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 look 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 (out of five)

Index CGQ Ranking*

Industry CGQ Ranking*





General Electric (NYSE:GE)




Gilead Sciences (NASDAQ:GILD)




United States Steel (NYSE:X)




United Technologies (NYSE:UTX)




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 based on their shareholder policies.

Go to the head of the class
Diversification is usually a good thing. It can keep your portfolio's performance from hinging on just one stock and can help a conglomerate weather the market's vagaries. Unless all your businesses are diversified across industries counting on economic growth.

United Technologies is still operating like someone has poured sand into its machinery. A maker of jet engines and helicopters, heating and air conditioning systems, and fire-safety products, it ran into a sandstorm of biblical proportions when the economy went south last year. Defense spending has propped up its Sikorsky helicopter division, but budget cuts are shearing the wings off defense contractors like Lockheed Martin and Boeing (NYSE:BA), making it harder for United Tech.

With new equipment orders falling, getting the gears going again will be slow work. Cost-cutting initiatives are helping to improve cash flows, and capital spending was throttled back, helping free cash flow increase by 22% year over year. Coupled with a saucy dividend yielding 2.8%, United Technologies looks capable of riding out the storm.

CAPS member sudhitatti says management is making smart decisions.

They have a good team in place which reads the market well and is responding to it in a timely and effective manner. Actions currently being taken by the management (M&A, downsizing, repositioning themselves for new business climate) will benefit the company in the long run. Market place is currently pricing this stock below their long term potential.

Steely reserve
It took manufacturers time to wind down their inventories of steel, but United States Steel may have reached the bottom of the slag pit. Steel Dynamics (NASDAQ:STLD) reported that order volume is beginning to grow and that capacity utilization rates at steel mills rose to about 52%, up from its nadir of 45% earlier this year. Production rates of at least 60% are needed for the steelmakers to earn a profit, so there is a ways to go yet, but at least they're moving in the right direction. As evidence of that, United States Steel recalled hundreds of laid-off workers.

CAPS member ddouge agrees that new demand is imminent.

A $150 stock in 2007, currently still selling at a 3rd of that price. Well positioned to wait out the recession. Super low steel inventories worldwide make this a stock ready to soar at the 1st sigh of any uptick in the economy. No recovery will take place without an uptick in steel demand and this company is well positioned to profit from any pickup in demand.

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.

Try any of our Foolish newsletter services 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. The Motley Fool's disclosure policy is a capital idea.