800-CEO-READ Excerpts

Box 1.1 Red Flags

Among the 175 “red flags” listed in Martin Howell’s Predators and Profits (out of print) are these twenty-four warning signs that trouble may be afoot in a corporation:

1. When you find the big lie, everything else crumbles around it.
2. If a technology stock is said to transform the world, it is being over-hyped.
3. When money is easy to raise, be alert to companies doomed to fail.
4. The Quitter: When a CEO leaves without an explanation.
5. Beware the worst combination of all: an aggressive CEO and a compliant CFO.
6. A CEO is known as a serial acquirer rather than a builder.
7. If a company rewards failure by repricing stock options.
8. Cross-board memberships can lead to conflicts of interest.
9. A company hides behind anti-takeover devices and ignores votes to change.
10. Companies dipping in and out of cookie-jar reserves.
11. When net profit is rising but cash flow is declining or negative.
12. Beware of accountants who are promoters of the latest business fad.
13. Don’t get caught out by the latest fad; it probably won’t last.
14. The SEC launches a full-scale probe into possible securities fraud.
15. A company is facing a large number of class-action law suits.
16. A CEO is built up as the new star who is going to fix everything.
17. When senior management includes the company’s former auditor.
18. When CEO pay is not closely linked to performance.
19. When stock options are handed to executives like there’s no tomorrow.
20. When top executives own very little of their company’s stock.
21. Big payments are made to executives for their work on takeovers.
22. Companies that always meet or beat earnings expectations.
23. The use of one time earnings gains (or aggressive pension fund assumptions) to reach earnings targets.
24. A company restates its results.

Source: Martin Howell, Predators and Profits (Upper Saddle River, N.J.: Reuters Prentice Hall, 2003). Quoted with permission. I wrote the foreword to this book.