By Andrew Tonner July 19, 2011

Face it, folks, the worst reputation can sink even the best company. Although not sexy or glamorous, ethics matter. Fools need look no further than the recent imbroglio surrounding News Corp. (Nasdaq: NWSA  ) to see what public outrage can do to shareholders' savings. However, as you'll see below, companies that engage in ethical behavior not only let their shareholders sleep better at night, but they can bolster their portfolio's returns as well.

A black eye in Britain
In case you spent the last several weeks underneath a rock, News Corp. recently came under allegations that one or more (the actual number and specific culprits have yet to be fully determined) of its newspaper subsidiaries engaged in hacking the voice mail accounts of individuals, including an abducted girl that investigators later found to be murdered, in hopes of getting some kind of scoop for their front pages. As of last night, the resulting public outrage shaved just over a cool 17% off the share price.

And yet, this seems like just another chapter in the sad, dysfunctional book of corporate malfeasance. You don't have to reach too far back into the history books to find plenty of corporate scandals and the havoc they can wreak on shareholders' purse strings. Last year, a well-publicized sexual harassment scandal and ensuing investigation catapulted Mark Hurd from the reins of Hewlett-Packard (NYSE: HPQ  ) and also helped chop 19.5% off its investors' returns in the month of August alone. In 2002, scandal ensued as The New York Times ran an article highlighting possible impropriety on the part of former Tyco International CEO Dennis Kozlowski. A jury found Kozlowski and one counterpart guilty of stealing more than $150 million from Tyco. Tyco shares closed down 71% in 2002. Although it doesn't take a rocket scientist to figure out, unethical behavior can, and often does, substantially damage the investment returns of the companies involved.

A better way forward
Although the good deeds of corporations often trail profits in investors' eyes, thankfully not everyone sees it that way. The global think tank Ethisphere publishes an annual list of the Most Ethical Companies that help to recognize the righteousness too often overlooked in the C-suite. Companies receive their ratings based on their overall score in four categories: ethics and compliance programs; reputation, leadership, and innovation; governance; and corporate citizenship and responsibility.

And while their good works are worthy of our admiration by themselves, investors should love the stocks selected by Ethisphere for another reason entirely. Since 2007, the companies making Ethisphere's Most Ethical Companies list have absolutely obliterated the market, declining less than the S&P 500 as the world imploded in 2008 and leaving it in the dust on its way up since then.

This year's list included 110 companies from around the world. And interestingly enough for Fools, some of the companies that made the list look downright cheap at their current prices. Below are just a few of the companies making Ethisphere's list this year and their current P/E multiples:

Source: Capital IQ, a division of Standard & Poor's, and Ethisphere Institute. *EV/FCF isn't a great measure for insurance companies.

These companies carry a potentially potent one-two punch. Academic research indicates value stocks outperform their growth brethren over time. With multiples like those seen here, these stocks look like some interesting candidates for further research. These companies have also undertaken some pretty interesting initiatives to become better stewards of society. For instance, Gap has installed solar panels and energy efficient lighting at various distribution centers, improved environmental practices at its mills, and now requires special treatment of water used to launder its denim. Texas Instruments is supporting cancer research, raising money for beleaguered Japan, and increasing its operation's energy efficiency among other items. 

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