Loss of Microsoft candidate shows challenge of CEO hunt

Bloomberg NewsDecember 18, 2013 

Microsoft co-founder Bill Gates told shareholders last month the software maker’s chief executive officer is a “complex role to fill.” As the board seeks a final candidate, it’s finding out just how right he is.

Steve Mollenkopf, Qualcomm’s No. 2 executive, was named CEO of that company Dec. 12, taking the 44-year-old out of the running to replace Steve Ballmer at Microsoft. While Ford CEO Alan Mulally is considered a candidate, his star faded amid concerns about his age, 68, and lack of technology experience, people with knowledge of the search have said. EBay Inc. CEO John Donahoe and former VMware Inc. CEO Paul Maritz declined to be considered, people with knowledge of the matter have said.

TRANSFORMATION SOUGHT

Microsoft is seeking to transform itself into a provider of devices and services amid declining personal-computer sales. The board is seeking an executive with enough experience to run a large public company and plenty of energy to oversee an overhaul, the people said.

“Going outside for a CEO is always riskier and always more costly,” said Joseph McCool, president of search-committee advisory firm McCool Group in Amherst, N.H. “For Microsoft, which has only had two CEOs, naming a new leader is one of the most critical decisions in its history. It has serious long-term implications because so much is hanging in the balance: the brand, the workforce, the customer base and investors.”

Another issue that could complicate the search for a new CEO is salary. If CEO pay at other companies is any guide, Microsoft will probably have to offer significantly more than the $1.26 million in compensation that Ballmer received for the fiscal year that ended in June.

Ballmer, who holds 4 percent of Microsoft’s outstanding shares, has been paid less than many of his top lieutenants and CEOs at peer companies. Mollenkopf received compensation of $14.2 million last year, according to data compiled by Bloomberg, while Mulally earned about $21 million.

Companies typically pay a premium of 30 percent to 40 percent whenever they choose a new outside CEO, especially when they’re recruiting another CEO, McCool said. Such compensation often involves extra equity or cash to make up for unvested stock or incentive plans they’re leaving behind, he said.

TALENT POOL IS LIMITED

“It’s a handful of people that can really do the job,” said Colin Gillis, an analyst at BGC Partners LP in New York. “You need a CEO of a $50 billion market cap company who wants to move to a $200 billion company and who wants to take on the challenge of turning Microsoft around.”

A spate of departures of senior executives at Microsoft over the last decade means many of Ballmer’s top lieutenants have only served at that level for a handful of years.

Satya Nadella, Microsoft’s head of cloud services, is a leading contender, people with knowledge of the search said in November. Even so, he has only run a business unit since 2011.

Business development and evangelism chief Tony Bates and former Nokia Oyj CEO Stephen Elop remain in the mix, although they’re considered less likely to be offered the job, the people said last month.

Susan Sheehan, a spokeswoman for Nokia, declined to comment.

Microsoft, with multiple businesses, many management layers and a complex organizational structure, has also been a difficult company for outside executives to fit into, said BGC’s Gillis. At the same time, it’s precisely because of such a culture that some investors want to see an outsider come in and shake it up, he said.

“This has to be a vexing moment for Microsoft because the qualities they likely want in a new CEO are going to be difficult to find in one person,” said Michael Useem, director of the Center for Leadership and Change Management at Wharton School of the University of Pennsylvania in Philadelphia. “They’re going to want someone who has managed a big company before and has a proven record for doing a turnaround.”

An outsider still needs to fit in even if the culture needs changing, said McCool. “To do something transformative, they need someone who will be there for more than three to four years,” Useem said.

LESSONS FROM J.C. PENNEY

Microsoft directors should be mindful of the lesson of J.C. Penney Co., said Steve Miller, the chairman of American International Group Inc. who spent his career helping hobbled companies survive. “What must terrify them is the example, say, of J.C. Penney,” Miller told Bloomberg Television’s Stephanie Ruhle and Erik Schatzker in an interview.

J.C. Penney hired Johnson from Apple Inc., where he turned the iPad maker’s stores into a lucrative retail empire. At J.C. Penney, Johnson as CEO scaled back discounts and sought to transform the department-store chain, resulting in plummeting sales and Johnson being replaced by former CEO Mike Ullman.

“They decided they needed to change, they brought in Ron Johnson, did a radical shift in their whole strategy, and it was a complete failure,” Miller said.

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