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The Huge Problem With EMC's Succession Plan

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Data storage specialist EMC (NYSE: EMC  ) is getting kudos it doesn't deserve. Why? The company is blowing a chance to right a wrong in its CEO succession planning.

Speaking to The Wall Street Journal, current CEO Joe Tucci said he planned step down as CEO and step into the role of executive chairman by the end of 2012. He'll leave the company formally two years later, handing the role of CEO and chairman to a successor.

Therein lies the problem.

For as good a steward as Tucci has been, as good as EMC's executive bench may be, and as good as the company's governance policies seem to be, there's no excuse for combining the roles of CEO and chairman. One holds responsibility for the company's long-term strategy, the other represents shareholders in evaluating the effectiveness of said strategy (and thereby the company's executive management). The chairman has to be able to fire the CEO.

Or at least that's how this Fool sees it. EMC disagrees. From page 20 of the most recent proxy statement:

Combining the roles of Chairman and CEO makes clear that we have a single leader who is directly accountable to the Board and, through the Board, to our shareholders. It establishes one voice who speaks for the Company to customers, employees, shareholders and other stakeholders.

A little history and a lot of herd behavior
Interestingly, the board does have the right to separate the two roles. Former CEO Michael Ruettgers didn't obtain the role of chairman until 2004. He was executive chairman, charged with helping Tucci transition into the top job, for the three years prior. In the Journal article, Tucci suggests that Ruettgers' role was broad enough to cause confusion among the rank and file, thus explaining why he now occupies both the chairman and CEO roles.

He's only modestly atypical in this sense. Yes, new Hewlett-Packard (NYSE: HPQ  ) chief executive Meg Whitman will get assistance from Executive Chairman Ray Lane, and NetApp (Nasdaq: NTAP  ) CEO Tom Georgens has Chairman Dan Warmenhoven overseeing him. But among sellers of data storage technology, only IBM's (NYSE: IBM  ) Sam Palmisano, Seagate Technology's (NYSE: STX  ) , Steve Luczo and STEC's (Nasdaq: STEC  ) Manouch Moshayedi combine the roles of chairman and CEO. Of those four, only IBM and EMC have outperformed the S&P 500 over the past two years.

Welcome to splitsville, EMC. Population: you. 
To be fair to EMC, the plan to allow Tucci's successor to combine the roles of chairman and CEO should speed decision-making. But is that necessarily a good thing? The tech world moves fast, sure, but if Apple proves anything it's that first-mover status isn't always an advantage. Overwhelming evidence shows second- or even third-generation products and technologies succeeding over early market entrants.

There's also logic to consider. How can the owners (i.e., shareholders) be fairly represented when the de facto leader of the board is responsible for evaluating his own performance? EMC gets around this paradox with a lead director who also chairs the Leadership and Compensation Committee, which in turns decides the size of Tucci's paychecks and bonuses. Here's who is in that group:

  • Windle Priem, chairman, a retired recruiting specialist who spent more than 25 years at a Korn/Ferry. He's served on the board since 2001 and beneficially owns 190,000 shares of EMC stock.
  • Michael Brown, director, a software and finance specialist who spent seven years with Microsoft. He's been an EMC board member since 2005 and serves as chairman of the Audit Committee for VMware (NYSE: VMW  ) . He also owns 90,000 shares of EMC stock.
  • Randolph Cowen, director, a former IT manager and CIO who spent the bulk of his career with Goldman Sachs. He joined the EMC board in 2009 and owns 30,000 shares of EMC stock.
  • David Strohm, EMC's lead independent director and a venture partner at Greylock Partners. He's served on the board since 2003 and rose to lead independent director in 2006. He owns 431,601 shares of EMC stock.

EMC's record shows they're doing a good enough job. But as investors, "good enough" isn't all we're after, is it? We have a right to demand better. Here's where to write the Leadership and Compensation Committee if, like me, you'd like to see EMC have a distinct chairman and CEO. Have a different take? Please weigh in using the comments box below. You can also keep track of EMC's progress using the My Watchlist tool.

  • Add EMC to My Watchlist.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of EMC and IBM. Motley Fool newsletter services have recommended buying shares of VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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