At Microsoft, would an insider CEO be the best choice?

Satya Nadella (Microsoft)
Satya Nadella (Microsoft)

Microsoft is nearing an end to its search for a new CEO, only the third in its 39-year history, according to several reports Thursday evening.

Bloomberg reported that the board is preparing to make Satya Nadella, the company's executive vice president of cloud and enterprise computing, the company's next CEO. The Wall Street Journal also reported Thursday that Nadella has emerged as the leading candidate for the job, though both publications warned that the plans aren't final. Microsoft's board is also reportedly considering naming lead director and former Symantec CEO John Thompson as its chairman, replacing company founder Bill Gates. (A representative for Microsoft said the company is not commenting on CEO speculation.)

If indeed Nadella does become CEO, that means the board will have chosen an insider after a high-profile, six-month search that has included very big outside names. Some investors were reportedly pushing the company to bring in a leader who didn't already work at Microsoft. Ford CEO Alan Mulally was apparently considered for the job, as was Ericsson CEO Hans Vestberg.

Yet there can be big advantages to going with an insider, particularly one with real technological bona fides. As Michael Cusumano, a professor at MIT's Sloan School of Management, told Bloomberg: “Microsoft is a contentious enough place that you wouldn’t want to bring in someone who lacked credibility with the engineers." Nadella, who has a master's in computer science, has held lead roles with the company's server software and Internet search businesses since he joined the company in 1992.

In addition, an outsider could be jarring at a place where the culture is as complex and embedded as Microsoft's, and where there have only been two CEOs — the company's founder and a long-time veteran. Because many outside CEOs also bring in new chief lieutenants, the effect on the culture could be as risky as it is potentially radical.

"I don't believe many boards truly understand the risks associated with bringing in an outsider," says Joseph Daniel McCool, who advises director search committees on CEO succession. "Too many follow a knee-jerk reaction to go outside, in part because the external candidates are highly marketed by search firms."

Moreover, the strategic jolt that an outsider brings may not be as powerful as many hope. One study by professors at Rice University and the University of Southern California, which examined CEOs in the manufacturing industry, found that early in their tenure, both newly elected internal and external CEOs tend to make changes in an attempt to leave their mark on the company. Yet after three years, their study found, the strategic changes made by insiders fared better.

"Insiders tend to be more familiar with the competencies and processes of the company — they're up to speed from the beginning," says Yan Anthea Zhang, a professor at Rice's Jones Graduate School of Business. "It takes outsider CEOs a while to get to know the business, especially when the business is as big as Microsoft. The chance for an external CEO to make a mistake is huge."

Zhang's research has also shown that outsiders are 6.7 times more likely to be dismissed with a short tenure than homegrown CEOs. "My explanation is that it's an 'information symmetry' problem," Zhang says. However much boards may learn about the outside candidate, directors simply know the internal candidate's strengths and weaknesses far better. As a result, she says, "the chance of making a mistake is much higher in an outside succession."

Zhang adds that the CEO job at Microsoft would be particularly risky for an outsider because of the former CEOs' presence on the board. "The discretion and freedom to make changes could be very limited."

Nadella may not have experience as a CEO, but if he does in fact get the nod, he will have the help of a board that is packed with senior executive experience. In addition to Gates and Ballmer, the board also includes Stephen Luczo, the leader of Seagate Technology, and Helmut Panke, the former chairman of the board of management for BMW and the former CEO of BMW (U.S.) Holding Corp. The board also, of course, includes Thompson, the former CEO of Symantec and the current CEO of privately held technology firm Virtual Instruments.

Jena McGregor is a columnist for On Leadership.

Read also:

A look at Microsoft's flawed system of performance reviews

Who is Satya Nadella?

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.
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