Much has been said about Sarbanes-Oxley stopping backdating. But is that true? Has it actually improved corporate governance?

Under Sarbanes-Oxley, all high-level executive stock option grants and exercises made on or after August 29, 2002 have be reported within two business days. Before August 29,2002, it was 10 days. At the time the sarbanes oxley second day reporting requirement was passed, shareholders and regulators were unaware that firms had been backdating executives' option grants and exercises.

According to a new paper by Berkeley's Professor Jesse M Fried, SOX did reduce the amount of both executive option backdating and executive exercise backdating. Once it required a blatant and easily detectable violation of SOX's reporting requirements, we suddenly found that about half of the firms that had been engaged in at least one form backdating were unwilling to continue.

But according to his paper Option Backdating and Its Implications, it didn't do enough. Fried found that between 15-20 per cent of publicly traded companies - between two and three thousand in number - simply disregarded the new disclosure requirements. Many ignored the two day rule and disclosed option grants and exercises as much as a month after the transaction supposedly occurred. This was no simple oversight. Fried found evidence that they did it deliberately.

Fried argues that backdating occurred because of a fundamental problem with US-style corporate governance: management simply has too much power over the board. And Sarbanes-Oxley does nothing to change that.

"The fundamental problem in US corporate governance ... is that executives of widely held firms exert too much influence over their boards. Sarbanes Oxley, which was intended primarily to improve the reliability of public firms' financial accounting, did almost nothing to address to this problem. And the stock exchange reforms aimed at increasing the number of "independent directors" on boards are unlikely to solve the ... problem, given the extent to which executives retain influence over board nomination and compensation decisions."