In the wake of the scandals that ruined investors in Enron and WorldCom, and the options backdating fiasco, "corporate governance" became the watch-phrase of the new millennium, and a whole cottage industry of rating management was born.

Some evidence supports the notion that stocks with stronger governance have lower risk, increased profitability, and higher valuations. Which means that companies with poor corporate governance could be targeted by shareholder activists, hedge funds, or short-sellers. In short, they could be ripe for a fall.

Below, we look at stocks that are marked to underperform the market by investors on Motley Fool CAPS, but sport above-average Corporate Governance Quotients (CGQs). Developed by proxy service Institutional Shareholder Services, a company's CGQ measures how well it 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.

Here are five I'm highlighting today:


CAPS Rating

Index CGQ

Industry CGQ

Annaly Capital Management (NYSE:NLY)




Dendreon (NASDAQ:DNDN)




Doral Financial (NYSE:DRL)




General Motors (NYSE:GM)




USANA Health Sciences (NASDAQ:USNA)




 Source: Yahoo! Finance, Motley Fool CAPS.

Although investors should consider many factors before buying a stock, how well it treats shareholders shouldn't be least among them. Consider these rankings a gauge of how these businesses stack up against one another relative to their shareholder policies.

One-trick pony?
These are the perils of investing in a company with an apparent all-or-nothing proposition on a single product. You'll either win big or lose your shirt. That's how Dendreon investors must be feeling these days, as the stock rockets or falls based on any bit of news -- or rumor -- regarding its prostate-cancer treatment Provenge. The latest word on the wonder drug was good, though not great. But should next year's results clear the hurdle set -- allowing Provenge to get FDA approval -- it could be big. With Cell Genesys (NASDAQ:CEGE) indefinitely suspending its rival treatment Gvax, which is used in combination with Taxotere by Sanofi-Aventis (NYSE:SNY), Dendreon would have a huge market opportunity to itself upon approval. Too bad we won't know for certain until next year.

CAPS member R3ALGOOD advocates taking an early position in Dendreon:

Provenge works, yet it wont be approved by the FDA.

Men are dying everyday from prostate cancer.

Does the FDA realize this?

This stock will soar next year when Provenge is approved.

Similarly, RxBodie acknowledges the high risk/high reward proposition, but with few alternatives for the therapy available, Dendreon could be a winner:

Interim results are very promising. Lack of any other viable treatment with [Cell Genesis] gvax safety issues makes this another High reward high risk stock. The risk is mainly that nobody knows what the FDA will do as seen before with this company.

However, be sure to do your own due diligence first, since this is still speculative.

Healthy dose of skepticism?
There's usually little middle ground when it comes to nutritional products maker USANA Health Sciences: You either love it or hate it. A disappointing third quarter, falling well below analyst expectations, was answered by a small spike in USANA's stock price this morning.  

Some might consider that move overly optimistic. CAPS member kdakota630 thinks the stock is overpriced, despite its resilience: "Junk, over-priced company near it's 52-week high and holding up very well against the markets' recent downturn. Gotta go with underperform."

Conversely, verdeamarelo seems to believe in USANA's aims:

Life changing products, Usana have been making a difference in peoples lives, all over the globe for 16 years.....Unstopping scientific research.....We will continue to share the vision of a world free of diseases. Thank you Dr. Wentz.

A Foolish quotient
There are many factors that go into whether a stock is a buy or sell, so 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. Head over to CAPS today and share your thoughts with other investor-analysts on whether you think these stocks make the grade.

Annaly Capital Management is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services 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.