The Best Citizens in Corporate Governance

Like most investors, you probably aim for the best possible return when picking potential investments. But as consumers increasingly clamor for companies to embrace social responsibility, good corporate citizenship is fast becoming a vital part of any business or stock's success.

Corporate Responsibility magazine recently released its "100 Best Corporate Citizens" list, in which it rated members of the Russell 1000 large-cap index on more than 300 different elements related to responsible behavior. I've been delving into each of the seven categories that contribute to a company's overall score.

Today, we'll look at corporate governance, which gets a 7% weighting. Dozens of companies got a top rating in this category, including:

  • EMC (NYSE: EMC  )
  • Boeing (NYSE: BA  )
  • Sherwin-Williams (NYSE: SHW  )
  • Consolidated Edison
  • Xerox (NYSE: XRX  )
  • Abbott Labs
  • Cisco Systems

To earn their high scores, the companies above engaged in a variety of good practices, including maintaining an independent audit and compensation committee, having an outside majority on the board, not having many directors serving on more than four boards, not employing poison pills as defenses against takeovers, and giving shareholders the right to call special meetings.

Among many other fine accomplishments, here's a quick review of some of the ways these companies earned their honors. EMC is lowering the threshold at which the owners of a set proportion of its shares can call special meetings, from 40% to 25%. (Shareholders asked for it to be set to 10%.) Xerox has a long policy page on its corporate governance positions, pointing to its independent board, stating that directors are expected to attend meetings and shouldn't serve on more than four boards. In its extensive corporate governance nook online, Sherwin-Williams states, among other things, that its audit and compensation committees will be composed of independent directors. Boeing does the same.

Of course, corporate governance is complicated, and practices such as those above don't necessarily ensure good governance. Berkshire Hathaway's (NYSE: BRK-B  ) board has recently added independent directors, but for the many decades during which it was less independent, few shareholders seemed concerned. Poison pills can also vary in how effectively they're used. In The New York Times, Stephen Davidoff criticized the J.C. Penney poison pill, which served to discourage major shareholders from even talking to each other, while observing that Casey's General Stores using one effectively to give its shareholders time to evaluate a possible takeover. Still, companies employing practices such as those above are more likely to be well-governed.

Companies that do the right thing can not only lift your spirits, but also boost your portfolio. In its first nine years, companies on the "100 Best Corporate Citizens" list outperformed the Russell 1000 over the ensuing three-year period by more than 25%. That's a great motivation for even the most coolly rational investors to take social responsibility to heart.

Click on EMC, Boeing, Sherwin-Williams, Xerox, Abbott Labs, Consolidated Edison, Cisco Systems, and Berkshire Hathaway to add them to your watchlist. You'll get valuable updates as well as immediate access to a new special report, "6 Stocks to Watch from David and Tom Gardner." Click here to get started.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value selection and, along with Sherwin-Williams, a Motley Fool Stock Advisor selection. The Fool has created a bull call spread position on Cisco Systems and it owns shares of Abbott Laboratories, Berkshire Hathaway, and EMC. Motley Fool Alpha LLC owns shares of Abbott Laboratories and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

DocumentId: 1475606, ~/Articles/ArticleHandler.aspx, 7/23/2014 4:35:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement