, accounting, and performance to deliver services to clients while complying with policies and procedures. Executives’ and nonexecutive members’ responsibilities are specified with well-rounded values and cultures supporting the systems. Globalization has influenced the way corporates rule in the world through international standards, by macrolevel, to support the allocation of the nation’s savings to its most productive use. Some investments and savings are expected to be achieved and be able to fund business activities, whether through equity or debt and returns that will eventually regulate national prosperity.

Lessons can be learned from the recent US experience with Enron, WorldCom, and other failures which reminds us of systemic implications for strategic investment that may leak if sustainability is not accomplished, and business failures are adequately inescapable. Emerging economies like South Africa have a problem integrating government with business interests. The SOEs agencies and parastatals have applied CG with some reservations since there are disparities in handling business from a public and a private point of view; hence, at some point, public and private partnerships and contracts emerged.

In Table 2, key principles of corporate governance are highlighted. In 1994, King 1 Report was established and a few principles of CG. Later, there was a new version of the second and third reports that developed and refined the principles from the first one to the fourth report [9]. The fourth report summarized all the principles with additional ones that include more stakeholder involvement in IT governance and disclosure. The application of these principles in the governance of the SOEs implies the diverse representation of shareholders and interests from the public and private sectors. The interesting part is that there is an inclusion of ethics and other good governance principles, especially from King III to King IV. In the South African context, the inclusion of the New Public Management Principles (NPM) was made clear during the transformation of the public service and recognized the involvement of the private entities in service delivery through public and private partnerships and contrast.

King 1	King II	King III	King IV
1. Board of directors – make up an appointment	Directors and their responsibilities	Incorporation of global trends	Recognition of committees for audit, risk, remuneration, social, and ethics
2. Determinants and disclosure of executives and nonexecutives	Accounting and auditing	Shareholders’ approval of nonexecutive directors’ remuneration	Effective control – mandatory rotation on audits
3. Board meeting frequency	Board meetings and ad-hoc meetings	Evaluation of the board of directors performance	Good performance-broader performance measurement is required
4. Balanced annual reporting	Integrated sustainable reporting	Integrated reporting	Transparent and meaningful reporting to stakeholders
5. Requirement for effective auditing	Internal audit	Risk-based internal audit	Internal audit
6. Risk management	Risk management	Risk management	Risk management, compliance, and assurance
7. Affirmative action programmes			Diversity management, balanced governance composition.; Fair remuneration; across the board.
8. Companies code of ethics			Ethical leadership and culture
9.		Alternative dispute resolution	Corporate responsibility
10.		IT governance	Technology and information
11.		Business rescue	Sustainable; governance
12.		Fundamentals during mergers requisition
13.		Global reporting on OECD guidelines on multinational companies.	Good governance
14.		Shareholders compliance	Legitimacy and shareholders’ compliance
15.		UN global compact and responsible investment.
16.		OECD guidelines, and the UK Companies Act of 2006.

Table 2.

King reports on the principles of CG.

Source: Robinson et al. [8].

1.4 Agency theory and corporate responsibility

The agency theory is fit to be aligned with CG as it is adopted to understand the relationship between the agency and the principal. In addition, the SOEs internationally and locally have adopted CG, with implications for the agency–principal relationship. Agency theory can be adopted in this study to understand the relationship between the principal and the agency. The focus of agency work in a business is how the agents protect the principal’s best interests, without considering their own. The introduction of the new public management (NPM) in the South African public service implied that the government introduced new alternative ways of improving service delivery.

With the introduction of the NPM in South Africa, the government portrayed a new look at their marriage of convenience with the private sector and nongovernmental organizations. The government introduced new alternatives to improve service delivery such as public and private partnerships, management contracts, and leasing. All these new strategies were practised by integrating private interests with public interests. As absorbed by them, there was a thin line to differentiate the differences between public good and bottom-up since there was growing competition and rivalry among the SOEs and the nongovernment organizations. There was a growing conflict of interests and corruption in SOEs and resulting in nonallegiance toward the principal’s best interests. Miscommunication and disagreement raised a variety of issues and strife inside government businesses.

