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Lessons on Succession from the Microsoft CEO Search Saga

Continuity triumphs as Satya Nadella, a 22-year veteran becomes Microsoft’s third CEO. Bill Gates returns as technology advisor and eminence gris. Here’s what the 46 year-old freshly- minted CEO faces--and what other companies might think about when confronting their own succession dilemmas.

Satya Nadella becomes the third CEO since the Redmond, Wash., company was founded in 1975. He succeeds Steve Ballmer, who in August announced his plans to retire. Ballmer was originally handed the reins in 2000 when founder and college friend Bill Gates stepped aside after 25 years. The appointment of Nadella, who is 46 years old and leads the Microsoft division that makes technology to run corporate computer servers and other back-end technology, is widely considered a safe choice. He has signaled a desire for continuity, telling directors that, as CEO, he hopes to lean on Gates, according to reports from The Wall Street Journal and other sources. Indeed, Nadella’s track record at Microsoft suggests he will not break from the company’s traditions.

One of the first things Nadella has requested is that Gates steps up and plays a more active role in the company as it moves forward, and the Microsoft co-founder has duly obliged, adding in his welcome speech that he will henceforth be committing “one third of [his] time to meet with product groups” as the company transcends into a new era. As such, Gates has also stepped down as the chairman of the board, a continuation of which would certainly have hindered this new hands-on role. Former Symantec CEO John Thompson, who serves on Microsoft’s board and led the board’s CEO search (which reportedly started with 100 candidates), will serve as Executive Chairman.

Some observers like former Medtronic CEO Bill George, now teaching at the Harvard Business School, worry that the new arrangement may be problematic for the company. He thinks that all companies should think very carefully about unity of command. “Who is really in charge here?” he told CNBC. Microsoft avoided HP’s mistake of going to a succession of outsiders, but with John Thompson, Bill Gates, and even Steve Ballmer (who is fast becoming the company’s biggest individual shareholder), “it’s not clear who is really calling the shots here.”

Legendary former Citibank chief Walter Wriston always insisted that former leaders should get off the board immediately, as he did when he stepped down as CEO. “It only creates confusion among people and isn’t good when disputes over strategic direction come up,” he once said. The problem can be particularly acute when the founder is still around because loyalties and legacies count for a great deal, regardless of the size of the company. It’s an issue that both Oracle and Cisco will soon have to confront.

Others like Yale School of Management’s Jeffrey Sonnenfeld thinks Microsoft made the right move, telling CNBC that the record shows that it’s the insiders that tend to make the big transformational moves that are necessary. “He’s an engineer with the requisite charisma, even though that sounds like a contradiction in terms,” Sonnenfeld muses. Statistically, most companies in the U.S. and elsewhere draw their succession candidates from within. And as even Sonnenfeld concedes, “recruiting from within one’s own ranks remains the best, if safest, practice except when it isn’t.”

Fortunately, this isn’t the case for Microsoft. However, the company is heavily dependent on a trio of products—Windows, Microsoft Office and related software to run companies’ back-end computing gear—that are deeply tied to the sales of Windows-powered PCs. Other well-known products, like the Bing search engine and the Xbox video game system, don’t contribute as much to results.

“A succession issue of this magnitude deserves a complete vetting of internal and external candidates. I see this as less of a ‘safe choice’ and more of a byproduct of thorough exploration of all available options,” says Tom Saporito, chairman and CEO of organizational advisor, RHR International.

Regardless of the company’s size or industry, cultural fit is a paramount concern when leadership changes, believes Saporito, who advises numerous companies on how to get succession right. “The issue of cultural fit at Microsoft is such a significant issue that having chosen an insider makes a whole lot of sense. Nadella represents a leadership style that allows the organization to move forward, embrace change as necessary, but do so in a highly collaborative manner. This is about ‘continuity,’ “he adds.

Another “thumbs up” comes from Brad Silverberg, co-founder of Ignition Partners and a former Microsoft executive who told C/ that “Satya has reinvigorated Microsoft’s server and tools business. He’s done a remarkable job getting Microsoft to move fast on the cloud and begin staking out a strong position against difficult competitors, such as Amazon. Most of all, he recognized that the world has changed and that to be relevant and become a leader again, Microsoft needs to embrace those changes and offer solutions for customers that fit in that new world. Whereas once open source was regarded as a cancer at Microsoft, Satya has found a way for Microsoft to add value while supporting new standards like Linux, Hadoop, and Ruby on Rails. It’s exciting to see Microsoft play well in this new world and offer differentiated solutions.”

Warwick Business School professor of practice Mark Skilton, who has consulted in the IT industry for 30 years before moving into academia, told Chief Executive. “Satya Nadella is a good choice and a logical place for Microsoft to focus on ‘scaling up’ and converging its portfolio across its four domains. Their first priority is to focus on the indisputable shift to cloud services in all areas and to strengthen uses of Bing, Skype, Yammar and other social platforms into mainstream Microsoft products.”

“I often have difficulty explaining that ‘disruptive innovation’ does not always mean a violent reactionary shift to beat competition with a step change. The iPhone and iPad were such events in truth as was the Google Chrome and Amazon supply chain transformations. But these were using existing technologies in new combination ways. Microsoft, like any company in transition, can re-compete by redefining combined services and user experience which I have often seen with their thought leadership from Microsoft Labs.”

While Nadella decides on Microsoft’s next move, other technology firms such as Amazon, Google and Apple are developing new technological visions such as flyable robots, driverless cars, wearable computers, and sensor-packed devices. In recent years, Microsoft has tempered its efforts at exploring technological edges and seems content to allow others to take the visionary lead. Nadella might surprise everyone with a bold move. In his first interview, he said one of the first things he wants to do is to remove internal barriers to innovation. One of his first tasks will be to hold onto the more talented “losers,” the senior executives within Microsoft that may have been passed over in the internal scrum for the top job. It is almost a management cliche to point to the horse-race method at General Electric where the winner gets the job and all the top executives who didn’t get the crown leave. Most companies aren’t GE and don’t have its near-unlimited bench strength. That’s not to say Microsoft doesn’t have lots of talented people. But it’s all the more reason why it, like any company experiencing transition, should reach out to the clever people it has and reformulate their role and renew their loyalty.

Nadella didn’t tip his hand in any single direction, but when he does it will be with the knowledge that co-founder Bill Gates and chairman John Thompson are not far away. For those watching from outside, pay close attention to who does or does not chose to jump ship. How Nadella, or any CEO, in his position handles internal talent will be telling.




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