But aside from Sarbanes-Oxley, whose effective date was after most of these practices were alleged to occur, there is a raft of potential other problems: As this was written in July, the many lawsuits that inevitably will be filed against companies accused of backdating had just started.
Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.
Attorney's Office in Northern California has launched a series of investigations and in July issued criminal and securities fraud charges against two top executives at Brocade Communications. National concern about the practice has been spurred by a series of articles in the Wall Street Journal. Companies found to have practiced this could be forced to restate their earnings.
(The administrative problem could be resolved if more companies would hire people with the right skills for stock plan administration, such as those with certification from the Certified Equity Professional Institute at Santa Clara University.) There are also companies, such as Microsoft, that issued options broadly but were concerned that because of the volatility of their stock, an employee who joined the company on one day might get an option grant at a price very different from one who joined a few days earlier or later.
So Microsoft, on the advice of its auditors, issued the option at the lowest price over a 30-day period.
The legal theory involved here could open the door for other interventions in potentially abusive executive compensation issues.
Soon thereafter, two public pension funds in Ohio indicated they will be suing United as well, followed by a retirement fund for Pirelli Armstrong Tire.
As important as the issue of executive equity compensation is, it should not blind us to a more important concern.
Research has definitely shown that broadly-granted equity awards improve corporate performance; concentrated grants force it down (the details are in the article Broadly Granted Stock Options Improve Corporate Performance).
Yet in all the many discussions about this scandal, and others that have preceded it, the issue of who should get awards is almost never raised.