The other interesting issue that emerges from the agency and principal relationship is that of patronage tendencies. Patronage is understood as the act of giving power to the agencies to make official bureaucratic appointments. Hollibaugh [10] notes patronage tendencies that emerge when public officials recognize certain traits such as loyalty and merits. Patronage appointees – often defined as those chosen for their campaign experience, electoral benefit, or other nonpolicy political benefits – tend to be assigned to low-priority organizations whose goals align with the president’s and to positions where their influence on agency outcomes will be minimal. A case in point is the investigation of the office of the public protector revealed malicious and corrupt tendencies between the state and the few businesses that were given contracts consistently by public officials to render government work [11].

1.5 The strategic roles of SOEs in South Africa

The emergence of CG in South Africa proceeded after the infusion of the NPM principles in the South African Public Service as part of the transformation agenda. The NPM welcomed the involvement of nongovernmental and private entities to partner with the government as service providers to improve the performance of parastatals and government departments. Therefore, the public and private sectors had to find ways to work together for convenience while having diverse interests. CG emerged as a convenient approach used by both private and public organizations to manage the operations of SOEs in Southern Africa. Public organizations have implemented and climatized King’s corporate governance model in the absence of a law guiding them on how to operate in South Africa.

Global and national forces, such as the technical development of international markets, increased the size and complexity of businesses, compelled them to work together more frequently, and increased the amount of capital they needed to survive and contribute to the national economy. According to Balbuena [12], most of the governments in Southern Africa have taken a similar path in the development of SOEs by privatizing some of their shares to develop their economies. In most countries like South Africa and Botswana, governments have also bailed these entities financially during their economic downswing. It is, therefore, not easy to find sustainable growth in SOEs.

To accelerate development and transformation, the government had to implement measures like privatization, which involved asking the private sector to develop the South African economy and create job opportunities. The agency theory and privatization theory are used as avenues for investment and collaboration in projects for global development and transformation.

Privatization is the process whereby the entity sells some of its stake or shares to private organizations or people who own a business. Privatization has been associated with the market economy where the bottom line and profit-making are the keys to success in boosting the economy. However, in a mixed economy like South Africa, privatization is favored by the private sector, and the public sector is aligned with the state interest of serving the general welfare. With growing globalization in the fourth Industrial Revolution (4IR), SOEs are created to support the economy by producing goods and services, and job creation. It should be noted that some stakeholders like workers’ unions and other political parties contested the privatization of some of SOE, especially in the transport and energy sectors. Privatization is blamed for increased costs of production and prices of services delivered by SOEs to their clients [12]. However, it should be highlighted that SOEs are required to focus their efforts on providing goods and services to their clients and consumers, as well as saving costs and increasing profits. This chapter can classify three types of public entities listed and endorsed by Public Finance Management. The first is composed of Schedule 1 entities which include constitutional institutions such as the Independent Electoral Commission and Public Protector among others. Schedule 2 entities are comprised of Major Public Entities with greater autonomy than Schedule 3 entities. Schedule 2 entities are listed below. The subdivision of Schedule 3 entities is as follows:

• National Public Entities – its purpose is specialized agencies or not-for-profit organization functions such as the Companies and Intellectual Property Commission, the Human Sciences Research Council, and the Road Accident Fund;

• National Government Business Enterprises – these enterprises function as profit-seeking businesses such as the Council for Scientific and Industrial Research, Passenger Rail Agency of South Africa and Rand Water;

• Provincial Public Entities – these selected entities can be found in selected provinces, and they include Gautrain Management Agency and numerous provincial gambling and liquor boards.

• Provincial Government Business Enterprises – they are profit-seeking businesses controlled by the provincial government and include the Richards Bay Industrial Development Zone and the East London Industrial Development Zone.

Governments around the world have long created SOEs with several public policy objectives in mind, constructing fundamental physical infrastructure; offering necessary services such as finance, water, and energy; producing essential goods and services, resource management, market failures addressed; and other benefits for the broader society. According to Sarika [13], the SOE’s existence has long been directed toward the developmental state agenda to boost the economic needs of the society by pursuing job creation and production of essential services and operations, especially in the energy and transport sectors. The agenda for development and acknowledgment of human rights motivated the government to drive SOEs toward the right path aligned to the projects and infrastructure on roads and transport toward the fulfillment of the dream for sustainable economic prosperity and economic liberation in Africa, SADC, BRICS, and SA. Therefore, the government’s role in balancing political, economic, and social sectors from the 1970s and 1980s from a variety of nations suggests an average low growth is yielded in Southern Africa. This suggests that the SOE’s challenges are crippling diverse projects that could improve the Southern economic development and investments. In addition, it is not a train smash to balance the government’s political will and the economic goals of these SOEs and private firms for their economic prosperity.

