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 in 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 PMI Group's (NYSE: PMI) leadership.

How much skin do they have in the game?
Are PMI Group CEO L. Stephen Smith's interests aligned with shareholders? Here's how the PMI Group CEO's ownership compares with that of other companies' CEOs in the broader thrifts and mortgage finance category.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

L. Stephen Smith, PMI Group

140,604

0.09%

$0.4

Paul Perrault, Brookline Bancorp

38,359

0.06%

$0.4

Vincent Palagiano, Dime Community Bancshares

675,781

1.96%

$8

Robert McCormick, TrustCo Bank

574,455

0.75%

$3

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.

Smith actually owns less than $1 million worth of PMI Group, or 0.09% 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 PMI Group's recent return on equity:


PMI Group's 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 has failed to move into higher-return businesses over the past five years. In PMI Group's case, crushing losses have continued to keep ROE at extremely negative levels. Offering loss protection in the case of borrowing default hasn't been a particularly attractive industry in recent years.

How productive are the 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, PMI Group'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 PMI Group's management is excelling in this area, let's compare the company with its peers once again:

Company

2005

2007

2009

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

PMI Group

$1,003

$852

$1,540

40%

Brookline Bancorp (Nasdaq: BRKL)

$379

$302

$343

6%

Dime Community Bancshares (Nasdaq: DCOM)

$272

$217

$245

2%

TrustCo Bank (Nasdaq: TRST)

$266

$167

$164

(14%)

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

PMI Group's revenue per employee isn't just rising -- it's better than its combined peer group. Because total revenues have been decreasing over the five years, gains in revenue per employee are because of reductions in staffing. With the company losing more than $1 billion in cash flow from operations over the past year, these austerity measures have been necessary to help stop the bleeding.

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 doesn't own shares in companies listed above. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.