The One Thing to Know About Amazon

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 Amazon.com's (Nasdaq: AMZN) leadership.

How much skin do they have in the game?
Are Amazon CEO Jeffrey Bezos' interests aligned with shareholders? Here's how the Amazon.com CEO's ownership compares to that of other companies in the industry.

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

Bezos owns $12.2 billion worth of Amazon, or 19.89% of shares outstanding. When CEOs invest a significant amount of their net worth in their own companies, we believe they're more likely to act in ways that generate long-term gains. This will ultimately increase shareholder value and their own wealth.

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 Amazon's recent return on equity:

Source: Capital IQ, a division of Standard and Poor's. Note: Return on equity for 2005 of 3,505% goes beyond the scale of the chart.

Amazon's current return on equity falls below its five-year average. While recent economic conditions have been challenging, declining return on equity typically 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. Here, though, returns on equity are still strong, just slower than they were during an outlying year in 2005.

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, Amazon's 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 Amazon's 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.

Amazon's 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.