2. Challenges of CG practices and policies

2.1 The international experience

Globally, organizations are currently operating in the environment of global financial sustainability, ecological overshoot, the climate change problem, and catastrophe that speak for themselves, for ethical governance requirements, and for compliance [14]. These aspects have been used correctly and incorrectly by various private and public institutions, individuals, businesses, governments, and other institutions. The planet’s natural resources quicker than nature can replenish them, and also can be innovative and increase stakeholder expectations, open evolution, and population expansion. For the past 150 years, businesses have operated using yesterday’s economic model based on two incorrect assumptions [14]. It has been assumed that in the first place, nature had endless resources, while resources are depleting, and signs are showing that human nature is a source of problematic arrangements of governance. Resource management is a challenge especially since land, water, air, coal, oil, and timber are all limited. All these resources are exploited by leaders and managers in various organizations; hence, the operation of the SOEs depends on these resources. CG as a model with required skills is suitable for running a business that accommodates both private and public entities with new demands for sustainability and ethical governance. Atinyo and Kawor [15] assessed the relationship between Corporate Governance and Financial Crisis in Ghana and attest that the major causes of the financial crisis can be linked to the failure of members of boards and management to comply with stringent CG principles and failure to identify and manage risk in various entities. The speculation on the causal link between financial bankruptcies and crises to failure to comply with CG in some entities persists throughout the world (Ong, & Djajadikerta [16]. The loosely arranged structures of governance with less-competent members of the boards that make decisions can degrade CG. As a result, the current economic systems in many countries can only work when they are a hybrid to sustain development and cushion the SOEs. By 2050, the United Nations projected that there will be an additional two billion people on the earth that will need resources. Many countries already have issues with food security and a shortage of fresh water. Given all these factors, it is obvious that no business can be done without challenges on how resources can be used or distributed, especially financial and human resources. In most countries globally, corporate entities provide support to fight the global crisis of economic meltdown due to COVID-19D 19 and other disasters. Parastatals and the SOEs have been at the forefront to support the development and economic growth in most countries. The main challenge in the operation of these entities is noncompliance and lack of accountability [17].

2.2 African experiences

In many African nations, SOEs are regarded as significant economic sectors and play a significant role in the advancement of the country through job creation, production, and service delivery. This is illustrated through access to essential services including water, energy, health, sanitation, telecommunications, and transportation and is made possible by SOEs. Small- and medium-sized businesses, which make up the majority of the private sector-led economy, rely largely on the infrastructure and services that these businesses offer to maintain their competitive position. On a regional scale, SOEs are major actors in significant cross-border infrastructure projects, which are essential to attaining what is thought to be a primary development aim and realizing regional integration aspirations. Because of their lucrative role, the public interest is mixed with business interest, and it is a bone of contention since it is a source of corruption to those managing these entities.

Besides sustainable governance, companies are acclimatizing themselves to CG by following new arrangements to manage enterprises and companies through the board of directors and a culture of principles and the interests of shareholders. Amartey et al. [18] assessed CG in Ghana and assert that there is a need for a rotation of auditing firms that assessed the application of compliance of CG in Ghana companies. Agyei-Mensah [19] also assessed CG in Ghana and argue that the absence of enforcement tools hurts the application of CG in Ghana, even though there is internal control information disclosure.

The idea of corporate citizenship is becoming more and more popular. Gurumoorthi [20] alluded to the experience and arrangement of CG in Botswana and assets that for every Botswana citizen, the government is obliged to act properly through agencies and keep others, neighbors, safe. Thus, it is anticipated that the legal entity, the corporation, operates in this capacity and honors corporate citizens. The global standard for reporting is evolving toward integrated trends on a global scale and is impacting African firms’ and organizations’ practices of CG (Botswana Accountancy Oversight Authority [21].

