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 General Electric's (NYSE: GE) leadership.

How much skin do they have in the game?
Are General Electric CEO Jeffrey Immelt's interests aligned with shareholders? Here's how the General Electric 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)

Jeffrey Immelt, General Electric

1,819,184

0.02%

$27

George Buckley, 3M

43,801

0.01%

$4

Scott Donnelly, Textron

124,519

0.05%

$2

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.

Jeffrey Immelt actually owns $27 million worth of General Electric, or 0.02% 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 General Electric's recent return on equity:


General Electric'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. In General Electric's case, declining profitability in their Capital unit has put a crimp on their return on equity. Given continuing uncertainity within the financial sector, it's unlikely the company will return to levels seen earlier this decade. Also, Immelt has looked to shed the company of some assets which no longer make sense within General Electric's varying business interests. For example, the company sold a portion of its NBC Universal stake to Comcast.

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, General Electric'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 General Electric'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

General Electric

$429

$527

$516

3%

3M (NYSE: MMM)

$305

$321

$309

(1%)

Textron (NYSE: TXT)

$271

$282

$328

11%

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

General Electric's been growing its revenue per employee over its five year overage, but it still lags its peer-group average. However, in absolute terms, General Electric still has a higher revenue per employee.

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 owns shares of no companies listed above. 3M is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. How well do you use your disclosure policy, The Motley Fool?