Executives and legislators are once again going after the right problem with the wrong solutions. Instead of curing the investor “confidence gap” in corporate reporting, the current focus on ethics and legislation is like putting a band-aid on your arm when your leg is hemorrhaging. It’s time to clear up some misconceptions.

(1) It’s not about ethics. “Business ethics” training has been around since the beginning of commerce. In fact, BCS founder Bob Stuckey is one of thousands of graduates of a popular executive ethics program who are reluctant to even list it on a resume’. Why? It was conducted by Arthur Andersen.

Executives don’t need to be taught not to lie about what they’re doing. They learned that in kindergarten. Thinking you can turn shady employees into upright moralists with some ethics course is lunacy.

(2) It’s not about regulation. The Sarbanes-Oxley Act of 2002 (Corporate Reform Act) doesn’t prevent anything. It simply establishes potential after-the-fact punishment along with a couple of governance restrictions. There is nothing in the Act that indicates how organizations should make certain their reporting is accurate. It’s like a coach teaching athletes how to win the Olympics by admonishing them to run faster. “Report better!” insists the Act, leaving the how up to the company.

(3) It’s not about reporting accurately. While there may have been 50 or so major scandals, the remaining top 1,000 companies are generally honest in their statements. You can totally mismanage your company, but as long as you report your terrible results accurately, you are in ethical and legal compliance.

(4) It’s not about financial control. The classic financial control techniques were founded in the era of Scrooge & Marley, but are now inadequate in the age of empowerment, restructuring, outsourcing, and the Internet.

So what’s the real issue? Our research found that the most important concern for investors should be corporate waste and inefficiency. You can pick up any edition of the Journal and find a number of articles where companies needlessly lost revenue and incurred unnecessary costs.

For example, Ford Motor took a $1 billion raw materials write-off (and lost nearly a quarter of its market capitalization) because R&D wasn’t talking to purchasing. The U.S. government wasted millions due to government employees purchasing— among other things—lap dances! Having to honor incorrect online air fares, paying more than retail for statewide PC database software, fines for incorrect utility charges … the list of blunders is endless. These are affecting investors far more than the lurid reporting scandals.

What organizations need today are effective business controls! This is a level above traditional financial or process controls, and covers the organization from boardroom to front-line.

There are standard early warning signs of control problems. We have identified six “out-of-control incubators” that provide the business equivalent of warmth, moisture, and nutrients for small control issues to grow into big problems. Two are ever-present: silo organizational structures and new IT systems. Four are event-driven: downsizing, outsourcing, restructuring/reorganization, and merger/acquisition/divestiture. When these are occurring, control problems are sure to be present.

So what can companies and institutions do about it? The initial step is to recognize that “business control” is a new organization-wide core competency. It is now legally mandated, right up there with sexual harassment and safety, and is going to take a comprehensive change in processes to accomplish. Then there are required “best practice” activities at several levels:

Public positioning … New legislation ensures that business control is not the fad du jour. Commitment starts at the top. Companies must take a public stand on their approach to business control. This means publicizing any initiatives and including business control content in all positioning statements and communications.

Board-level … The Corporate Reform Act recommends a few board-level changes, but doesn’t go far enough. Boards now require different levels of organization, expertise, and information to do their job correctly. This includes having greater skills, taking a more active role, and getting more information directly from company sources.

Performance management … “Business control” must make its way into the organization’s policy manual, competency models, job descriptions, performance plans, appraisals, and compensation systems.

Skills development … Business control is now a mandatory competency for supervisors on up. A certification process is required to ensure that everyone in the organization understands control and has the skills to achieve it. And many front-line professionals, such as IT systems developers, will need specialized training on designing controls in.

Operations … Some companies are already setting up a dedicated, cross-functional business controls team. This is a high-impact group that should be populated with rising stars. The team becomes a central point for communicating successes and learning from mistakes. Business controls concepts also have to be integrated into project management and decision templates, and process design tools.

Don’t think that you can knock these off one-by-one. An effective business control system cannot be piecemealed. Just as a chain is only as strong as its weakest link, the same holds true for an effective business control system. In addition, business control is a forever endeavor. Controls cannot remain static in the ever-changing business environment.

Implementing this entire program has two crucial advantages:

• Our research indicates that implementing effective business controls is the fastest way to improve the bottom line by eliminating unnecessary expenses and waste and preventing future mistakes.

• It is also the only way to keep executives from being punished as a result of honest error by providing the basis for an active defense, i.e., “We did everything in our power to prevent this.”

While these activities may currently provide a competitive edge, they will ultimately be a standard requirement. It’s only a matter of time before some analyst during a briefing or some stockholder with microphone in hand asks about the company’s status in these areas. Why invest in a company that isn’t properly under control?

Idealistically, we wish that controls of any sort were not needed and that we could rely on human integrity, i.e., ethics. Realistically, letting employees get into situations where they have to make ethical decisions simply means that the controls are inadequate. The only way to stop the hemorrhaging is to treat the true cause of the bleeding … poor business controls.

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