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. ISS then 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 (out of 5)

Index CGQ Ranking*

Industry CGQ Ranking*

Avon Products (NYSE:AVP)




Entergy (NYSE:ETR)




Goodrich (NYSE:GR)




Infinera (NASDAQ:INFN)




Morningstar (NASDAQ:MORN)




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
Having lost a good chunk of its business from Level 3 Communications (NASDAQ:LVLT), communications chipmaker Infinera is touting its new deal with Telefonica (NYSE:TEF) and others, along with the next generation systems it is developing as a reason to expect growth.

The markets were rightly concerned when Infinera slipped in a notice at the end of July that its biggest customer had decided to use another DWDM vendor in its network. Dense wavelength division multiplexing is a fancy phrase for increasing bandwidth over long-haul fiber optic networks. Level 3 provided a quarter of Infinera's revenues in the first half of the year so it was a significant blow, though analysts had been suggesting for awhile that Huawei was stealing the show.

More importantly however is Infinera looks like it will finally get a 40 Gigabit/second photonic integrated circuit (PIC). It was speculated that's the reason Level 3 took its business to Huawei in the first place. Yet because Level 3 said it was still going to be buying from Infinera in the future, it may be able to woo back its customer when the PIC finally comes online.

But that loss may be why CAPS member htownjester believes the "market correctly anticipates loss of significant revenue in short term." It's a top-rated company on CAPS, but htownjester is taking a "contrarian" position here figuring it will underperform the market, at least short term.

With a new CEO coming on board, Infinera could get the bounce it needs to recover, but I don't think that will happen for awhile even with the customer wins (and the sharp move higher on the news). It's going to have to struggle through Level 3's defection first and I think htownjester is correct that there's just not a compelling reason to be a buyer yet.

Agree? Feel free to share your point of view in the comments box below.

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.