The One Thing You Must Know About National Oilwell Varco

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, that's the one important area you should know about before finalizing your investment.

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 National Oilwell Varco's (NYSE: NOV) top brass.

How much skin do they have in the game?
Are National Oilwell Varco CEO Merrill Miller's interests aligned with shareholders? Here's how his ownership compares to that of the heads of other companies in the industry.

Source: Capital IQ, a division of Standard & Poor's.

Merrill Miller actually owns $22 million worth of National Oilwell Varco, or 0.14% 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. Merrill Miller has been the CEO since 2001, so his tenure is another area to consider. We prefer longer-tenured CEO's with a knowledge of the field and a history of delivering returns.

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 National Oilwell Varco's recent return on equity:

National Oilwell Varco'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. The shape of National Oilwell Varco's return on equity curve should be familiar to investors in the oil and gas industry. However, with larger competitors in the industry moving to consolidate, the company could face increased competition. That could keep returns on equity from increasing to levels seen in years past, even if energy prices rebound.

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, National Oilwell Varco'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 National Oilwell Varco'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.

National Oilwell Varco's revenue per employee isn't just rising; the absolute total is better than that of its peer group. That shows a pretty solid level of cost controls in the face of volatile energy markets.

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.