The One Thing to Know About Google

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 Google’s  (Nasdaq: GOOG) leadership.

How much skin do they have in the game?
Are Google CEO Eric Schmidt’s interests aligned with shareholders? Here’s how the Google CEO’s ownership compares to that of other companies in the industry.

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.

Eric Schmidt owns over $4 billion worth of Google, or 2.94% 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. Between Eric Schmidt and co-founders Sergey Brin and Larry Page, Google has a high degree of ownership between its executive team.

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 Google’s recent return on equity:

Google’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 Google’s case, while net income margin has remained fairly high after a dip in 2008, the equity on its balance sheet has been increasing along with profitability. One concern to shareholders might be the companies inability to monetize non-search products. Google has a history of rapidly creating product lines that don’t always have a tangible way to produce income to the company. That could be troubling to shareholders.

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, Google’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 Google’s management is excelling in this area, let’s compare the company to its peer group once again:

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

Google’s been growing its revenue per employee. The fact the company has grown its revenue per employee might help quell some concerns it has over-hired in recent 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 owns shares of no companies listed above. Google is a Motley Fool Inside Value pick. Baidu and Google are Motley Fool Rule Breakers recommendations. eBay is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.