Most Companies Select Insiders as CEOs

Like Microsoft, Most Companies Select Insiders as CEOs

By
• Rachel Feintzeig
• CONNECT

With the announcement of Satya Nadella as its new chief executive, MicrosoftMSFT -0.36%’s global search for a new leader ended in its own backyard.
During the five month long search, the board was said to have courted candidates including Ford Motor Co.F +2.20% chief Alan Mulally and former Nokia Corp.NOK1V.HE +0.40% leader Stephen Elop before tapping Nadella, a popular executive who started at Microsoft in 1992 and leads the division that makes technology to run corporate computer servers and other back-end technology.

When Nadella’s predecessor, Steve Ballmer, announced he was stepping down last year, he told The Wall Street Journal that the company needed profound changes, and he was not the executive to make them. Although companies often go outside for transformative leaders, by picking Nadella, board members are signaling that they believe an insider is up to the job.

More often than not, a company’s next CEO is already working there. In 2012, the last full year for which data is available, 73% of S&P 500 companies with outgoing CEOs selected an internal candidate as successor. This continued a slight downward trend – as recently as 2008, according to the research, 83% of companies chose to promote from within.
A high-profile search process is “not a very healthy time” for a company, said William George, a management professor at Harvard Business School and former chief executive of medical device company Medtronic Inc. Morale problems can spring up as workers grow uneasy about where their employer is headed; an internal pick, said George, may reassure staff.

Nonethless, the search process suggests that Microsoft failed to effectively plan for Ballmer’s successor, management experts said. The former CEO held his post for 14 years–plenty of time to have a replacement groomed and ready, George said.
Succession planning should start as soon as a chief executive starts his or her job, with three or four potential candidates on the board’s radar, according to Michael Useem, a management professor at the University of Pennsylvania’s Wharton school. The practice gives board members ample time to know the up-and comers, he said. Granted, Microsoft isn’t alone in having thin succession plans, and the company’s reorganization last year left it unclear who, exactly, was Ballmer’s number two.

And companies should move fast if they have internal favorites, George added.
“If you liked internal candidates, choose them. You know the internal candidates and you should step up to it,” he said.

Microsoft would not comment on the specifics of the search, but spokesman Peter Wootton said “it’s not uncommon for a search of this magnitude to require four to six months.”

For now, Microsoft must “build up the bona fides” of Nadella and clearly explain its choice, said Paul Argenti, a professor at Dartmouth University’s Tuck School of Business and a corporate communications expert who’s worked with companies like Novartis and Goldman Sachs Group Inc. Leaders should also note that the company needed to proceed carefully at a crucial time in the history of the business.