The Best Citizens in Corporate Governance

Like most investors, you probably aim for the best possible return when picking potential investments. But as consumers increasingly clamor for companies to embrace social responsibility, good corporate citizenship is becoming a vital part of many companies' success -- and it can boost the performance of our portfolios, too.

Corporate ResponsibilityMagazine recently released its "100 Best Corporate Citizens" list (link opens PDF file) for 2012, in which it rated members of the Russell 1000 large-cap index on 325 different elements related to responsible behavior. I've been delving into each of the seven categories that contribute to a company's overall score.

Today we'll look at corporate governance, which gets a 7% weighting. Among the 100 top-ranking companies, several dozen tied for first place in corporate governance.

To earn their high scores, companies engaged in a variety of activities, including maintaining an independent audit and compensation committee, having an outside majority on the board, not letting many directors serve on more than four boards, not employing "poison pills" as defenses against takeovers, and giving shareholders the right to call special meetings.

Getting specific
Here's a taste of how some companies approach the topic and how they're earning solid corporate-governance scores:

  • EMC (NYS: EMC) lays out its governance practices clearly, noting that eight of its 10 board members are independent -- including all members of its audit, corporate governance, nominating, and compensation committees -- and that each member is elected annually by majority vote.

  • General Electric (NYS: GE) also lists its governance principles, including its aim to have a majority of its directors be independent, to elect them annually by majority vote, and to hold members of the audit and compensation committees to higher standards. Each director is also expected to hold at least $500,000 worth of GE stock.

  • Railroad company CSX (NYS: CSX) , in its own governance guidelines, also aims for a majority of independent directors and for non-management directors to have a stake in the company via company stock. It discourages directors from serving on many other boards and limits its audit committee members to a maximum of three board memberships.

  • The corporate governance principles of oil-field services company Baker Hughes (NYS: BHI) include a majority of independent directors, elected annually. The company publishes attendance statistics for board meetings, noting that in 2010, for example, the company held five board meetings, with 92% attendance. It does not allow directors to stand for re-election following their 72nd birthday and bids them farewell if their attendance at meetings dips below 66%.

  • Abbott Labs (NYS: ABT) , too, has only independent directors on its audit and compensation committees, and nine of its 10 directors are independent. Directors are expected to disclose conflicts of interest that arise and to hold a stake in company shares.

Policies such as the ones above don't guarantee effective and ethical management of a company, but companies employing them are more likely to be well-governed. Having nonindependent directors on compensation committees, for example, can make it easier for lavish pay packages to be rubber-stamped by those who want to please the CEO. And having all directors elected every year can make it easier for motivated and disgruntled stockholders to replace the whole slate.

Companies doing the right thing can boost your portfolio. A Goldman Sachs report found that leaders in social, environmental, and governance policies outperformed their peers by some 25%. That's great motivation for even the most coolly rational investors to take social responsibility to heart. And here's one more great employer to check out: The Motley Fool.

If you're in the market for solid socially responsible candidates for your portfolio, check out the Rising Stars portfolio run by my colleague Alyce Lomax. Out of more than a dozen portfolios run by smart Fools, she was recently in second place.

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter,holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of EMC and Abbott Laboratories. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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