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Corporate Governance Gone Bad

Corporate trust will suffer another blow next week when researchers publish findings from a new study involving stock option backdating. The study, conducted by professors from Harvard Law School, Cornell University, and France's Insead, estimates that nearly 1,400 outside board directors, at 460 companies, have accepted manipulated stock options from the organizations they oversee. The study's findings are certain to shatter worker trust in their leaders, or what trust remains after the onslaught of recent corporate scandals.

The Sarbanes-Oxley Act of 2002 charged corporate board members with looking after shareholder interests and preventing unscrupulous behavior by senior managers. In drafting the legislation, lawmakers considered many board members rubber-stamping spectators who were unaware of what their CEOs were doing. The resulting law aimed to hold directors to a higher responsibility of corporate governance. But the study reveals that many outside directors were not only aware of corruption in their organizations, they were part of it. "Rather than merely failing to notice or stop the manipulation of executives' grants, many outside directors have received manipulated option grants and thus directly benefited from the manipulation practices," says the study.

Harvard's Lucian Bebchuk, Cornell's Yaniv Grinstein, and Insead's Urs Peyer conducted the study.
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