Stock investing takes guts. When you buy stocks, investors entrust a company's management with their money, counting on leaders to do right by common shareholders. Ideally, the market should reward good governance and punish shady behavior. Institutional investors respect this relationship, and so should you.
How will I know (if management really loves me)?
Astute in her questioning of whether certain men had genuine concern for her emotional well-being, Whitney Houston was on the right track. And you are too, if corporate governance scandals like Enron, Parmalat, and Adelphia give you the willies. You'd scrutinize a potential mutual fund manager before investing, so why not look into the leadership practices of the individual companies in which you want to invest?
There's a lot of widely accepted evidence that good corporate governance pays off. If you're still skeptical, consider these points:
returns on equity by 23.8%.The CFA Institute, which traces its existence back to Benjamin Graham's words when he proposed a rating system for financial analysts, believes that the evidence adamantly supports the direct link between good corporate governance practices and higher valuations for businesses.If you're able to suspend disbelief long enough to accept that governance is tied to performance, you're probably wondering how to gauge a company's governance quality without having a brain aneurysm. It can be done a few ways.
Rating governance
The most convenient assessment of a company's corporate governance quality is probably obtained via the Corporate Governance Quotient (CGQ) data from Institutional Shareholder Services, a RiskMetrics Group subsidiary. Those subscriptions aren't free, but you can get some information on Yahoo! Finance and other free news sources. Also, ISS makes its top 10 governance quotient rankings for several indexes available online.
But the ratings don't always make much intuitive sense. For instance, General Motors is currently ranked second in the Russell 3000, despite its trip into bankruptcy protection. ISS also gave Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) low marks for its lack of board independence and once campaigned for Coca-Cola 's (NYSE: KO) removal of Warren Buffett from its board.
So, good governance obviously doesn't guarantee success, and success doesn't guarantee a good governance rating. Furthermore, great companies sometimes won't fit the ISS mold. The metric clearly has some validity, though, and while you'll need more than the CGQ data to make an intelligent investment decision, owning shares of healthy companies with strong shareholder protections has clear advantages. Institutional investors and the corporations themselves listen to the ratings agencies, so it won't hurt you to do the same.
After running a screen for companies with improving growth prospects, I've listed a few with above-average CGQ scores here:
Company
Industry CGQ Rating (out of 100%)
Index CGQ Rating (out of 100%)
Expected 5-Year EPS Growth (%)
52-Week Change (%)
Family Dollar (NYSE: FDO)
99.0
96.1
12.2%
41.9%
UnitedHealth Group (NYSE: UNH)
99.2
96.9
9.3%
11.1%
MBIA (NYSE: MBI)
100.0
99.8 Continued... |