Here's the Real Problem With Microsoft's CEO Search

Mulally won't join Microsoft, but there's more at stake here.

Alex Dumortier
Alex Dumortier, CFA
Jan 8, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Despite a higher-than-expected number of jobs added by the private sector in December, stocks opened roughly unchanged on Wednesday, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) down 0.13% and 0.49%, respectively, at 10:15 a.m. EST.

Scratch one highly qualified candidate from the list of potential successors to CEO Steve Ballmer at Microsoft (NASDAQ:MSFT). In an interview with the Associated Press that put an end to months of speculation, Ford (NYSE:F) CEO Alan Mulally said categorically he would not jump from the automaker to the software concern: "I would like to end the Microsoft speculation because I have no other plans to do anything other than serve Ford."

The timing of Mulally's public commitment to Ford isn't random, coming ahead of Monday's start to the press reviews of the North American International Auto Show in Detroit, where the Blue Oval will launch a new version of its F-150 pickup truck, the most successful model in Ford's lineup and a major contributor to company profits. Last month, the rumors of Mulally's possible departure hampered his efforts to promote the 2015 Mustang. Sales of Ford's F-Series pickups rose 18% last year to 763,402, easily topping the second-place Chevrolet Silverado, which had sales of 480,414.

Within the last month, both General Motors and Chrysler resolved significant leadership issues, leaving them free to focus on selling cars.

As an outsider not only to Microsoft, but to the entire software industry, Mulally was perhaps the most interesting name to come up with regard to Redmond's CEO search, particularly given his success at turning around Ford. Microsoft needs someone who can assess the business with a clean slate, someone for whom there are no sacred cows. Mulally was that person and, as a bonus, he already had a relationship with Ballmer.

Which brings us to another issue: Microsoft's search is complicated by the fact that the only two CEOs the company has ever had -- one of them a co-founder -- sit on the board. In fact, Bill Gates is part of the committee that is tasked with selecting the next CEO, although, according to an excellent piece in The Wall Street Journal that looks at why Microsoft hasn't chosen a new chief yet [subscription required], neither Gates nor Ballmer has veto power over a candidate.

Nevertheless, some major investors are reportedly concerned about the extent of Gates' influence on the board. Justifiably so, in my opinion: one of Microsoft's biggest challenges is its inability to move with sufficient alacrity. The current CEO search is turning into another example of that weakness.