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

Some evidence supports the notion that those companies with stronger governance have lower risk, increased profitability, and higher valuations. Which 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 up to 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and to its industry group.

Here are five that I'm highlighting today:


CAPS Rating

Index CGQ

Industry CGQ

Alpharma (NYSE:ALO)








Collective Brands (NYSE:PSS)




Sonus Networks (NASDAQ:SONS)








Source: Yahoo! Finance, Motley Fool CAPS.

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. Use these rankings to gauge how these businesses stack up based on their shareholder policies.

Walk this way
The effort by Collective Brands' Payless ShoeSource to provide $1 million worth of shoes to needy kids has CAPS member EPS100Momentum believing it's worthy of investor support.

Due to the thoughtful thing [Collective Brands] is doing for Needy families

I have decided to purchase this year's Christmas shoes for my family and relatives all from either Payless or Stride rite its other division. It warms my heart when a corporation acts with some dignity and gives instead of only taking. The story by [Collective Brands] has touched my heart.

However, top-rated All-Star tenmiles looked at the results from the previous quarter and found that there is much less than meets the eye. Without a trademark infringement settlement from K-Swiss (NASDAQ:KSWS) included, Collective Brands' revenue fell below expectations and earnings would have only met analyst forecasts. That's enough to give the company its walking papers.

Take out [extraordinary] items and their earnings pop was nothing special; [technically] vulnerable at $9.36-believe this is an above average short after today's rally.

Optimizing potential
Like business optimization specialist Omniture (NASDAQ:OMTR), TIBCO Software looks to capitalize on companies' need to improve the flow of data while also helping them migrate their IT infrastructure to service-oriented architectures (SOA). Yet with its large exposure to banks, brokerages, and insurance companies, TIBCO Software might have a rocky road to cover. CAPS member SwordAgain thinks it could fall further.

12/22/08, 4:30 PM In this environment, [TIBCO Software] might either go belly up or become a penny stock.

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 investors on whether you think these stocks make the grade.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.