Companies must submit clear and intelligible financial reports expressing the effects of their efforts, both good and negative, socially, environmentally, and financially that affected a community. It entails a picture of the company’s performance that is comprehensive and integrated in terms of both its sustainability and financial standing. Magang and Magang [22] contend that despite Botswana’s low levels of compliance with international best practices, the researchers have concluded that Botswana Unified Revenue Service’s (BURS’s) departure from these practices has the potential to result in among other things, incompetence, corruption, bad administration, dominance, cronyism, and, in the end, a weak institution. Botswana has been excluded from international practice. Agyemang is of the view that countries’ SOEs are geared toward investments depending on their capabilities.

According to CG practices, the capability of an organization can drive corporate practices and succeed in attracting capital providers based on its strength and resources. Mostly, companies and agencies can achieve great success if they can also induce capital providers to invest in businesses that can yield economic growth and benefit from their social responsibility strategy. Some of the countries like Zimbabwe have not succeeded in generating proper investment from SOEs due to their weak corporate governance that can safeguard the country’s interests [23].

Josiah et al. [24] assessed the compliance of CG in Botswana and found that Botswana has not fully complied with international best practices. The case of Bostwana is not unique since they are also exposed to the mismanagement of funds, as a result, CG in the SOEs cannot safeguard their investment. The main problem is centered around the mismanagement of finances. Agyei-Mensah [19] asserts that in Botswana, the relationship between corporate governance, corruption, and forward-looking information disclosure are not stable as a result there are unstable financial governance responsibilities of the board of directors to maintain good auditing and management of financial affairs.

2.3 South African challenges

2.3.1 Understanding and compliance with regulatory measures

The South African experience is interesting since the economy has inherited the apartheid legacy of a racial society with many inequalities and a dual society where you find income disparities. The economy is strongly supported by both the public and private sectors. Even though there are no direct policies to regulate SOEs, the King I–IV Reports have been used to apply CG by private firms and the SOEs in South Africa with little success in understanding the regulatory measures as policies and the principles of corporate governance specified by the Kings Reports. The SOEs in South Africa play a strategic role to contribute to the economy, especially during the post-apartheid period when the government of national unity restructured SOEs to perform relatively better than in the past. Evidence from the 1970s, 1980s, and to the present, several SOEs in SA performed unwell relative to private firms due to the demands and standards set to them, and the environment in which they operate.

According to Thabane and Snyman-Van Deventer [25], the government of national unity in 2014 inherited some of the underperforming SOEs, hence, the resolution to improve their status was to privatize them. These institutions, especially the energy sector, are struggling to meet the demands of multiple policy goals and the business objectives needed to reconcile. According to Kikeri [26], SOEs often incurred substantial financial losses and became an unsustainable burden on the national budget and banking system. A case in point is the failure of electricity supply by Eskom, SABC mismanagement, SAA’s instability to maintain air routes, SANRAL failure to collect revenue to sustain the E-Toll roads project, TRANSNET’s failure to sustain the railroads, and others. There is a loss of revenue on the side of these entities due to these bad practices, and all these acts reduced business confidence and downgraded the South African economic outlook.

The Presidential Commission was tasked to investigate the performance of the SOEs in 2014. According to the Presidential Review Commission Report [27], the nonsupport and compliance of the government policies in support of SOEs slow down the successful application of CG in the SOEs. The overarching responsibilities of the board of directors and the financial disclosure were the main hiccup in the application of CG. The private sector, performed well as compared to public agencies and parastatals in the application of CG while there is limited potential for expansion of the private sector [27]. These predicaments faded the mandate of the energy sector to improve performance by exposing SOEs to competition, daunting budget allocations, and mismanagement of funds with staggering managerial changes. Padayachee [28] alluded to the absence of strong CG measures before 1994 and asserts that the arrival of the King IV Report on CG progressed toward a capable and valuable tool toward strong CG. The current involvement of the SOE’s mismanagement of funds is revealed through the Public Protector Report [29] and Venter ([30], pp. 1–4) of the State Capture probe. These reports conveyed serious allegations of noncompliance to legal requirements like the PFMA and CG principles by the senior managers. A case in point is the continuous blackouts due to shortages of electricity supply by Eskom, and a weak administrative supply chain in government departments where these SOEs are managed.

