Corporations grant backdated stock options—opportunistically manipulated to be more profitable—to independent directors responsible for policing the activities of company executives, a new study sponsored by Harvard Law School found.

The study released yesterday, entitled “Lucky Directors,” showed that outside directors received stock options that were timed to make them more profitable than could be explained by chance.

The study’s authors—Friedman Professor of Law Lucian A. Bebchuk, Yaniv Grinstein of Cornell University, and Urs Peyer from the Paris-based business school INSEAD—found that board directors at 6,500 companies received “lucky grants” or backdated options for which the strike date is timed in order to maximize profit.

While the practice of granting such options has been common in executive compensation packages, the study discovered that the outside directors had also received these grants without the public’s knowledge. The study did not reveal whether the directors themselves knew that the timing of their options was manipulated.

Although backdating is not illegal in itself, legal questions could be raised if they are not disclosed properly to the public, according to the Wall Street Journal.

Bebchuk said that because directors of a company are meant to safeguard against questionable actions of corporate executives, when directors are involved in undisclosed backdating practices, their regulatory role may be compromised.

According to Bebchuk—who also holds a PhD in Economics—the study shows that “favorable timing” is evident when looking at the stock option transactions of directors.

The study examined over 29,000 specific transactions in which public companies gave grants to outside directors, and determined that in over nine percent of the cases, the grant occurred when the stock price was at its lowest in a given month or a quarter.

“Nine percent is significantly more than what one would expect if grants were assigned by mere luck,” Bebchuk said in an interview yesterday.

In fact, there was a departure from “mere luck” in 11 out of 12 industries studied, he said.

Even though the amount granted to outside directors in options pale in comparison to options given out to executives, such practices shed light on the manner in which many corporations are governed.

“In the case of director grants, we don’t expect the dollar figures to be significant because, in general, the value of director grants is not large relative to the grants that are given to executives,” Bebchuk said. “The significance of the finding is from a governance perspective.”

The Securities and Exchange Commission is currently investigating the backdating procedures of more than 130 companies, according to the Journal, in the largest corporate-fraud probe in decades.

—Staff writer Kevin Zhou can be reached at kzhou@fas.harvard.edu.