SEC Says the Bonds of Friendship Mean Nothing in the Face of Corporate Director Independence Requirements
The rules on corporate director independence are great for corporate governance lawyers, which is to say you can’t find them all in one place and they’re a little messy. Some sources are (1) NYSE and NASDAQ listing standards; (2) the Sarbanes-Oxley and Dodd-Frank Acts; (3) SEC regulations; and (4) state corporate law. We won’t cover them all here, but publicly traded companies generally have to have a majority of independent directors, and “independence” itself can involve complex analysis. A director who’s independent for one purpose might not be independent for another. But if you say a director is independent when he’s not, you can get into trouble. James Craigie, the former CEO and non-executive chair of consumer products manufacturer Church & Dwight, just found this out the hard way.
D&O Questionnaires
The New York Stock Exchange requires its listed companies to determine independence affirmatively, and Church and Dwight’s own corporate governance guidelines mirror that requirement. The Board considers all relevant facts and circumstances in making that determination, including those specified by NYSE and SEC rules.
Like many other companies, to make this independence determination Church and Dwight primarily uses a “D&O Questionnaire” that is sent each year to its board members. The company then incorporates the collected information into its annual proxy statement. The D&O Questionnaires explain a number of things to the directors, including (1) They have to tell the truth and can be held personally liable if they don’t; and (2) For a director to be independent, the Board must affirmatively determine that the director has no material relationship with the Company.
After ending 11 years as CEO in 2015, Craigie retired and continued as a director but as a “non-independent” director because of his recent executive service. Following a cooling-off period and after considering information he provided on the D&O Questionnaire, shareholders elected Craigie as an independent director as of the 2020 annual shareholder meeting.
Did we just become best friends?
Around 2017, Craigie began to mentor “Executive”, then a division head, as he’d done with other up-and-comers at the company. Craigie and Executive got to be pals. The SEC says that Craigie:[i]
paid more than $100,000 for them to travel together with their spouses, overseas and domestically. They went to five different continents!
sometimes hosted Executive at his apartment in Miami.
took Executive and his family on boat trips in New York, Connecticut, and Miami.
didn’t do these things with other Church & Dwight people.
told Executive several times that he thought Executive could eventually become CEO, and that he wanted to help him do that.
What Craigie Said on the D&O Questionnaires
By 2021, Craigie had served as a public company CEO and board member for decades and had completed dozens of D&O Questionnaires. He knew the answers ultimately fed into the proxy statement. And he at least should have known that the standards for independence were the same at NYSE- and NASDAQ-listed companies.
After listing a number of examples of material relationships, the D&O Questionnaires in 2021, 2022, and 2023 asked if directors had “any other relationship” with Church & Dwight or its management. Craigie said “no.” The Board determined that Craigie met the criteria for independence in 2021 and 2022, and the company’s proxy statements for those years reflected that. He declined a chance to edit the proxy statements before they were published.
Somehow – the SEC’s complaint doesn’t say exactly how – Church & Dwight discovered Craigie’s relationship with Executive before publishing its 2023 Proxy Statement.
Leadup to the Next CEO
In early 2022, Church & Dwight’s then-CEO told the Board he was considering retirement, and the Board established a CEO succession committee (“CEO Committee”) to assess the internal candidates. Everyone was told to keep the process confidential. At a Board meeting in August 2022, Craigie and others voiced concern about the internal candidates, including Executive. The Board decided to retain an outside search firm, which then asked Board members to suggest any external candidates. Craigie secretly told Executive about the confidential external search process.
While on another international vacation together, Craigie and Executive reached out to Craigie’s close friend and Executive’s former supervisor (“Friend”!) to solicit the Friend’s interest in becoming a CEO candidate. Craigie sent the Friend’s resume to the CEO Committee and said he thought the Friend could be a good short-term option while the internal candidates gained more experience. Craigie didn’t disclose (a) that the Friend was Executive’s former supervisor; (b) that he had met Friend while attending Executive’s birthday vacation; or (c) his friendship with Executive.
Craigie told Executive that if the Friend were hired, the other internal candidate might leave Church & Dwight, creating a glide path for Executive to succeed the Friend as CEO. The Friend ultimately became a strong candidate for the CEO role before the Board became aware of Craigie and Executive’s friendship and the whole plan unraveled.
After learning about Craigie’s relationship with Executive, the Board formed a special committee to investigate, the CEO postponed his retirement indefinitely, and the company paused the succession process to figure out what to do. The Board then determined that Craigie was no longer considered an independent director, and disclosed that in its 2023 proxy statement.
SEC Mad
The SEC was mad about these rules in particular: Section 14(a) of the Exchange Act says companies have to follow the SEC’s rules in their proxy processes. Rule 14a-9 says proxy statements can’t be materially false or misleading. And Item 407 of Reg S-K requires companies to identify its independent directors. Because Church & Dwight’s 2021 and 2022 proxy statements said Craigie was an independent director when he wasn’t, the SEC said this was materially misleading.
Upshot
Craigie has to pay a civil penalty of $175,000 and receives a 5-year officer-and-director bar. He’s 70 years old, so the five-year bar might turn out to be a permanent one if other companies are less likely to bring on a new director whose last board service ended like this. And the fees he would have received from serving on other corporate boards will likely dwarf the penalty itself. The investigation will probably have been especially annoying for Church and Dwight, which didn’t do anything wrong but surely had to spend substantial resources in responding to SEC requests for documents and testimony.
SEC v. James R. Craigie, Case No. 1:24-cv-7382 (S.D.N.Y., filed Sept. 30, 2024)
[i] The case isn’t being litigated, so these “facts” are really just allegations and we don’t know if they’re true.