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 InterOil's (NYSE: IOC) leadership.

How much skin do they have in the game?
Are InterOil CEO Phil Mulacek's interests aligned with shareholders? Here's how the InterOil 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)

Phil Mulacek, InterOil




Rene Joyce, Targa Resources Partners




David Wood, Murphy Oil




John Hess, Hess




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.

Phil Mulacek owns $66 million worth of InterOil, or 2.46% 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 InterOil's recent return on equity:

Despite difficult economic conditions, InterOil managed to grow return on equity beyond its five-year average. Consistently increasing return on equity suggests that management is either adept at cutting costs and managing assets, or is moving the company into new high-return areas. In InterOil's case, it's finally seeing profitability after years of losses, which has enabled ROE to approach positive levels.

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, InterOil's revenue per employee has moved below its five-year average. This might mean that the company is hiring too many people, or spending too much. To better see whether InterOil's cost controls are actually deficient, let's compare the company to its peer group once again:





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






Murphy Oil (NYSE: MUR)





Hess (NYSE: HES)





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

InterOil's revenue per employee has been declining, but investors should keep in mind that it only has 680 employees in total, so the metric might not be as meaningful as other peers.

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, VP of Fool.com, owns no shares of any companies listed above. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.