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 Occidental Petroleum's (NYSE: OXY) leadership.

How much skin do they have in the game?
Are Occidental Petroleum CEO Ray Irani's interests aligned with shareholders'? Here's how the Occidental Petroleum 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)

Ray Irani, Occidental Petroleum

7,630,785

0.94%

$587

J. J. Mulva, ConocoPhillips

741,685

0.05%

$40

John Watson, Chevron

80,157

<0.01%

$6

Rex Tillerson, ExxonMobil

1,390,803

0.03%

$85

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

Ray Irani actually owns $573 million worth of Occidental Petroleum, or 0.94% 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 Occidental Petroleum's recent return on equity:


Occidental Petroleum'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.

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, Occidental Petroleum'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 Occidental Petroleum's cost controls are actually deficient, 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

Occidental Petroleum

$1,765

$1,936

$1,525

(20%)

ConocoPhillips (NYSE: COP)

$4,562

$5,261

$4,534

(11%)

Chevron (NYSE: CVX)

$3,134

$3,138

$2,489

(21%)

ExxonMobil (NYSE: XOM)

$3,114

$3,377

$2,697

(18%)

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

Occidental Petroleum's trailing its peer group in this category over the past five years. Shareholders should keep a wary eye on this red flag in the coming 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.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jeremy Phillips owns shares of no companies listed above. Chevron is a Motley Fool Income Investor selection. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.