2.3.2 Economic growth and transformation

The government’s neoliberal policies impacted the SOE’s performance, especially the New Growth Path (NGP), which was earmarked to create five million additional jobs by 2020. Other policies such as the National Development Plan (NDP), the Medium-Term Strategic Framework (MTSF), and the Industrial Policy Action Plan also focus on the role of SOEs as main suppliers to infrastructure development and economic restructuring, when the Nine-Point Plan, which focuses on the government priorities, includes tackling the electricity contest and backup of improvements in SOEs. Overall, the government’s goal to guarantee the SOE’s contributions toward the broader developmental goals and transformation was tested. The application of CG reveals weak systems of these SOEs, especially on the board performance on issues of financial disclosure and accountability to support the transformation and competitiveness of the economy.

Several SOEs in SA are managed through CG since they are commercialized and separate legal entities in the early 1980s after the integration of homeland parastatals into South African SOEs. In the efforts to advance a developmental state, performance contracts were developed to monitor SOEs’ performance and hold managers accountable for results while some of the managers had limited experience and qualifications to manage [31]. The improvements in the SOEs fall short of expected targets in the current decade; hence, some of them from the energy and transport sector applied for financial bailouts. According to Kikeri [26], SOEs board of directors failed these entities, the early reforms were not all successful, and their implementation fell short while the senior managers were paid luxury salaries to fund their expensive life.

Even though the government bailed out some of the SOEs, some are still bankrupt, especially the energy sector. According to the IMF [32], the SOEs from the energy and transport sector are in the spotlight in South Africa due to their inconsistent performance in a staggering economy. Some of those SOEs from the utility sector include the electricity (Eskom) and water enterprises (i.e., the water boards and the Transcaledon Tunnel Authority (TCTA), a related water infrastructure company). The transport sector comprises mainly commercial railways, infrastructure on ports and pipelines (Transnet), airlines (SAA and SAX) and the related airport, air traffic and navigation companies (ACSA, ATNS), and passenger railway transportation (PRASA). Several Auditor’s General’s Reports (2019/2020) indicate mismanagement of funds and a decrease in investment ensuring the maintenance of some of these entities, while there are less or no benefits to the South African economy. According to Matsiliza [33], the mismanagement of funds by the SOEs led to financial bankruptcy in some of the SOEs. As a result, the government bailed out some entities, especially in the energy sector like Eskom.

2.3.3 Oversight and accountability

The SOEs are governed by some pieces of legislation created by the government such as the enabling legislation (EL), the Companies Act (CA), and the Public Finance Management Act (PFMA). Application of the EL differs across SOEs. EL can uphold the sort of SOE objectives and requirements on governance, oversight, reporting, and accountability. The CA determines the CG that can be applied to SOEs and private sector firms. The PFMA classifies the oversight responsibility for SOEs’ shareholder compacts, corporate plans, and reporting requirements. The board members and the chief financial officers’ responsibilities are classified in the PFMA. Also, the Cabinet adopted a protocol of CG which is a nonlegislated code of conduct to govern SOEs. There are diverse tools used to apply CG from various documents such as Kind 1–5 Reports, which define the relationship and balance between the government, SOEs, and stakeholders while pursuing the independence of SOEs from the executive in their day-to-day operations. According to the Zondo Commission Report on State Capture [11], there has been noncompliance and limited oversight of SOE for a long time.

The premier is a powerful representative and head of the province who has a legal right to monitor the financial viability of the SOEs/public entities at the provincial level and carries duties mandated by the Constitution [34]. The overseeing department at the provincial level will be responsible for the operation of the entity based on the directed services that are cut across various government departments. For instance, the South African National Road Agency (SANRAL) is a public agency that is responsible for the maintenance of road infrastructure in South Africa. It is monitored by the department of transport which has offices in all noni Provinces’ route networks.

