How to Grade Company Management

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?