The One Thing You Must Know About 3M

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 3M's (NYSE: MMM  ) leadership.

How much skin do they have in the game?
Are 3M CEO George Buckley's interests aligned with shareholders? Here's how the 3M CEO's ownership compares to that of other companies in the industry.

CEO, Company	Shares Owned	% of Shares Outstanding	Insider Ownership Market Value (in millions)
George Buckley, 3M	43,801	0.01%	$4
Jeffrey Immelt, General Electric	1,819,184	0.02%	$27
Scott Donnelly, Textron	124,519	0.05%	$2
David Roberts, Carlisle Companies	240,390	0.39%	$7

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.

Buckley actually owns $4 million worth of 3M, 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. Buckley took over the reins in December 2005, so while his tenure doesn't sit on the longer end of CEOs, he's had some experience running the company.

How well are they using your money?
Return on equity (ROE) 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 3M's recent return on equity:

3M's current return on equity falls below its five-year average. While recent economic conditions have been challenging, declining return on equity shows either that management hasn't been able to control costs and manage assets, or that it's failed to move into higher-return businesses over the last five years. In 3M's case, net income margin slipped about 3 percentage points (from around 17% to 14%) during the crisis, which helped lead to the decline in ROE. Since then, the margin has increased back to 15.5%, and revenues are back to their peak level seen in 2008. With 3M's broad line of products and services, it has ample ability to stretch into fields offering more attractive returns. Shareholders should watch in coming years to see if management is able to make a full recovery back to margins seen before the financial crisis.

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, 3M'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 3M's cost controls are actually deficient, let's compare the company to its peer group once again:

Company	2005	2007	2009	Last Year's Revenue Per Employee vs. 5-Year Average
3M	$305	$321	$309	(1%)
General Electric (NYSE: GE  )	$429	$527	$516	3%
Textron (NYSE: TXT  )	$271	$282	$328	11%
Carlisle Companies (NYSE: CSL  )	$199	$216	$238	3%

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

3M's trailing its peer group in this category over the past five years. Overall though, the company is still above levels seen in 2006, so while productivity gains aren't impressive, they're not especially troubling either.

In the end, management aims to return capital to shareholders, especially if the company can't adequately find new high-growth areas to invest in. So we're pleased to see that:

• Dividends have increased by 5.8% annually over the past five years. The company's current dividend yield stands at 2.6%.
• Its outstanding share count has dropped over the past five years. While CEOs are often tempted to retain key talent through lavish stock option awards, this tactic can dilute current shareholders if it's used excessively. If the company's stock isn't overvalued, buying back its own shares is a very tax-effective way to return capital to shareholders.

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.