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I've recently been trying wrap my head around the concept of corporate governance. How should I use it to evaluate my stocks? Thanks, S.A.

Gregg Greenberg: If you feel overwhelmed by the concept of corporate governance, it's understandable. It's a very broad, fairly mushy idea that isn't easily defined. One of the better definitions comes from the International Chamber of Commerce :

"Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations."

Yeah, that's a pretty wide berth that's not easily quantifiable. There are a plethora of components that make up good governance, ranging from shareholders having adequate voting rights in company affairs to the extent of a company's financial disclosures.

Though it's sometimes difficult to gauge, investors should still seek companies that maintain good corporate governance standards, since those companies are more likely to act in shareholders' best interests. And according to some studies, companies with strong governance and management practices will be the best performers in the long run. The theory is that companies that communicate better with their shareholders will see their borrowing costs lowered, and the risks of bad managerial decisions will be reduced due to the heightened accountability.

That's not to say that companies with strong corporate governance will always perform well, or that those with less-than-stellar standards will perform poorly. Corporate governance is just one aspect of evaluating a stock.

One way to see how a company's governance practices stack up is by checking its "corporate governance quotient," a rating system provided by governance and proxy firm Institutional Shareholder Services . This figure, available on Yahoo! Finance, evaluates the strengths and deficiencies of a company's corporate governance practices and its board of directors.

According to ISS, the CGQ evaluates variables under four areas of focus: board of directors, audit practices, anti-takeover provisions and executive and director compensation.

The data for the CGQ is primarily culled from public documents, press releases and corporate Web sites. Each company's CGQ is compared with other companies in the same index and industry group.

And just in case you want another method for measuring the quality of a company's corporate governance Morningstar assigns so-called "stewardship grades" for stocks it covers.

According to Morningstar's Web site, the firm evaluates "the demonstrated commitment to shareholders of each company's board and management team" by looking into the transparency of accounting and financial disclosure, how much power shareholders have relative to management and whether management's incentives are aligned with shareholders' interests.

What is a PEG ratio and how useful a metric is it? Thanks, T.B.

The "price/earnings to growth" ratio is just the P/E ratio divided by the company's annual earnings growth rate. And since it is forward-looking, many analysts believe it can be a much better indicator of a stock's potential compared to a trailing P/E ratio.

The basic rule of thumb is that if the PEG is below 1, the stock is underpriced. If PEG is greater than 1, the stock is overpriced. If a company's PEG is 1, the company is pretty fairly valued.

My buddy Tracy Byrnes recently expounded on ratios, including those of the PEG variety, in a recent Booyah Breakdown column . You might want to check that out, too.