December 13, 2005
Excerpts: The Battle For The Soul of Capitalism - Part XIII
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:
- When you find the big lie, everything else crumbles around it.
- If a technology stock is said to transform the world, it is being over-hyped.
- When money is easy to raise, be alert to companies doomed to fail.
- The Quitter: When a CEO leaves without an explanation.
- Beware the worst combination of all: an aggressive CEO and a compliant CFO.
- A CEO is known as a serial acquirer rather than a builder.
- If a company rewards failure by repricing stock options.
- Cross-board memberships can lead to conflicts of interest.
- A company hides behind anti-takeover devices and ignores votes to change.
- Companies dipping in and out of cookie-jar reserves.
- When net profit is rising but cash flow is declining or negative.
- Beware of accountants who are promoters of the latest business fad.
- Don’t get caught out by the latest fad; it probably won’t last.
- The SEC launches a full-scale probe into possible securities fraud.
- A company is facing a large number of class-action law suits.
- A CEO is built up as the new star who is going to fix everything.
- When senior management includes the company’s former auditor.
- When CEO pay is not closely linked to performance.
- When stock options are handed to executives like there’s no tomorrow.
- When top executives own very little of their company’s stock.
- Big payments are made to executives for their work on takeovers.
- Companies that always meet or beat earnings expectations.
- The use of one time earnings gains (or aggressive pension fund assumptions) to reach earnings targets.
- 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.
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