The flip side to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests. Conversely, there are top-flight companies that also 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. It 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. Today, we'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market and that also sport above-average CGQ scores, either in their index group or among industry peers.

Company

CAPS Rating
(out of 5)

Index CGQ Ranking^

Industry CGQ Ranking^

Aqua America (NYSE:WTR)

****

64.7%

51.4%

Cimarex Energy (NYSE:XEC)

*****

79.2%

92.5%

VASCO Data Security (NASDAQ:VDSI)

*****

87.5%

87.0%

Waters Corp. (NYSE:WAT)

*****

72.5%

98.8%

XTO Energy (NYSE:XTO)

*****

66.1%

95.5%

Sources: Yahoo! Finance, Motley Fool CAPS.
^Relative placement when compared with 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 success in investing, there are many factors an investor should consider, and how well a company 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
In the sci-fi classic Dune, the desert planet Arrakis is so devoid of water that its inhabitants not only wear body suits that recycle their sweat, but they recycle water from the dead. To spit upon meeting someone is considered an honorable introduction.

Things haven't gotten so drastic here on Earth, but water remains an important enough commodity that Aqua America has been able to garner rate increases from public utility commissions even during tough economic conditions. Certainly rates remain low enough that increases are not seen as burdensome -- letting the faucet run in the kitchen or bathroom is not a big concern to many. But the necessity of upgrading facilities is seen as paramount, as water quality remains a top priority.  

Although there is usually a gap between when facility improvements are made and when a price increase goes into effect, the increases typically permit a revenue level to include recovery of the current cost of capital. The $59.5 million that Aqua America was awarded in rate relief in 2008 is expected to have a positive impact on earnings this year, and analysts forecast profits to grow 27% in the current quarter and 16% for the year.

Aqua America and American Water Works (NYSE:AWK), the two largest water utilities in the U.S. -- Veolia Environnement (NYSE:VE) is based in Paris and derives only 7% of its $55 billion in revenues from the U.S. -- have until recently engaged in a growth-by-acquisition strategy. Indeed, American Water was one of the biggest IPOs last year following its own acquisition in 2003 and subsequent divestiture.  

CAPS member Dezertenergy pointed out in February that water represents a real problem for some areas of the country, which will permit the sector to flush out profits:

Playing the water sector with 15 picks. It's a "real" problem with needed solutions on a constant basis. I think there's plenty of room for growth and value in this sector. I've seen a 14% gain in the last 3 months on 8 water picks, so I thought I'd add 6 more to track.

A Foolish quotient
Many factors go into whether a stock is a buy or a 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.

Veolia Environnement is a Motley Fool Income Investor recommendation. Cimarex Energy is a Motley Fool Inside Value selection. VASCO Data Security International is a Motley Fool Stock Advisor pick. 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.