The One Thing To Know About Boeing

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 Boeing’s  (NYSE: BA) leadership.

How much skin do they have in the game?
Are Boeing CEO James McNerney’s interests aligned with shareholders? Here’s how the Boeing 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 McNerney actually owns $15 million worth of Boeing, or 0.03% 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 Boeing’s recent return on equity:

Boeing’s current return on equity falls below its five-year average. In Boeing’s case, the measure is heavily screwed by a 320% return on equity in 2009. Of course, the huge spike in return on equity also shows the limitations of the measure. Boeing has been building up Treasury Stock (repurchased shares) and accumulated losses on currency. Both of these areas are taken out of the equity item on the balance sheet, which has sent Boeing’s equity crashing down to extremely (even sometimes negative) levels. In Boeing’s case, qualitative measures might be the best judge of management. The company has seen repeated delays in both its 787 and next generation 747 programs. While outsourcing production seemed prudent during the planning phase, its created a logistical nightmare. As Boeing embarks on future plane upgrades, carefully watch how well management is able to stick to its delivery schedules. The other threat to the company in coming years will be paltry defense spending. Boeing and its industry peers will play a difficult game of shifting into new areas seeing increased spending (such as cybersecurity and UAV’s) while defending existing programs from spending cuts.

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, Boeing’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 Boeing’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.

Boeing’s revenue per employee isn't just rising -- it's better than its combined peer group. That's quite an impressive feat.

In the end, management aims to return capital to shareholders, especially if the company can’t adequately find new high-growth areas to invest in. So we’re pleased to see that:

• Dividends have increased by 11.4% annually. The company’s current dividend yield stands at 2.6%.
• Its outstanding share count has dropped over the past five years. While CEOs are often tempted to retain key talent through lavish stock option awards, this tactic can dilute current shareholders if it's used excessively. If the company’s stock isn’t overvalued, buying back its own shares is a very tax-effective way to return capital to shareholders.

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.

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