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

Some evidence supports the notion that companies with stronger governance have lower risk, increased profitability, and higher valuations. That means 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 to its industry group.

Today, I'm highlighting these five:


CAPS Rating

Index CGQ

Industry CGQ

Alliance Data Systems (NYSE:ADS)




Capital One Financial (NYSE:COF)




Quiksilver (NYSE:ZQK)




Tessera Technologies (NASDAQ:TSRA)




Vail Resorts (NYSE:MTN)




 Source: Yahoo! Finance, Motley Fool CAPS. Data as of Nov. 19, 2008.

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

Indebted forever
As the economy worsens, overextended credit card users find their ability to repay debt becomes more difficult. American Express (NYSE:AXP) seems to have figured that access to taxpayer money is a good salve for what ails it, but Capital One Financial actually surprised analysts with news that charge-offs and delinquencies rose by far smaller amounts than expected. That's not enough to convince CAPS member enilesh, who thinks Capital One may find itself in default next year:

This company is grossly over valued. There credit Card portfolio along with there involvement in alt a and arm's is going to kill them. I would not be surprised if this one goes away sometime in 2009. They need to take some major write downs which they have not done. ... The more the government gets involved the longer this crunch will last. Let's face it and get our house in order. ... It is totally ridiculous that a student not making a dime is able to get a credit card with $5000.00 in limit. I should know as I am that student.

One to put on layaway
Alliance Data Systems saw its shares fall the other day, after Capital One announced that its charge-off rate (the percentage of credit card loans it doesn't expect to collect) had increased. Yet ADS is a behind-the-scenes operator; it also runs airline loyalty programs and a host of specialty credit cards, like the Angel Card from Limited Brands (NYSE:LTD) Victoria's Secret division. As a result, Alliance Data is actually one of the few companies raising earnings guidance these days.

Nonetheless, CAPS member kpscott thinks forced selling of ADS's shares by hedge funds and other institutions will put pressure on the stock:

Red thumbing this because of the major share in the company owned by hedge funds. Expect this stock to be hurt by non-economic selling as economic woes drag on and people convert to cash.

A Foolish quotient
Many factors go into a buy or sell call on a stock, so it pays to start your own research on these and other companies in 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 on whether you think these stocks make the grade.

Tessera Technologies is a Motley Fool Hidden Gems Pay Dirt selection. Vail Resorts is a Hidden Gems pick. Limited Brands is a Income Investor recommendation. Limited Brands and American Express are Inside Value picks. The Fool owns shares of American Express. 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.