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 Oracle's (Nasdaq: ORCL) leadership.

How much skin do they have in the game?
Are Oracle CEO Larry Ellison's interests aligned with shareholders? Here's how the Oracle 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)

Larry Ellison, Oracle

1,157,421,324

23.03%

$26,644

Steven Ballmer, Microsoft

408,252,990

4.72%

$9,892

Marc Benioff, Salesforce.com

11,291,006

8.77%

$1,267

Mark Templeton, Citrix Systems

272,268

0.15%

$16

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.

Larry Ellison owns $26,644 million worth of Oracle, or 23.03% 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 Oracle's recent return on equity:


Oracle'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. One problem going forward for Oracle may be its move into hardware. While hardware allows the company to emulate an IBM-like strategy, it can also be a drag on profit margins. However, when analyzing the components of Oracle's return on equity, net income margins have still been pretty impressive. The main driver in its declining value is an increased equity line on the balance sheet that's been consistently increasing as a result of profitability.

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, Oracle'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 Oracle'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

Oracle

$237

$241

$270

6%

Microsoft (Nasdaq: MSFT)

$652

$647

$628

(2%)

Salesforce.com (NYSE: CRM)

$238

$287

$329

18%

Citrix Systems (Nasdaq: CTXS)

$287

$301

$335

9%

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

Oracle's been growing its revenue per employee, but it still lags its peer-group average.

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. Microsoft is a Motley Fool Inside Value pick. Salesforce.com is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.