There’s a flipside to shareholder-friendly stocks expected to underperform the market: highfliers that pay little heed to their owners' interests. But there are also some top-flight companies that treat their shareholders with respect.

Institutional Shareholder Services -- the big name in corporate proxies -- measures how well a company performs in as many as 63 categories, covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. ISS assigns the stocks a rating that it calls its Corporate Governance Quotient, or CGQ.

Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market and which also sport above-average CGQ scores, either in their index group or among industry peers.


CAPS Rating (out of 5)

Index CGQ Ranking*

Industry CGQ Ranking*

American Eagle Outfitters (NYSE:AEO)




Dow Chemical (NYSE:DOW)




Frontier Oil (NYSE:FTO)




Terex (NYSE:TEX)




UnitedHealth (NYSE:UNH)




Sources: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared to companies in index or industry. Higher is better.

Although finding good companies and holding them for the long term is one of the greatest secrets to investing, there are many factors that an investor should consider regarding whether a company is good, and how well it treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Go to the head of the class
Speculation that oil refiner Frontier Oil could be a takeover target now that oil prices have come down has been fueling volatile trading in its shares. Over the past five days alone, Frontier's shares have swung several times, from $18 to more than $21 a stub (which is where it closed yesterday). Tesoro (NYSE:TSO) was similarly volatile, though it is presumably not a target. CAPS member ChicagoBreeze finds Frontier attractive for both of those reasons -- it will be more profitable as oil continues its descent, and it could be bought out:

The profitability of refineries has an inverse relationship with the price of oil. With the drop in the price of oil, FTO's profitability will increse along with its stock price. Finally as reported in the Wall Street Journal, FTO makes an attractive buyou target.

As it becomes increasingly clear that Europe is sliding toward a recession, much as the U.S. is currently experiencing, it shouldn't have come as a surprise that capital equipment manufacturer Terex reported a decline in demand for its products. This is particularly true since said report came only a few days after Joy Global (NASDAQ:JOYG) reported a similar waning interest. But the market's decision to whack 20% off its market cap seems a bit excessive. At least, CAPS member jbfoolsgold thinks so, since the company’s far-flung operations ought to serve as a hedge when any specific economy declines:

This stock is currently severely oversold. It is a global company that should act as a hedge against localized economic downturns, and has huge upside potential delivering the equipment to build infrastructure around the world.

Humana is being lauded by analysts for raising its prescription-drug prices high enough to price itself out of a Medicare pool of patients, and many are expecting that UnitedHealth will end up doing the same, as it becomes too expensive to service the pool. There's little incentive for the patients to use lower-cost alternatives, and analysts feel the increase in prices will make up for any losses incurred. That was perhaps unwittingly implicit in the CAPS pitch from tulipomania, who noted that patients don't "see" the money that flows through to UnitedHealth:

Stock looks really cheap right now. Insider buying and Buffet buying are encouraging. Plus, the company is buying back their own shares while they are cheap.

Health care should be able to weather any economic storm fairly well. . . most people don't even 'see' the money that goes to this company, as opposed to discretionary spending.

A Foolish quotient
Many factors go into whether a stock is a buy or sell, but do corporate governance policies enter into your equation? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

Dow Chemical is a Motley Fool Income Investor selection. UnitedHealth Group is an Inside Value pick. UnitedHealth Group and American Eagle Outfitters are Stock Advisor picks. The Fool owns shares of American Eagle Outfitters and Terex. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.