Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
Background. In the complaint against Craigie, the SEC charged that Craigie failed to disclose information to the company’s board that would enable the board to make a determination as to whether Craigie could be considered an “independent” director in 2021 and 2022. From 2004 to 2015, he served as the company’s CEO, from 2007 to 2019, as board chair, and as a non-independent director from 2004 to 2019. As alleged, in January 2019 and 2020, the board affirmatively determined that he was an independent director based on information provided by Craigie that he did not have a material relationship with Church & Dwight. Based on statements in the company’s proxy statements, Craigie was elected by the shareholders as an independent director effective at the 2020 annual shareholder meeting.
According to the complaint, Craigie had a “practice of mentoring employees with growth potential.” Around 2017, he began to mentor the Executive, who was the head of a Division, ultimately forming a “personal friendship.” Craigie also appears to have had a practice of inviting other couples on international vacations with him and his spouse, generally paying “for all guests’ business class airfare and luxury lodging.” Craigie and his spouse vacationed internationally with the Executive and his spouse six times, paying their expenses, which aggregated over $100,000. There were also domestic vacations, including long weekends, stays at Craigie’s Miami apartment and boat trips in New York, Connecticut and Miami. The SEC alleges that “Craigie did not take similar trips with or pay for travel for any other Church & Dwight personnel.” As alleged, Craigie “withheld, and instructed Executive to withhold, the nature of their relationship from Church & Dwight,” taking proactive steps to prevent discovery by the company of their relationship.
Consistent with NYSE standards, the company’s corporate governance guidelines required that, in assessing director independence, the board must affirmatively determine that the director has no material relationship with the company, “broadly consider[ing] all relevant facts and circumstances as well as any other facts and considerations specified by the NYSE and specified by the rules and regulations of SEC.” The company’s D&O questionnaires, which “instructed recipients to ‘exercise great care,’” provided as a non-exhaustive list of examples of “material relationships,” commercial, industrial, banking, consulting, charitable and familial relationships, but did not list friendships. As alleged, the questionnaire also asked “if directors had ‘any other relationship’ with Church & Dwight or its management. In 2021, 2022, and 2023, Craigie answered ‘no.’” The board found that Craigie was independent in 2020 and 2021, and included that information in the proxy statement, which Craigie, given an opportunity to review, did not correct. The company subsequently discovered Craigie’s relationship with the Executive and did not identify him as independent in the 2023 proxy statement.
The complaint alleged that, as an “experienced public company executive and board member,” Craigie ‘knew, or should have known, the criteria that public company boards use to assess a director’s independence, as well as the factors that are important to that analysis. This included personal relationships with company executives.” He also, the SEC charged, “understood the importance of the D&O Questionnaire for determining director independence,” and that the information would be included in the proxy statement. As a director of other public companies, Craigie completed other questionnaires that were subject to the same exchange standards, some of which included questions that “further clarified what facts and circumstances Craigie should have considered when responding to the Church & Dwight questionnaire.”
According to the complaint, in 2022, the company’s CEO advised that he was considering retirement, and the board established a CEO succession committee. Craigie had previously advised the Executive that, with time, he had CEO potential. In board meetings, however, “Craigie, among other Board members, voiced concern about the internal candidates, including Executive.” An outside search firm engaged by the board asked directors for candidate suggestions, and “Craigie and Executive reached out to Executive’s close friend and former supervisor… to solicit the Friend’s interest in becoming a CEO candidate.” Craigie indicated to the Executive that if the company hired his friend, the SEC alleged, the Executive could have an opportunity to eventually succeed the friend as CEO. Craigie forwarded the friend’s resume without disclosing these relationships, and he became a “strong candidate.”
As alleged, in 2023, the company learned of Craigie’s friendship with the Executive, leading the board to form a Special Committee to assess Craigie’s conduct. The CEO “postponed his retirement indefinitely and Church & Dwight halted the CEO succession process to allow the Board to reconsider how to structure the process in a way to eliminate bias.” According to the complaint, the “Special Committee found that Craigie failed to disclose his close personal friendship with Executive and disclosed confidential information about the CEO search, which he may have done to influence the CEO search to Executive’s long-term advantage. As a result of this conduct, the Board determined that Craigie violated his obligations of confidentiality and candor under Church & Dwight’s Code of Conduct. The Board determined that Craigie was no longer considered an independent director. Church & Dwight made this disclosure in its 2023 proxy statement.”
Violations. The SEC charged that, because of Craigie’s “concealment,” the company’s proxy statements in 2021 and 2022 contained misstatements of material fact. Reg S-K Item 407 requires the company to identify all independent directors, and the proxy statements incorrectly identified Craigie as an independent director. According to the SEC, information about director independence is material to shareholders “because shareholders expect independent directors to exercise autonomous judgment in their decision making that is free from any conflicts of interest.“ The SEC charged that Craigie violated Exchange Act Section 14(a) and related Rule 14a-9: he was “directly liable for these misstatements because he failed to disclose his relationship to Executive in the D&O Questionnaires, which resulted in the material misstatements in the 2021 and 2022 proxy statements regarding independence. Craigie then permitted his name to be used in the proxy statements in connection with Church & Dwight’s annual proxy solicitations.” The SEC also alleged that Craigie benefitted from the misleading proxy statement disclosure because, as an independent director, he could “participate substantively in the CEO succession process, without disclosing his relationship with Executive even though Executive was a CEO candidate.” As noted above, Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000.
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