Legislative oversight through the parliament is complex in a bi-camera system that has two legislative chambers where the ruling party dominates in these chambers because it sets a motion that can always be accepted by the majority from the ruling party. The dominance of the ruling party on parliamentary oversight influences decision-making in parliament [35]. There is more influence on decision-making, especially on the functioning of parliamentary committees that are scheduled to investigate oversight and accountability matters of executive institutions and the SOEs. The separation of powers in South Africa should augment the role of the executive institutions in the monitoring of policy implementation in South Africa’s public agencies. Even though the powers are separated between the legislative, executive, and judicial houses, they still work interdependently to enhance oversight and accountability. When there is a transgression of law by executives, the parliament can investigate the matter through parliamentary committees and submit recommendations to the president. Other institutions that assist in the oversight investigations in South Africa include the commissions appointed by the president, the National Prosecution Authority (NPA), and others. The oversight of Chapter 9 institutions and the SOEs are not a straight-train smash. Parties involved in the governance of these institutions have diverse interests in the governance of these enterprises. The provincial oversight is most centered around the premier house and the ministerial executing councils.

Parliament’s Standing Committee on Public Accounts (SCOPA) is responsible for reviewing the SOE’s annual financial statements and audit reports from the Auditor General. Each SOE sector accounts to separate portfolio committees that are charged to exercise oversight over corporate plans and targets of each SOEs service delivery performance. Each minister is responsible for ensuring policy alignment between SOEs and public departments to ensure proper corporate governance and to monitor policy implementation, respectively. The National Treasury and the Financial Ministry are answerable for financial oversight, especially on budget and spending to keep up with the national credit rating. The SOE boards of directors have full responsibility for the sustainability of these institutions by maintaining a balance between spending and performance to maintain a strategic direction for SOEs’ performance. According to the IMF [32], SOEs in South Africa could have yielded better profits and outcomes if boards of directors, executive, and nonexecutive directors were skilled enough to manage risk and ensure that their key performance indicators are achieved timeously.

The involvement of politics deployed in the governance of SOE boards did not yield good results in investigating the corruption and mismanagement of SOEs. As reported by the Judicial Commission into the State Capture [11], the role of the ruling party is to safeguard the national interest in all its involvement in the parliamentary committees. It is alleged that some of the members presiding on these parliamentary committees overstepped their roles through a series of connections and relationships with the agency’s stakeholders and service providers who ultimately influenced decision-making in the appointments of executive officials that manages the SOEs [31].

The involvement of agencies to make decisions on behalf of the state complicated exercise of autonomy in commercial decision-making. There is an existence of social responsibility adds value to the corporate governance of the SOEs but there was a thin line in the separation of commercial and social objectives. The State Capture Commission Report [11] also noted the requirements for the party’s disclosure of assets and donations through their treasury General and their subcommittees on finance should be there to avoid the conflict of interest when the members have to account in parliament. This also settles the public service obligations by the members of the executive when transferring resources to the SOEs. While financial discipline and ethical leadership are required as ingredients in achieving good governance, greater autonomy for SOEs is reciprocal to having performance contracts, auditing, and good accountability mechanisms. A bad rating on the economic performance in South Africa could not support the transformation and reforms of SOEs. Continued economic degrading by other companies, like S&T and Moody, impacted negatively on the credit rating also of SOEs and the future economic outlook.

2.3.4 Leadership and governance of SOEs

The SOEs are governed mostly through Kings Reports (1–5), while there is no specific legislation that governs them and that imposed risk for the SOEs to efficiently achieve their goals through CG. Various acts regulate these enterprises such as the Companies Act, and the Public Financial Management Act. The rest of the inefficiencies and financial losses may result from conflicting interests that are wedged between all parties involved. Consequently, the principal–agent issue arises. Promoting privatization and agency theories is appropriate for this chapter to provide theoretical lenses and scholarly perspectives that could advance the debate on the pros and cons of corporate governance in South Africa’s emerging economy and the broader society. Since private interests were already protected through foreign investment and the private sector, the establishment of a mixed economy in South Africa was not unexpected.

Ethical leadership seems to be a challenge, where there are business transactions with less or no accountability for the acts of the executives and senior managers in these entities. The contestations on privatization signaled fear from the society about the negative effects of privatization. The costs of privatization had long-term effects on the increased infrastructure and tariffs, losses of jobs due to restructuring and downsizing, and rising foreign ownerships since the selling of shares was open to global buyers. Kikeri and Nellis [36] and Nellis [37] argue that there was no proper planning for the privatization of SOEs. The process was neither favorable to the government nor to other shareholders, hence, the process ended up with scandals and mismanagement of resources when the institutional frameworks were lacking [38]. However, the whole process ended up questioning the role of the state.

