In the wake of the scandals that ruined investors in Enron and WorldCom, as well as the stock-option 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 those companies with stronger governance have lower risk, increased profitability, and higher valuations. That, in turn, 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 (out of 5)

Index CGQ

Industry CGQ

Allied Capital (NYSE:ALD)




American Superconductor (NASDAQ:AMSC)




Radian Group (NYSE:RDN)








Time Warner (NYSE:TWX)




 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. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Searching for answers
At a time when anything connected with housing, financials, or insurance seemed like a bad bet, Radian Group surprised Wall Street in November by posting a $36.7 million profit, or $0.46 a share. It was even more remarkable because analysts had been anticipating a per-share loss of $1.93.

Despite Radian's performance, the market analysts at the credit rating agencies aren't building up any hope that 2009 will be better than last year. S&P says it's expecting unemployment to hit 8%, which will pressure the financials of Radian and MGIC Investment (NYSE:MTG), while Fitch Ratings sees the housing crisis extending further out to the broader prime market.

CAPS All-Star member TheAlbinoRhino acknowledges that this might not be the best time to be delving into financial stocks, but considering Radian was able to turn a profit and has been working to keep people in their homes, he feels it will be a long-term winner:

Since the begining of this crisis this company has worked hard to raise capitol and help people stay in thier homes. Once the smoke clears in 6 more months this stock will start to take off. RDN shocked everyone with a profit last quarter and will be one of the survivors of this mess. ... In 2 to 4 years you will be nicely rewarded. Be patient and go long on this one.

Is it time?
Has Time Warner finally figured out what to do with AOL? The decision to focus on one of AOL's few strengths may help capitalize on the popularity of some of its niche sites. The new online publishing division -- dubbed MediaGlow -- will expand its offerings as a means of differentiating itself from Yahoo! (NASDAQ:YHOO) and MSN. AOL plans to introduce some 30 new sites this year.

Top-rated CAPS All-Star Polarimetric isn't convinced and thinks Time Warner will one day fold back into Warner Bros:

Everyone knows that AOL is basically worthless at the moment, which would explain why they're desperately trying to sell it off. There are simply much better products out there than their TV and Internet offerings, namely FiOS, which I expect will gradually siphon off some of Time Warner's market share as their more savvy consumers get fed up with them. I don't know anyone who uses their phone service. Their filmed entertainment division is really the only thing that's very successful, and that alone is not enough to make up for their shortcomings in everything else.

From what I can see, Time Warner will be nothing more than Warner Bros. soon enough. Everything else they offer is a fossil. Verizon and AT&T are the only major communications companies that are offering true 21st century technologies, such as fiber optics or mobile phone service. Unless Time Warner finds a way to transport itself from 1996 into 2009, this dog's going nowhere.

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.

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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. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.