The selection of Satya Nadella as Microsoft’s (MSFT) chief executive played out as the conclusion of a soap opera that started nearly six months ago, when Steve Ballmer announced his retirement. In the end, Microsoft’s board made the safe choice of promoting an insider, despite some calls for an outsider who would bring radical change. Was it by luck or happenstance that they “found” Nadella, despite the fact that he was there all along? And why did it take them six months?
The answer is it shouldn’t have taken six months to replace Ballmer with an insider. The Microsoft board is supposed to know and be comfortable with the company’s senior leadership—a pool of potential CEOs. Instead, their first reaction was to look outside.
The drawn-out drama of Microsoft’s CEO succession underscores what many companies—and their boards—fail to do: have a plan in place that ensures the availability of talent from within to take the key jobs at a moment’s notice. That’s Succession Planning 101.
The truth is that too many companies stop there, satisfied to have a replacement plan. What they really need is a development plan, one that identifies future leaders and gives them, over a 10-15-year horizon, the experience necessary to ensure they one day will be ready to fill top jobs. In Microsoft’s case, it is surprising that they didn’t already have that one person who could become the next CEO from among the many talented executives and that it took six months to identify that internal candidate.
Sadly, many boards are not familiar with the managers lower down the organization to feel comfortable choosing a successor from inside. Boards too often depend on the CEO to take responsibility for driving succession planning and typically don’t get deeply engaged until the CEO announces his or her retirement, or when the company is floundering. Lacking familiarity with the quality of potential leadership inside the company, boards naturally turn to the outside to explore candidates with bold visions and fresh eyes who may or may not know anything about the core business. Instead, they should know what the talent looks like two or three levels below the C-suite and make their own judgments as to the best-qualified candidates.
Where do boards go wrong when they have to select a new CEO? Because they don’t know internal candidates as well, they put too much weight on industry knowledge and experience and not enough on management skills and personal characteristics. IBM’s (IBM) Lou Gerstner and Ford Motor’s (F) Alan Mulally are often mentioned in the same breath as people who succeeded despite lacking prior experience in their industries. In addition to a proven track record, both men brought strategic and operational skills, intellectual curiosity, versatility, learning agility, and drive to their roles—precisely the skills you want in a leader. In both cases, skills and personal characteristics trumped industry experience.
To be fair, Satya Nadella has deep industry experience, but he also has a track record of mastering different and increasingly complex jobs during his 20-year Microsoft career. The CEO job is unlike any other position, and the best preparation is having a record of accomplishments that shows adaptability, versatility, and judgment. That is what Microsoft’s board should be counting on in choosing Nadella.
Boards can’t really know how a new CEO will perform, but good governance demands they mitigate the risk of failure. Boards can offset that risk if they follow three important guidelines: Be prepared to take the long view developing key talent from within; balance the desire for industry experience against the personal characteristics that drive success; and get deeply involved in knowing the future leaders coming up through the ranks.