The 1 Thing to Know About Frontier Communications

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle to other categories of analysis. However, at Fool.com we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of Frontier Communications' (NYSE: FTR) leadership.

How much skin do they have in the game?
Are Frontier Communications CEO Mary Wilderotter's interests aligned with shareholders? Here's how the Frontier Communications CEO's ownership compares to that of other companies in the industry.

Source: Capital IQ, a division of Standard & Poor's.

Wilderotter actually owns $14 million worth of Frontier Communications, or 0.19% of shares outstanding. We Fools prefer CEOs who have higher ownership stakes in their businesses, since that better aligns their interests with shareholders'. However, while we think high insider ownership is a good sign, low insider ownership isn't necessarily a bad one. CEOs may be relatively new, or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at Frontier Communications' recent return on equity:

Despite difficult economic conditions, Frontier Communications managed to grow return on equity beyond its five-year average. Consistently increasing return on equity suggests that management is either adept at cutting costs and managing assets, or is moving the company into new high-return areas.

A dwindling level of shareholder equity has helped Frontier out in this measure; however, cost cutting will continue to be a focus in coming years. The company is integrating a vast amount of assets from Verizon and will need to operate them at maximum efficiency to assure the deal makes sense. Investors looking to track management's effectiveness in the coming years should watch the churn level of fixed-line phone subscribers and the company's ability to control operating and integration costs.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Frontier Communications' revenue per employee has moved above its five-year average. Rising revenue per employee can suggest that management's getting better at controlling costs, or encouraging more productivity from its workers. To better see whether Frontier Communications' management is excelling in this area, let's compare the company to its peer group once again:

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

Frontier Communications' revenue per employee isn't just rising -- it's better than its combined peer group. That's quite an impressive feat.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.