**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 *Corporate Governance in the South African Public Agencies: Implications for Oversight… DOI: http://dx.doi.org/10.5772/intechopen.110391*

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 forwardlooking 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

#### *Corporate Governance in the South African Public Agencies: Implications for Oversight… DOI: http://dx.doi.org/10.5772/intechopen.110391*

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

#### *Corporate Governance in the South African Public Agencies: Implications for Oversight… DOI: http://dx.doi.org/10.5772/intechopen.110391*

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].
