What are red flags? - The Corporate Governance Institute (2024)

For non-executive directors, especially those who sit on the audit committee, it is vital to ensure that the company, the CEO and the management team are doing what they should be doing.

The board’s role is to ensure that the organisation’s strategy, governance, finances and operations are in good order.

However, not all companies run like smooth ships, and when things start going wrong, they need to be addressed as swiftly as possible.

So, what are red flags and how can you spot them?

Red flags are signs that things are going wrong in the organisation due to ineffective leadership.

When looking for red flags, a company director should first look at the organisation’s approach to corporate governance, particularly the integrity of people at the top.

• Do the chair of the board and the chief executive officer (CEO) work well together?
• Is there an open culture that is accepting of challenges and changes?
• Does the organisation have silos with departments defending their turf, not sharing information, and not communicating?
• Does the CEO encourage an open-minded culture where everyone participates in solving problems, seeking solutions, and coming to effective decisions?
• Do functional and business lines share information?
• Does senior management challenge executives before problems arise? Or is it just after the fact?

The dynamics present in aboardroomcan also be an essential indicator of trouble.

• A weak chief financial officer (CFO) on the executive team in comparison to a strong CEO could spell trouble.
• The company’s expenditures can also raise red flags. One clear indication of a lack of control can be unexplained variances on costs and expenses.
• An organisational reward system that does not reflect the ups and downs of a company’s performance, but only the highs, can be a warning sign.
• Low staff retention rates and high employee turnover (particularly among new hires who may not like what they see) are bright red flags.
• When it comes to compliance and ethics, how vocal and fast does the CEO act?
• Failure to pay suppliers on time is another red flag.

The ‘culture’ of an organisation is often indefinable, intangible, but it is important because it permeates every area of operations.

If thecultureof an organisation is not articulated and communicated, it may spell trouble ahead for the company.

Poor or toxic company culture is a red flag the board needs to address as quickly as possible; as it is a considerable risk to the sustainability of the business.

The main indication of poor company culture will come from the employees and customers.

It’s easy for employees to get bad vibes in the workplace, and if they don’t like the company they work for, they’ll leave the company as soon as they can.

To determine what the workforce thinks about the organisation, board members should examine staff turnover rates and read exit interviews.