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How to Grade Company Management

Jennifer Openshaw

It's easier said than done, though.

These days, financial facts aren't hard to find, but marketplace information is more challenging. You have to tune in to the company, its products and what its customers (and the media) are saying about it.

Management is always the toughest item on my list. How do you appraise management competence and quality, and the quality of the organization in which it works? Does the corporate structure accommodate the right kind of business thinking?

There is no way to fact check all facets of an organization or management team. But if you're willing to start with corporate governance, you can access a thorough analysis -- once the domain of institutional shareholders only -- now available to the masses, for free.

What I'm talking about is the corporate governance quotient, or CGQ, a rating system developed by Institutional Shareholder Services. CGQ covers some 8,000 companies, rating each across 65 variables. Those variables cover such items as board composition, audit practices, executive and director compensation and ownership -- it's a long list.

CGQ is now available on the Yahoo! Finance investment portal "Profile" page for major U.S. companies. I'll use Apple Computer (AAPL Quote) as my first example.

At the time of writing, Apple is better than 49.2% of S&P 500 companies. That's not too outstanding, and it's consistent with the recent concerns about options backdating.

However, ISS reports that Apple is better than 92.6% of companies in the so-called Technology & Hardware Equipment sector. That's not bad, but it doesn't say much for the sector at large.

Click here for the video version of this story from Jennifer Openshaw.

I poked around a little more, and found that Home Depot (HD Quote) has come a long way since the replacement of the controversial CEO Robert Nardelli -- and it sits among the top of all S&P 500 companies (95.5%, actually) and at a stellar 99.2% among retailers.

I found that most of the other companies I follow were near the top of their industry groups, if not the S&P 500 itself. ISS does publish a list of the top 10 rankings among four key market indices: the S&P 500, MidCap 400, SmallCap 600 and Russell 3000.

So do I have the answer to appraising corporate management?

In a nutshell, no -- at least, not a complete one. Governance doesn't equal management. A company can have good governance but still have bad or inept management, and can still make bad decisions.

A recent Goldman Sachs (GS Quote) study, however, concludes that bad governance leads to trouble, while good governance tends to lead to good corporate results. Specifically:

• Better stock price performance. Investing long in top-rated companies and selling short in bottom-rated companies resulted in significant alpha: There is a correlation between CGQ and performance.
• Earnings surprises. Top-rated companies reported positive earnings surprises vs. earnings disappointments for bottom-rated companies.
• Avoidance of bottom dwellers. Using low governance scores to screen out companies with low ratings would have increased returns on the test portfolio.

So I'm putting CGQ in my bag of investment tools for readers of The Millionaire Zone. It gives me a better idea of how a company stacks up against its peers. But like financials and market data, I must add common sense to the mix.

CGQ is definitely a help. Now, wouldn't it be nice if someone came up with a governance quotient for our governments?