Charles Noski

Microsoft's CEO selection: The unanswered questions

November 15, 2013: 12:30 PM ET

On November 19, at the tech giant's annual meeting, shareholders will have a chance to ask the board about its CEO succession process. Here's what they should ask.

Steve Ballmer

Steve Ballmer

FORTUNE -- Microsoft (MSFT) CEO Steve Ballmer will be stepping down, and the board does not have a replacement. Although a baseball team would never think of operating without relief pitchers, Microsoft has plenty of company in the business world. Many boards have not selected non-emergency CEO replacements.

On Nov. 19, at the tech giant's annual meeting in Bellevue, Wash., shareholders will have a chance to ask the board about its CEO succession process. Here's what they should ask.

How far along are you in sorting out who should be on the board?

HP (HPQ) board members were so worn out from boardroom squabbling that they never even met CEO Leo Apotheker before they hired him. All boards need to keep their membership refreshed with people who have the time, energy, and expertise to pick the best top manager. Companies in industries like technology, which goes through rapidly changing business models, require especially intentional board updates.

Microsoft's board could use a reboot. David Marquardt has been on the board for over 30 years, as has Bill Gates, the company's founder, former CEO, and current chair. Ballmer, Helmut Panke, and Charles Noski have been on the board 10 years or more. With five members that ought to have their eyes on the exits, shareholders should ask John Thompson, a 2012 board hire and the nominating committee chair, what his timetable for modernizing the board is, beyond the one new hire that has been announced for next year.

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It's not okay to kick the board renovation down the road until after a new CEO is hired. Great tennis players want to play with great competitors -- and strong CEOs (high ability, low ego) want strong boards. Plus the board should select the CEO, not the other way around.

Despite a few recent additions, the Microsoft board needs a healthier level of ongoing turnover. As they replace the five with long tenures, they should consider the guideline WorldCom had to adopt after its crisis: One person leaves per year.

Have you been rethinking your CEO succession process?

Microsoft's governance guideline that "The board works with the CEO to plan for CEO succession" is about as aspirational as saying the Democrats work with the Tea Party to raise federal income taxes and restore vital social programs. Sounds great in theory, but how likely is it? Sure, once the CEO is on the way out, a board may gain her cooperation, but that's putting a short fuse for no good reason on what deserves a longer-term, more thoughtful approach.

Unlike CEO advisor and author Ram Charan, I don't think boards need to wait to begin the process until six months after the new CEO is in place. A CEO's tenure is completely irrelevant to a well-designed succession process. What matters in CEO succession is identifying and revisiting who can best address the challenges of the business at any point in time. A day after the CEO is in place is not a moment too soon. Shareholders should ask the board about its current and ongoing approach.

Have you decided who will be independent chair? 

As part of the CEO succession process, the board should designate which independent director will be chair and lead the board post-hire. Microsoft's board could use a fresh face in that spot, and CEO candidates need to know who that will be, as the two individuals will need to have a good working relationship.

It also sets the tone in the hiring process and avoids the problem cited by growing numbers of shareholders at J.P. Morgan (JPM). They'd like to call Jamie Dimon's boss to complain about his performance – except, as board chair, Dimon is his own boss. Shareholders need to ask Thompson who will be the independent chair and how the board will choose her.

Have you identified the new CEO's performance metrics, adopted a no contracts policy, and figured out ways to negotiate the most cost-effective salary and bonus package? 

If the board has developed an effective job description, the directors will be able to let CEO candidates know how their performance will be measured. For example, does the board want the CEO to manipulate stock price or earnings? Then TSR (total shareholder return) and EPS (earnings per share) are reasonable metrics. If they are seeking loftier goals, they should communicate measures tied to those expectations.

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Boards should establish a "no CEO contracts" policy, something Goldman Sachs (GS) board member Bill George has championed. No CEO contracts make it much easier to renegotiate pay when the bloom has gone off the rose and fire a CEO without unwarranted obligations. Consider the huge payout given to former HP CEO Mark Hurd upon his unsavory exit. But when a board has a gun to its head to find a new hire, it often caves into paying whatever the whistling cowboy (a.k.a. the CEO candidate) dictates and agreeing to all kinds of crazy compensation arrangements.

Ford's CEO Alan Mulally has been suggested as a potential candidate to replace Ballmer. Mulally has had a sweet deal at Ford (F) that Microsoft should not seek to replicate. Despite falling "well short of numerous internal performance targets used to set pay for top executives," according to a CNNMoney report from March, he earned $21 million in 2012 and has "accumulated Ford stock worth more than $300 million in the six-plus years he has led Ford."

Shareholders ought to ask whether a focus on extracting as much moolah from the corporate coffers as possible will disqualify a CEO candidate. And to encourage a strong pool of internal candidates who can step in on an ongoing basis, has the board considered guidelines, such as not paying more than 20% above what Ballmer's current direct reports earn?

Boards find pay negotiation a lot easier if they choose an internal candidate. But some boards have been successful in using information strategically to ratchet down an outsider's package. Shareholders should be curious about how cognizant the directors are about their own weaknesses and whether they plan to ask someone on or off the board to act on behalf of their interests. Think about the role former SEC chair Richard Breeden played as independent monitor of WorldCom when he had final signoff on new executive hire pay packages.

Have you explained to CEO candidates that they won't be sitting on the board?

Of course, the Microsoft board will be keenly interested in the new CEO's opinions. But she'll be in the board meetings -- she doesn't need a vote. "The CEO should not sit on the board," says John M. Nash, founder and president emeritus of the National Association of Corporate Directors. (Full disclosure: Nash has worked for my company.)

This may be the most radical suggestion of all. But what good will it do shareholders to let this opportunity pass? If shareholders want the Microsoft board to make a good choice and get off on the right foot, on November 19 they need to send a clear message that directors need to first get their act together -- and then make clear to the new CEO that independent board members will be calling the shots.

Even if the board announces the new CEO before the meeting, shareholders should aggressively pursue these questions. After all, a new CEO hired under the wrong conditions may prove unsuitable very quickly.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board education and advisory firm.

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