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. 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 stars)

Index CGQ Ranking*

Industry CGQ Ranking*

CapitalSource (NYSE:CSE)

****

65.2%

76.8%

ConocoPhillips (NYSE:COP)

*****

54.3%

92.5%

Dynamic Materials (NASDAQ:BOOM)

*****

73.8%

62.8%

Powerwave Technologies (NASDAQ:PWAV)

****

79.6%

80%

Raytheon (NYSE:RTN)

****

51.2%

88.3%

Source: 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
While management says that CapitalSource has taken the steps necessary to get costs under control and the business streamlined, investors aren't so sure that the commercial lender doesn't have more room to make cuts.

CAPS member JackCaps says that if real cost-cutting had been initiated, CapitalSource's SG&A expense line would not have soared the way it did.

SG&A expenses appear disconnected from revenue. For the last few quarters, revenue is down a lot while SG&A went much higher. Most recovery scenarios involve management regaining control over the SG&A expenses while trying to hold on to as much revenue as possible. Neither seems to be occurring here, hence my negative forecast.

But in the latest quarter, management reported operating expenses that were down 14% sequentially -- including a 16% sequential decline in its Other Commercial Finance segment. Management is also cautiously optimistic about the future since the loans it has written off as uncollectible fell to $124 million, compared with $184 million in the fourth quarter of 2008. Even though the company has slashed its dividend to just a penny and dramatically reduced its loan-loss provisions, it still ended up with a GAAP loss of $104 million.

Does that performance foretell the complete demise of its dividend? Very few banks have actually gone that far, though Bank of America (NYSE:BAC), Fifth Third Bancorp (NASDAQ:FITB), and Citigroup have maintained only token payments. Even so, with losses still piling up, it seems to make little sense to pay out money to shareholders if that move keeps CapitalSource in precarious financial straits. The company got a kick-save from Wachovia once to avoid a default, and investors can't count on another one for any dramatic improvements.

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.

Dynamic Materials is a Motley Fool Hidden Gems selection. The Fool owns shares of Dynamic Materials and CapitalSource. 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's disclosure policy is capital idea.