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Reader Profile

Anne H. McNamara
Director
RailAmerica, Inc.
Former SVP/General Counsel, AMR Corp.

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

During your more than two decades with AMR, how did the emphasis on corporate governance shift?

Corporate governance was always important, since a good lawyer or corporate secretary should want to do it right, both substantively and procedurally. And the basic concepts--full disclosure of anything material, timely compliance with the rules, applying the rules to everyone without exception, respect for process----have been with us all along. What has changed is the intensity of focus and the addition of lots more process in an effort to “insure” compliance by making the responsibility and penalties clearer for a failure in compliance, the latter a product of various CEOs and CFOs defending blatant transgressions with the “too busy and/or too dumb” defense.

Do you believe that Sarbanes-Oxley creates beneficial structures for management and stockholders?

Overall, yes. But at what price? And could we have gotten there more effectively without the cost?

Clearly, the cost has been very high. And for the well-governed companies who comprise the vast majority of businesses, you could argue that the improvements have been largely non-substantive: for example, a better process for signing off on financial reports, but in general, few changes in what the reports actually say. Or a clear liability and responsibility trail in signing off on the numbers and disclosure. But the fundamental liability isn’t new--it just may have been harder to prove. But I have to say, the number of companies who delayed filing their numbers does suggest that the in terrorem effect of Sarbanes Oxley was valuable.

The big companies have simply baked the costs of complying with Sarbanes-Oxley into their cost structure and coped, just as they do with other governmental and regulatory burdens. Smaller corporations, though, don’t always have that luxury. There is also anecdotal evidence of fewer IPOs coming to market because of the cost of compliance.

One consequence of Sarbanes-Oxley and the Andersen conviction (now overturned) has been to change the relationship between auditors and their public clients. Clearly, in some cases the relationship had become too close and too supportive of management desires. Sarbanes-Oxley has reminded auditors that they have a watchdog function that they ignore at their peril. And that is good.

What steps can boards take to bring more diversity into the boardroom?

Easy. Recruit for it. Obviously, putting a stranger on a board is a major, frightening step, because board dynamics are very important, and it is hard to know how a relative stranger will affect those dynamics. But a good recruiter can usually learn a great deal about the personality and style of a candidate. That, coupled with a lot of interviewing and shared time, should make the decision a comfortable one. But I would caution any company seeking to add diversity to focus on the totality of the “diverse” candidate under consideration, since their views will be voiced on issues other than workforce ones. So, be sure there is a fit on those other business issues.

What do you think makes a good director, based on your time at AMR and your time serving on outside boards?

First, I think a good director needs good judgment. That may seem simplistic, but there are a lot of people out there, successful in their day jobs, who don’t necessarily have it. Second, a good director needs to commit the time to learn the business with particular emphasis on where the major risks are--what can go wrong, the possible consequences if things do go wrong, the variables that affect that risk. Third, a good director needs to understand that he/she is not management--their role isn’t to develop or execute the business plan or to apply their professional skills to day-to-day decisions but to be sure those developing and executing the plan and making those decisions are the best people to do so and that the plan makes sense and is achievable. Fourth, a good director needs the communications skills to engage in an ongoing, iterative dialogue with management and the other directors to be sure the plan is continually assessed and tweaked and that risk (broadly defined) is dealt with appropriately--hopefully adding value through that process of dialogue. And finally, a good director needs the courage to do the hard stuff, if necessary, to discharge their duty--to confront or replace management, to insist on appropriate disclosure, to leave the board if he/she is uneasy with the direction taken by management and/or the other directors.

What advice would you give someone considering joining the board of a publicly held company?

Obviously, the decision isn’t a no brainer, if it ever was. Joining a board means putting one’s net worth on the line, often dependent on the integrity and vicissitudes of an industry, company and managers that one barely knows. So the first step is due diligence. Learn as much as you can about the industry, the company, the senior management. Spend time with other directors and senior management and listen to your gut. If you don’t trust them then stay away. Life is too short and litigation too painful for it ever to be worthwhile.

Understand the governance structure of the organization and check their disclosure documents to see whether they tend toward transparency or Byzantine complexity. If they tend toward complexity, you need to work harder to understand what is going on, and you should understand why things are so complex. Look at the board--are they independent of management or dependent on relationships with the company and/or its executives? Are there conflicts of interest? Is the company able to admit mistakes and learn from them? Do employees speak up, or does management “shoot the messenger?" Learn how the company has dealt with problem managers in the past--have transgressors been terminated or given a slap on the wrist? Is there a clear expectation of integrity that is more than just lip service?

Assuming you’ve decided that it is a good organization and that you can make a contribution, join the board and keep doing your homework--learn as much as you can about the industry and company, read everything they send you, ask the dumb questions, ask them again if the answers don’t make sense. Share your experiences and thoughts, but listen more than you talk. Ask more questions than you answer. Learn which directors and senior managers seem the most solid and reliable, get to know the managers below the senior level in those areas closest to the risks, and listen to what they say.

Be alert to the fact that even the best CEO is more comfortable with a controlled flow of information and be sure that you have access to information from other individuals in the company. Be sensitive to any tendency by a CEO to exclude senior management from the substantive part of the board meetings--even the best CEO can unintentionally spin information, or not deign to share other perspectives which you may need.

Board service can be intellectually and emotionally enriching. It provides exposure to a new company and perhaps a new industry, and new ways of doing things. And it provides an opportunity to share lessons learned elsewhere and perspectives acquired in other places. It is a chance to do a good job, but it takes work!

Anne H. McNamara is a director of RailAmerica, Inc., and was senior vice president and general counsel of AMR Corporation and its subsidiary American Airlines for 15 years until her retirement in early 2003. During her 27-year tenure at American Airlines, McNamara also held positions as vice president, personnel resources, corporate secretary and attorney. Prior to joining American Airlines, McNamara was an associate with the law firm of Shea & Gould in New York. Following her retirement from American and AMR, McNamara served as president of The Center for American and International Law and continues to serve on the executive committee of its board. She has previously served as a director for The Sabre Group Holdings, Inc., LG&E Energy Corporation and Louisville Gas & Electric Corporation. In addition, McNamara is a member of a number of professional organizations. McNamara received her undergraduate degree from Vassar College and her J.D. from Cornell Law School. She is admitted to practice in Texas and New York.