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 EMC's (NYSE: EMC) leadership.

How much skin do they have in the game?
Are EMC CEO Joseph Tucci's interests aligned with shareholders? Here's how the EMC 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)

Joseph Tucci, EMC

1,307,467

0.06%

$24

Thomas Georgens, NetApp

7,100

0.00%

$0

Eli Harari, SanDisk

3,360,551

1.44%

$139

John Coyne, Western Digital

1,002,575

0.44%

$25

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.

Joseph Tucci actually owns $24 million worth of EMC, or 0.06% 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. In Joseph Tucci's case, while his ownership of common stock might be low, he definitely gets passing grades for tenure. He's been the CEO since 2001 and has guided the company into virtualization and the resulting changes in the storage market.

How well are they using your money?
Return on equity (ROE) 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 EMC's recent return on equity:


EMC'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 EMC's case, declining ROE can be partially attributed to a growing equity line item. While the company saw drop-offs to its net income margin back in 2008, its since recovered as demand boomed for its storage products. As the recent bidding war for 3Par showed, the storage market is hot. Companies like EMC that have cloud-friendly storage solutions are well equipped to dominate the next generation.

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, EMC'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 EMC'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

EMC

$365

$351

$325

(7%)

NetApp (Nasdaq: NTAP)

$420

$423

$443

4%

SanDisk (Nasdaq: SNDK)

$2,129

$1,228

$1,092

(18%)

Western Digital (NYSE: WDC)

$157

$185

$162

(4%)

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

EMC's trailing its peer group in this category over the past five years. There's been significant changes to EMC across the years such as its acquisition of deduplication specialist Data Domain and its spin-off of its VMWare virtualization products. However, the revenue line is still trailing rival NetApp (which has shown gains across the years), so EMC investors should keep an eye on how well management controls costs in coming years.

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. Vmware is a Motley Fool Rule Breakers choice. Try any of our Foolish newsletter services free for 30 days. 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. The Motley Fool has a disclosure policy.