The One Thing to Know About ConocoPhillips

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 ConocoPhillips' (NYSE: COP) leadership.

How much skin do they have in the game?
Are ConocoPhillips CEO James Mulva's interests aligned with shareholders'? Here's how the ConocoPhillips 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.

James Mulva actually owns $39 million worth of ConocoPhillips, or 0.05% 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. James Mulva has been with the company (originally Phillips) since 1973, so that should provide some comfort to shareholders, as he's a seasoned veteran of the industry who knows the company's operations well.

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 ConocoPhillips's recent return on equity:

Despite difficult economic conditions, ConocoPhillips managed to grow return on equity beyond its five-year average. Like other oil companies, ConocoPhillips experienced the ups and downs of the energy market that have sent returns on equity up to elevated heights, only to send them crashing back down in 2008 thanks to declining energy prices and a massive impairment of goodwill. Going forward, like other oil majors, ConocoPhillips will need to decide whether it wants to diversify more aggressively into other areas of energy like natural gas. It also needs to decide how aggressively it wants to pursue offshore plays, where increasing complexity can boost the cost of production, which can cause prolonged lower returns if oil prices stay within their current range.

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

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

Though ConocoPhillips's revenue per employee has been declining, its results still beat those of its peer group. On an absolute basis, ConocoPhillips produces a very impressive revenue per employee figure.

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.