A Lesson in Board Independence and Disclosure Compliance

McDermott Will & Emery reports that a former CEO and current board director of an NYSE-listed company was charged with violating proxy disclosure rules in a recent enforcement action. 

In SEC v. James R. Craigie, the SEC alleged that the director, labeled “independent” in company filings, had a close, undisclosed friendship with a senior executive, thus disqualifying his independence. He was fined $175,000 and barred from serving as a public company officer or director for five years.

The case centers on the concept of director independence, a requirement for many board positions on public company boards. After a four-year “cooling off” period following his CEO tenure, the director was deemed independent in 2019 and stood for reelection as such.

However, evidence presented by the SEC revealed that the director had engaged in an undisclosed, close personal relationship with a senior executive since 2017. Their connection included frequent vacations together, with the director spending over $100,000 on trips for the executive and his spouse.

Furthermore, the director was found to have shared confidential information regarding a sensitive CEO search process with the executive, breaching his duty of confidentiality and candor.

The SEC found that the director’s failure to disclose this personal relationship constituted a violation of the director’s fiduciary duty to the company and its shareholders under Section 14(a) of the Securities Exchange Act. By actively concealing this relationship from the board, the director impaired his independence and contributed to misleading proxy disclosures.

As a result, the SEC penalized the director with a fine and a five-year prohibition from serving in executive or directorial roles in public companies.

For law firms and corporate governance professionals, this case underscores the critical importance of transparent director disclosures regarding relationships that might impair independence. Boards are advised to reevaluate director and officer questionnaires to include inquiries about close personal relationships, as the SEC may continue to scrutinize personal director behavior that could jeopardize corporate governance integrity.

This case also signals the SEC’s intent to pursue individual accountability for misleading disclosures, potentially affecting directors and public companies alike.