Microsoft’s Next CEO: How the Board Can Get It Right

Let’s face facts: Most boards invest heavily in executive assessments, exposing chief-executive candidates to C-suite responsibilities and checking their P&L performance — while simultaneously scanning outside prospects.  Yet less attention is given to one of the most important determining factors of all:  Whether directors who have actually served as CEOs are driving the process.  It takes one, in our view, to really know one.  If the succession and search are not driven by those who have already run another firm, the company is, in our experience, less likely to end up with a CEO who can run this one.

Look at Microsoft’s current search for a successor to chief executive Steve Balmer, who has run the show since 2000.  John W. Thompson, the former CEO of Symantec, leads its search committee, and he is joined by Steve J. Luczo, chairman and CEO of Seagate, and Charles H. Noski, former CFO of Bank of America.  All have served at or near the pinnacle of company power, and they now bring that experience to judging who has the requisite skill-set to lead the world’s largest software maker in a fast-morphing market.  They will likely decide among three major options, and here is where that prior executive experience will prove critical in picking among them:

1. Stay inside or consider an “outside-in” candidate.  Thompson and his colleagues have up-for- consideration several long-term Microsoft managers and a former executive, Stephen Elop,   recently reacquired when Microsoft purchased much of Nokia.  Their prior question here is sure to be the company’s long-term strategy.  Should Microsoft reinvent itself or stay the course?  Most insiders are likely to play to the latter since they have been deeply responsible for executing the departing CEO’s agenda.  This is the default—most Fortune 100 CEOs have been home grown—but it comes with a downside: other top talent may decamp to corner offices elsewhere.

2.  Go outside for a tech-savvy executive with a proven record and who is of an age to run the company for the next ten to fifteen years.  This option opens the way for a much larger gear shift, but it also comes with the same hitch.  The inside talent that is passed over may quickly head out the door, as happened at Boeing when it brought in James McNerney from 3M— only to lose its own Alan Mulally to Ford.

3. Go outside for a more experienced outside CEO of a major enterprise who could further develop Microsoft’s top talent and then be ready to step aside in five or six years.  This brings the advantages of holding off on anointing an internal executive who may not be quite ready—but at the same time retaining the top contestants and allowing for a strategic redirection.  This is no doubt one reason that Ford’s Mullaly is under active consideration.

Regardless of the choice, we believe that Microsoft search committee will better be able to assess these options and their candidates given its members’ own C-suite experience.  Since they have been there and done what they are looking for before, that should improve the likelihood that they and the board will reach the right outcome in the biggest decision that the directors will ever face.

From observation and experience with many boards in the U.S. and abroad, we have come to conclude that too much of the debate around CEO succession misses one of the most important determinants of success or failure.  And that is a matter of creating the right social architecture in the boardroom — including composing the search committee — that can optimize finding the right executive given the company’s challenges at hand.

We also believe that current and former chief executives, or those who have been close to the throne, are more likely to bring the right insight and instinct to the board’s decision.  Having already made so many executive selections of their own, and knowing personally what is required of those who carry ultimate responsibility, they bring the confidence and know-how of the seasoned veteran.  They are less likely to hand-off the process to a search firm, more likely to make company strategy the first criterion in narrowing the field, and more likely to discern who would constitute the best strategic fit.

Company boards think a lot these days about downside risks, as they obviously should and have learned to do in the wake of the financial crisis.  Directors worry about bad acquisitions, bad operating procedures, bad safety measures, and bad multinational expansions that can kill results.  But in our view the greatest such hazard is picking the wrong CEO who can drive the company in the ground.  And to guard against that ultimate risk, the best protection is to bring great performers onto the board who know how to run companies for having done it — and then to place the best of the best on the search committee when it really counts.

Ram Charan, Dennis Carey, and Michael Useem are authors of Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way, 2014.

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