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Budget-busting when a company pays the defense costs of a director or officer

The legal fees paid by Goldman Sachs in defense of a former board member were almost three-quarters of $30 million; Procter & Gamble picked up the balance. From the same article in the NY Times, June 19, 2012, at B1, Morgan Stanley paid $4 million in the defense of one of its employees accused of insider trading, CA (formerly Computer Associates) paid $15 million, and Enron absorbed a gargantuan $70 million plus. Some of these expenses may be recovered eventually from the employee or insurance.

Companies incur such expenses because their by-laws require them to indemnify board members’ and officers’ legal fees for conduct that occurred while acting on behalf of the company. If the legal fees are charged to the legal budget, then, like the legal fees incurred by independent counsel to the board, they could swamp the GC’s ship that year (See my post of July 25, 2005: costs of Boards retaining independent counsel; and July 25, 2007: payment by a company of Board members’ fees of outside counsel.).

If the legal fees are not applied against the law department’s budget, then total legal spending by the department, such as in response to a benchmark survey, is to that extent significantly understated.