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 Monsanto's (NYSE: MON) leadership.

How much skin do they have in the game?
Are Monsanto CEO Hugh Grant's interests aligned with shareholders? Here's how the Monsanto CEO's ownership compares to that of other companies in the fertilizer and agriculture chemicals industry.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

Hugh Grant, Monsanto

534,825

0.10%

$31

William Doyle, Potash

216,963

0.07%

$32

Stephen Wilson, CF Industries Holdings

130,596

0.18%

$12

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.

Grant actually owns $31 million worth of Monsanto, or 0.10% 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 Grant's case, he gets a nod for his tenure, having served as chief executive for seven years.

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 Monsanto's recent return on equity:


Monsanto'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 past year hasn't been kind to the company, as revenues have crashed while expenses have remained the same.

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, Monsanto'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 Monsanto's management is excelling in this area, 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

Monsanto

$380

$444

$512

13%

Potash (NYSE: POT)

$712

$952

$712

(25%)

CF Industries Holdings (NYSE: CF)

$1,357

$1,901

$1,683

(5%)

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

Monsanto's change in revenue per employee isn't just rising -- it's better than its combined peer group. That's quite an impressive feat. If the company continues struggling in coming quarters, further cuts may be needed.

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, VP of Fool.com, owns no shares of any companies listed above. Monsanto is a Motley Fool Inside Value selection. Motley Fool Options has recommended a synthetic long position on Monsanto. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.