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 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 Linn Energy's (Nasdaq: LINE) leadership.

How much skin do they have in the game?
Are Linn Energy CEO Mark Ellis's interests aligned with shareholders? Here's how the Linn Energy CEO's ownership compares to that of a group of peers across the energy industry.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

Mark Ellis, Linn Energy

562,953

0.38%

$17

Floyd Wilson, Petrohawk Energy

3,191,521

1.06%

$52

H. Clark, Forest Oil

374,186

0.33%

$11

Douglas Miller, EXCO Resources

4,566,831

2.15%

$68

Miles Allison, Comstock Resources

1,501,004

3.17%

$34

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

Mark Ellis actually owns $17 million worth of Linn Energy, or 0.38% 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 Linn Energy's recent return on equity:


Linn Energy'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.

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, Linn Energy'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 Linn Energy's management is excelling in this area, 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

Linn Energy, LLC

$382

$515

$754

15%

Petrohawk Energy (NYSE: HK)

$1,676

$3,372

$2,310

(5%)

Forest Oil (NYSE: FST)

$2,119

$1,488

$1,089

(33%)

EXCO Resources (NYSE: XCO)

$646

$1,298

$730

(29%)

Comstock Resources (NYSE: CRK)

$3,408

$2,403

$2,237

(21%)

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

Linn Energy'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.

Jeremy Phillips does not own shares of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.