The One Thing to Know About United Parcel Service

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 United Parcel Service's (NYSE: UPS) leadership.

How much skin do they have in the game?
Are United Parcel Service CEO D. Scott Davis' interests aligned with shareholders? Here's how the United Parcel Service CEO's ownership compares to that of other companies in the shipping and logistics industry.

Source: Capital IQ, a division of Standard & Poor's. Shares are common stock equivalents only and do not include options, awards, and other forms of compensation.

Davis actually owns $8 million worth of United Parcel Service, or 0.01% 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 United Parcel Service's recent return on equity:

Despite difficult economic conditions, United Parcel Service 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. In UPS' case the company took a large unusual items charge in 2007 that caused the extreme downward movement in return on equity. Overall, the company has done a good job of controlling operating expenses during the downturn. The company has managed to decrease operating expenses faster than its revenue declines, which has helped stabilize net income despite a large drop in revenue.

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, United Parcel Service's revenue per employee has moved below its five-year average. This might mean that the company's hiring too many people, or spending too much. To better see whether United Parcel Service's cost controls are actually deficient, let's compare the company to its peer group once again:

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

Though United Parcel Service's revenue per employee has been declining, its relative performance versus its five-year revenue per employee still beats its peer group. However, UPS' performance sits a bit below direct competitor FedEx.

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.