In a recent enforcement action, the SEC concluded that the relationship between James Craigie and an officer of Church & Dwight Co. fatally undermined Craigie’s status as an “independent director” of the company under New York Stock Exchange rules. The SEC seems not to have needed a bloodhound to sniff out sufficient evidence for its case, particularly in light of some pretty expansive language in the relevant NYSE rule. Nevertheless, this case also merits some investigation by mutual funds and their independent directors.
Craigie had previously served as CEO and a non-independent director of Church & Dwight. After retiring from his CEO position, Craigie commenced a mentoring relationship, and a significant friendship, with a younger Church & Dwight executive being the mentee. Subsequently (after the expiration of a “cooling off” period), Craigie assumed the role of an independent director of the company. The SEC asserted that, while serving in that role:
- Craigie paid more than $100,000 in travel and lodging expenses for the mentee and the mentee’s wife to vacation on multiple occasions with Craigie and Craigie’s wife.
- Craigie and the mentee both had ambitions for the mentee ultimately to become Church & Dwight’s CEO, but when Craigie’s successor as CEO planned to retire, it became apparent that someone other than the mentee would be chosen.
- Craigie, however, discussed the situation with the mentee, and the two of them reached out to a mutual friend who might be interested in the CEO position. This friend was an older executive who had been a colleague and supervisor of the mentee at a former company, and apparently also viewed the mentee favorably. Their apparent assumption was that, after some further seasoning, the mentee would be well positioned to become CEO following a relatively brief tenure by the friend in that position.
- Craigie then recommended the friend to the director heading Church & Dwight’s CEO search committee, and the friend subsequently became a strong candidate for the position.
- Craigie improperly concealed the facts mentioned in (i)-(iii) from the company and/or its other directors.
Based on these and other facts, the SEC concluded that company proxy statements had misstated a material fact by identifying Craigie as an independent director and that he had violated the SEC’s proxy rules by causing or permitting that disclosure. Craigie settled the case without admitting or denying the SEC’s allegations.
The language of the relevant NYSE rule requires simply that an independent director have no material relationship with the listed company in question. Given that Craigie’s mentoring, befriending, and promoting of the mentee were not part of his specific duties as an independent director, and the fact that he concealed those things, it is understandable that he could be construed to have a material relationship with the company that was distinct from his relationship as an independent director, and not a purely personal relationship with the mentee.
Somewhat analogous language in the Investment Company Act of 1940 defines which mutual fund directors are considered independent (or, in the act’s parlance, not an “interested person”). Basically, that language requires that there be no SEC finding of a “material business or professional relationship” between the director and the investment adviser of the fund (or of another fund managed by that adviser) or the CEO or a controlling person of that adviser. The fact that this language refers only to “business” and “professional” relationships indicates that purely “personal relationships” are OK. But, even if the result in Craigie’s case seems pretty understandable, many (if not most) relationships entail a mix of personal and
often subtle business/professional elements that leave the boundary between
independence and non-independence shrouded in mist and subject to
second-guessing.
