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Total legal spending and payment of legal bills of independent directors

Assailed by law suits, American International Group announced in May 2005 that it would pay the legal bills of its independent directors. According to unnamed securities lawyers, “AIG’s decision to pay its directors’ legal expenses is standard practice.

In a separate post today, I discussed the complexities of board retaining independent counsel. This is a variation on the same theme. I take the position that total legal spending should encompass all payments made to outside vendors whose services are closely related to legal issues. If that is the rule, declines in share price would not count, even if the declines were directly attributable to litigation risks. (See the post today about Merck and its Vioxx-related loss of market capitalization.)