These Software Makers Treat Their Owners Well

When it comes to good corporate governance, Intuit and Microsoft rank high among software stocks, while i2 Technologies and Ariba are among the worst.

Admittedly, the ranking draws from a limited sample: the 10 software stocks covered by Salomon Smith Barney. The investment bank released the list on the occasion of adding ISS's so-called corporate governance quotient, a measure of a company's corporate governance policies based on 51 variables, to its research notes.

The value of the measure? Software analyst Heather Bellini suggests in her note introducing the metric that it can be useful in assessing risk. Salomon, the first investment bank to add the rating to its research, was unavailable for comment on the move.

A low ranking could tip investors that they should look deeper into a company to determine whether it has the right checks and balances in place, said Pat McGurn, vice president and director of corporate programs at ISS. Investors also use the rating to select companies in their portfolio as targets for shareholder activism campaigns, he said.

Meanwhile, a comparison of the software companies' corporate governance ratings to their stock performance this year found a correlation only at the top and bottom of the list.

Software Stocks: Corporate Governance Rating vs. Stock Performance
Company	Corporate Governance Rating	Stock Price Nov. 21	Stock Price Jan. 2	Change
INTU	94.5	52.86	41.54	27%
MSFT	87.5	57.84	67.04	-14
SEBL	75	8.67	29.25	-70
JDAS	64.2	10.26	21.34	-52
EPNY	44.6	4.24	8.46	-50
VIGN	41.2	1.39	5.38	-74
PSFT	37.9	21.03	38.99	-46
INFA	19.2	7.01	13.02	-46
ARBA	6.2	4.40	6.45	-32
ITWO	5.4	1.51	8.10	-81
Source: Salomon Smith Barney, Institutional Shareholder Services.

McGurn said ISS has tried to weigh the variables that contribute to the corporate governance quotient so that it correlates to long-term performance. But "there are always anomalies," he acknowledged. "There are some companies that you get exactly what you expect: bad governance and bad performance." But there's also the case of the badly governed company that performs well, he added.

Many of the companies plagued by corporate scandals did not rank well, Bellini said in her note. For instance, Adelphia had a corporate governance quotient of 16, Worldcom 11 and Enron 42. The number reflects the percentage of companies the firm outperformed in the relevant benchmark index (a rating of 95 means that the firm outperformed 95% of the companies in the relevant benchmark index).