Where to search for red flags?

• Position: Editorial

From The Director's Handbook (2012 Edition) by Thomas J. Dougherty. Copyright [C] 2012 by the author. Published by Corporation Service Co. (www.lexisnexis.com/csc).

DIRECTORS ARE NOT EXPECTED to involve themselves in the day-to-day operation of a business. However, without trying to second-guess every management decision, directors must exercise sufficient vigilance, judgment and experience so as to recognize a red flag (or indeed even a yellow flag) and ask questions. The answers to the questions, or lack thereof, will build insight, which will in turn inform oversight.

But how are directors to know where to search for flags? Is it simply a matter of common sense, or can the search be structured?

One way to structure vigilance is to be on the lookout for gaps in relevant...