One of the hottest investment criteria today is how a company meets corporate governance standards. Seriously. Once considered a nicety in about the same category as gender diversification, issues like shareholder rights and board independence have suddenly acquired gravitas.

The passage of the Sarbanes-Oxley Act in 2002 is, of course, mainly responsible for this new sensitivity. Also, the spate of corporate frauds, which have cost investors billions of dollars, has contributed mightily.

Where can one find governance information that might prevent such disasters? One source would be GovernanceMetrics International. GMI was founded in 2000 by Gavin Anderson, who has 20 years of experience in providing investor relations advice, and Harold Sherman, who was at ISS, the proxy voting services firm, and previously served as the CEO of Thomson Financial.

GMI collects data from companies around the world and provides ratings from one to 10 on governance issues such as board accountability, financial disclosure, shareholder rights, remuneration, anti-takeover defenses, and corporate behavior. The information is collected from public documents; the reports are reviewed with the companies for accuracy.

GMI recently published ratings on 3,220 companies around the world. Included for the first time were the companies that make up the S&P Small-Cap 600 Index. The report also reviewed the governance characteristics of the larger companies in the S&P, the MSCI World, and MSCI EAFE indices, as well as the TSX 60 in Canada and numerous other foreign indices.

Why bother? Mr. Anderson’s view is, “The vast majority of the investment industry is not paying sufficient attention to corporate governance.” Lucky for him, that appears to be changing. Today, there is a growing group of money management organizations that, for fiduciary and investment reasons, are incorporating governance ratings into their stock evaluations. These organizations, as well as certain regulatory authorities and accounting firms, are among GMI’s main clients.

Moreover, there is evidence that good corporate governance leads to above-average stock price performance. What do you know?

GMI cites 34 companies around the globe as having received a perfect 10 rating. They maintain that these paragons outperformed the S&P 500 index in the last one, three, and five years by 11.3%, 9.9%, and 15.93%, respectively. Those are pretty impressive margins.

GMI’s most recent report highlights some interesting trends. For example, the ratings of smaller companies are worse than those of their larger brethren. In America, the inclusion of smaller capitalization companies resulted in a drop in the average company rating from 7.23 last September to 7.03 today. Results are similar overseas.

This is not surprising, since many small companies would likely be younger in their corporate life cycles, and would have more holdovers from their start-up days of single-family ownership. A fellow’s first move on starting up a successful company is to get all his buddies on his board; often his last move is to worry about internal accounting controls.

One of the main criticisms of Sarbanes-Oxley is that it places an unfair and, in some instances, a crippling burden on small companies. These ratings disparities support the view that compliance with the new governance regulations may be an uphill battle for many small firms.

It is also interesting to compare the results of different countries. The average rating for Japanese companies in the study was 3.5, compared to 7.4 in Britain and 7.23 in America. Why so poor? For one thing, the Japanese perform almost no board evaluation. Also, the extent of cross-board entanglement has long been a feature of the Japanese corporate landscape.

Have the new Sarbanes-Oxley regulations prompted any change in corporate behavior? It appears that the number of independent directors has increased, not only in America but in almost all of the 23 countries monitored. Also, there are fewer companies in which the same person holds the titles of chairman and chief executive officer. Finally, GMI has seen an increase in periodic board evaluation.

What are companies doing wrong? GMI issues “red flags” for a number of misdeeds. In America, not surprisingly, the most common cause for this alert was remuneration – not the amount being paid to management, but the method of determining it, which often appears whimsical or not sufficiently tied to performance. In Europe, a large number of companies were cited for having excessive anti-takeover provisions.

How do countries compare? Britain had the highest ratings, with Canada and America following close behind. The Greeks had the lowest ratings, at 2.37 on average. Japan had the second-lowest, followed by Belgium and France.

Who were the Bo Derek perfect 10s? Of the 34 companies so noted, 27 were American companies. In the New York area, these included Colgate-Palmolive, General Electric, PepsiCo, and several others.

What about the dogs? GMI is reluctant to cite the current crop of lowest scorers. However, a review of the past three years yields several companies that were given extremely low ratings, including Parmalat, Freddie Mac, Marsh & McLennan, Krispy Kreme, and Interstate Bakeries.

This may be a subscription that pays for itself in no time.