The Securities and Exchange Commission (the “SEC”) recently settled charges against James R. Craigie, a former CEO, Chairman and board member of Church & Dwight Co. Inc. (the “Company”), for violating proxy disclosure rules by standing for election as an independent director while concealing from the Company’s board of directors his close personal friendship with a Company executive. This caused the Company’s proxy statements over multiple years to contain materially misleading statements in violation of the Securities Exchange Act of 1934, as amended.
Craigie served as CEO of the Company until 2015 when he stepped down but continued as Non-Executive Chairman and as a non-independent director. In 2017, Craigie began mentoring an executive of the Company (the “Executive”) and developed a close personal friendship with the Executive. In the following years, Craigie frequently vacationed with the Executive and the Executive’s spouse, including six international trips. Craigie paid more than $100,000 for the couple to join Craigie and his spouse on several of these international vacations. Craigie, the Executive and their spouses also vacationed together domestically, and the Executive occasionally stayed at Craigie’s apartment in Miami. On a number of occasions, Craigie made efforts to ensure that he and the Executive concealed their relationship from the Company.
After retiring as CEO in 2015, Craigie was considered a non-independent director because his recent tenure as CEO created a connection between himself and the Company. To become an independent director, in compliance with the requirements of the listing standards of the New York Stock Exchange (the “NYSE”), the board of directors would need to affirmatively determine that Craigie did not have a material relationship with the Company by considering all relevant facts and circumstances. The Company’s Corporate Governance Guidelines, in compliance with the NYSE requirements, stated that no director would be considered independent “unless the Board of Directors affirmatively determines that the director has no material relationship with the Company (either directly or as partner, stockholder, or officer of an organization that has a relationship with the Company). When making “independence” determinations, the Board shall broadly consider all relevant facts and circumstances . . . .”
Consistent with the customary practice for public companies, the Company sent its board members a questionnaire each year, known as a D&O questionnaire, to obtain information for, among other reasons, use by the Company’s board of directors to make an assessment and determination about whether individual board members qualified as independent. The Company’s D&O questionnaire noted that for a director to be independent, the board must determine the director has no “material relationships” with the Company. While the Company’s D&O questionnaire did not list friendships as “material relationships,” it did note that commercial, industrial, banking, consulting, charitable and familial relationships are examples of material relationships.
As Craigie’s relationship with the Executive developed, he did not disclose it to the board and encouraged the Executive to do the same. Indeed, over multiple years, Craigie affirmatively responded that he did not have a material relationship or “any other relationship” with the Company or its management. Following a determination by the board in 2019 that Craigie was independent, the Company’s proxy statements in 2020 through 2022 represented that Craigie was an independent director and that he met the independence requirements. Craigie was given an opportunity to review and correct the proxy statements, but he did not. When the Company began a CEO succession process, Craigie allegedly shared confidential details about the process with the Executive and took steps to better position the Executive for succession in the future. Once the Company learned of Craigie’s relationship with the Executive, the board of directors determined that he was not an independent director.
The SEC complaint alleged that Craigie, as an “experienced public company executive and board member,” knew or should have known how public company boards assess a director’s independence, including personal relationships with company executives. The SEC also argued that Craigie “understood the importance of the D&O questionnaires for determining director independence,” and that information regarding his personal relationship with a Company executive belonged in the Company’s proxy statements. Craigie was a director of other public companies and completed other companies’ D&O questionnaires subject to the same NYSE standards, some of which included questions that “further clarified what facts and circumstances Craigie should have considered when responding to the Church & Dwight questionnaire.”
The SEC argued in its complaint that “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts,” and that “[b]y concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Further, as a result of the concealment, multiple years of the company’s statements contained material misstatements. The SEC argued that Craigie himself was “directly liable for these misstatements because he failed to disclose his relationship to [the] Executive in the D&O Questionnaires [and] then permitted his name to be used in the proxy statements in connection with Church & Dwight’s annual proxy solicitations.” In connection with the settlement of the charges, while Craigie did not admit or deny the allegations, he agreed to pay a civil penalty of $175,000 and to be barred from acting as an officer or director of any public company for five years.
While a “close personal friendship” between a director and an executive must be considered in a board’s independence analysis, the facts and circumstances at hand will dictate what rises to the level of board consideration and proxy statement disclosure. Director independence analysis should, at a minimum, consider whether directors and executive officers: spend significant time together outside of the business context, vacation together, share vacation homes or provide each other with significant gifts or other benefits.