2.4 Policy implications

It surfaced earlier that the understanding of CG is moderate; therefore, government officials and nonexecutive managers need continuous training and capacity building to allow change and development in the SOEs. The government must formulate legislation/policy that will directly regulate the SOEs without excluding the corporate governance principles that are already in place. Most SOEs are also regulated by diverse legal principles and policies such as the Public Financial Management (1994), Company Act (2008), and others. These policies enable oversight and accountability of executives in these entities. Other countries can also learn from the South African case, especially on how the gaps can be addressed. The policy implications are diverse, although it seems that CG is an effective tool for managing private companies, it is complex to manage state-owned enterprises with CG to improve investments in the other due to political interference.

The measuring and evaluation of the performance of SOEs in South Africa need to be examined. As it has also been daunted by the political forces since most of the committee members and board members have political allegiance to the ruling party, they find it difficult to report early financial entanglements and misuse of public resources that hurt the country’s investment [39]. Investigating on the integrity of institutions and the Judicial Commissions, they should ask themselves questions on whether they need to adopt Corporate Government in these entities the same way as they are applied in private companies. Another important policy implication is on finding qualified and skilled managers that will also understand policy directives and be able to assist the government in formulating tools that will be directed at measuring performance and monitoring the SOEs. The Zondo Judicial Commission [40] found discrepancies in the management of SOEs, where the executives were involved in service delivery contracts for personal gains [40].

3. Conclusion

CG has been adopted to steer the SOEs on the right path from the early days of democracy in South Africa. This chapter demonstrated that parastatals/SOEs experienced unstable growth and development due to the impact of socioeconomic and political influence in government decisions to sustain these entities.

Among these factors, political oppositions contested the privatization of SOEs, especially in the energy and infrastructure sectors. SOEs have been exposed to loss of scrutiny since the government is the majority controlling shareholder.

Corruption and maladministration in SOEs demonstrate self-sabotage of the South African democracy. The allegations on Zondo Judicial Commission imply a weak supply chain system, and the absence of a direct legislation or policy to direct/guide and monitor the performance of SOE instead of relying on corporate governance only.

The global financial crisis and the COVID-19 epidemic affected the operation of public sector entities and added to their problems with the nondelivery of services to clients. The current challenge of SOEs emerged from their act of noncompliance of the shareholders and their executives to corporate governance principles. This chapter demonstrated the challenges of CG in the South African SOEs with special reference to accountability and oversight mechanisms.

3.1 Recommendations

Even though SOEs are not perfect in the application compliance and accountability mechanisms, these elements pressured governments all over the world to turn their attention back to enhancing SOE performance. Despite widespread privatization, SOEs’ Function and Value Governments still own and run national commercial companies in crucial industries including finance, infrastructure, manufacturing, energy, and natural resources. State-owned industries have persisted and even grown in many low- and middle-income nations, significant emerging market economies, and high-income nations. A considerable number of SOEs are currently among the biggest investors, businesses, and participants in the capital markets worldwide. SOEs in vital industries are increasingly seen as instruments for faster development and international expansion in many nations. South African government must learn lessons from the progressive global SOEs and improve their performance.

Lessons can also be learned from other African and global SOEs on the employment of competent and specialized managers in risk, accounting, and other operations. The government in its new path of renewal must provide continuous training to the managers, executives, and nonexecutives charged to manage the SOEs.

They must match and place employees well in the suitable positions. It is also imperative for government to introduce a merit-based cadre deployment of encumberments to improve their skills and performance.

Integrity institutions and the justice system need to upscale their capacity and pace of correcting the wrongdoings as findings of the investigation on the alleged corruption and mismanagement of funds in the SOEs, by strengthening the prosecution and instilling ethical culture and compliance measurements in the SOEs.

External forces such as political interference impact the business of SOEs and can only be minimized when risk assessment is prioritized. The SOEs must hire qualified and skilled risk managers to assess and manage risk and compliance at all phases of major projects such as infrastructure, roads, and energy. Evidence on the mistakes of limited oversight and risk management can provide lessons from the energy side by Eskom risk managers who failed to estimate future shortages of energy and power supply of electricity in South Africa.