Why Boards That Lead Succeed

When Microsoft CEO Steve Ballmer announced last August that he would be stepping down within one year’s time, the board began a six-month-long search for his replacement. Directors reportedly identified more than 100 potential CEO candidates to fill the top spot before choosing Satya Nadella, who had headed up the Redmond company’s cloud-computing and enterprise-engineering group.

As an outsider peering in, it seems clear that the search, headed by an independent director, was exhaustive and methodical. The choice likely came down to—as it frequently does—either a) the CEO of another company, who has the broader general experience, but not the deep knowledge of the specific industry; or b) a candidate who has the DNA of the company and deep expertise, and who may have leadership experience at a lower level within the organization, but is not yet battle-tested as CEO.

Microsoft’s board decided that the latter was the best bet. Nadella clearly has the deep understanding of where Microsoft’s future lies as a technology-driven company, how the industry is shifting and in what direction it is headed. Did the board make the right choice? Choosing a CEO is never risk free, but the conscientiousness and high level of deliberation that went on in the Microsoft boardroom gives us high hopes.

The Microsoft search is a fine example of how far U.S. corporate boards have come in the U.S. Gone are the days of the ceremonial, rubber-stamp board serving at the pleasure of an imperial CEO who made all the big decisions, including when to leave and whom to anoint as the successor. Company performance is now transparent, and investors, activist shareholders and other stakeholders don’t shy away from taking passive boards to task. A growing number of boards are reinventing their role in keeping with this new governance climate.

Successful boards are beginning to make sharp distinctions about when they should partner with the CEO, when they should get of his or her way and when they must have a firm grip on the reins. When it comes to succession—selecting a leader, coaching and developing a leader, and when necessary, dismissing a leader—boards must take the lead and do all they can to get it right.

Nothing can overcome a wrong leader in the top job. Some boards, like DuPont and Apple, have done well in choosing their chief executive and, as a result, their companies have flourished. Others, like Sears, Kmart and more recently, Yahoo!, with its cavalcade of CEO departures, have not been so fortunate. When a CEO fails, the consequences are weighty, not only for the company and its ecosystem but also for the nation. Here are some of the key things successful boards do to manage CEO succession—and what can happen when they fail in that role.