What's 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.


CAPS Rating (5 Max)

Index CGQ Ranking*

Industry CGQ Ranking*

Arena Pharmaceuticals (NASDAQ:ARNA)




Brocade Communications (NASDAQ:BRCD)




Denbury Resources (NYSE:DNR)




DuPont (NYSE:DD)




Sunrise Senior Living (NYSE:SRZ)




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
Companies that become serial acquirers, chewing up rivals in merger after merger, can cause years of underperformance for investors. As integration of operations and corporate cultures diverts management's attention away from the business at hand. Revenues slow, profits sag, and the stock turns lackluster.

That doesn't mean all acquisitions a company makes are a drag. Look at Brocade Communications' purchase of Foundry Networks, which helped power the networking equipment and solutions provider to 43% revenue growth this quarter. Brocade was able to exceed analyst expectations for earnings. Having hewn closer distribution ties with IBM (NYSE:IBM), Brocade will have that extra spring in its step to keep Juniper Networks (NASDAQ:JNPR) in its sights, and there seems to be plenty of catalysts for growth.

Brocade has an industry-leading data center position and has shown a willingness to get closer to original equipment manufacturers. And a bevy of new product offerings underscores the growth potential still present. The company's market valuation is just one-fifth of Juniper's, and Brocade is trading at a significant discount to forward earnings estimates, relative to Juniper. As Cisco enters the server market with its Unified Computing System, we'll find more companies such as IBM and Hewlett-Packard trying to reposition themselves by turning to Brocade.

That move underscores the sentiment of investors such as highly ranked CAPS All-Star member sentinelbrit, who responded after the recent earnings and was surprised to find  this growth stock priced so low.

Great results today. Beat estimates and was very upbeat on the future. It is linking up with IBM and HP to sell some of its products. Mgt is very confident of beating earlier estimates of 40 to 50 cents in earnings this year. On that basis, the stock is trading on about 13x this year's earnings. This is ridiculously cheap for a growth stock.

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.

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Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool's disclosure policy is capital idea.