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 NVIDIA's (Nasdaq: NVDA) leadership.

How much skin do they have in the game?
Are NVIDIA CEO Jen-Hsun Huang's interests aligned with shareholders? Here's how the NVIDIA CEO's ownership compares to that of his semiconductor peers.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value
(in Millions)

Jen-Hsun Huang, NVIDIA

19,880,141

3.47%

$184

Paul Otellini, Intel

812,471

0.01%

$16

Richard Templeton, Texas Instruments

148,480

0.01%

$4

Scott McGregor, Broadcom

362,308

0.07%

$12

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

Jen-Hsun Huang owns $182 million worth of NVIDIA, or 3.47% 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 NVIDIA's recent return on equity:


Source: Capital IQ. Periods are for fiscal years ending last Sunday in January.

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

Company

2006

2008

2010

Last Year's Revenue per Employee
vs. 5-Year Average

NVIDIA

$868

$822

$583

(20%)

Intel (Nasdaq: INTC)

$389

$444

$440

5%

Texas Instruments (NYSE: TXN)

$350

$458

$392

(6%)

Broadcom (Nasdaq: BRCM)

$623

$595

$583

(7%)

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

NVIDIA has lost most of its lead over its peer group in this category over the past five years. Shareholders should keep a wary eye on this red flag in the coming quarters.

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. Intel is a Motley Fool Inside Value recommendation. NVIDIA is a Motley Fool Stock Advisor pick. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.