The Board Of The Borg

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On April 17 of this year, I wrote a post that I never published. The following day, Microsoft was set to release their Q3 numbers and I wanted to see what they looked like before I ran my piece. I wanted to see if the implosion of the PC industry would start to show up in that quarter, or if it would take another quarter before we saw how dire things really were.

Then life got in the way. I never ran the post. But given this week’s news of Steve Ballmer vacating his CEO position sometime in the next 12 months, I figured it was just as timely, if not more so.

The Q3 numbers, released on April 18, ended up being pretty decent. But there was one sign that perhaps all was not as well as it seemed in Redmond: CFO Peter Klein would be leaving the company. As I quipped at the time, “Who is best positioned to know that winter is coming? The CFO.”

A few months later, we got a complete re-organization of the senior leadership of Microsoft, led by Ballmer. And a week later, the company released their Q4 numbers. As expected, these were not great — accentuated by the fact that the company had to take a $900 million write-down related to their Surface RT debacle.

And now the final shoe has dropped. Ballmer. But I’m still not certain it should be the end of the changes if Microsoft really hopes to return to greatness. While the buck ultimately stopped with Ballmer, there was another group of people who enabled him to make one catastrophic miss after the next. The Board.

Below, find my original post from April:

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I’ve been thinking about Microsoft a lot lately. Maybe it’s the awful Surface product. Maybe it’s the fiasco that is Windows 8. Maybe it’s the complete and utter lack of interest in Windows Phone. Bing. Maybe it’s the collapsing state of the PC industry. We’re watching a once giant balloon deflate before our very eyes. And while it can be hard to perceive such deflation at first, we’re getting to that point now.

Right now, Microsoft feels a lot like Nokia a few years ago. Or RIM shortly thereafter. On paper, the numbers still look good. The company is still on top and financially healthy. And yet, it sure feels like they’re nearing the cliff that Nokia and RIM eventually hit. It’s like the Ernest Hemingway quote about how you go bankrupt: “Two ways. Gradually, then suddenly.”

I know I’ll be called crazy by many for taking this stance. The same thing happened with Nokia. Yet many others will agree, saying all of this is obvious. But if it’s so obvious to some of us, why can’t Microsoft do anything about it? Is it just the innovator’s dilemma in action? It sure seems like Microsoft is trying to take some gambles. But in each case, it seems like they’re either taking the wrong ones — or worse, the right ones far too late.

This seems like a leadership problem pure and simple. And while there are few CEOs more divisive than Steve Ballmer these days, it seems like you have to look higher — to the people for whom he serves: the Board.

When I started thinking about this a few weeks back, I realized I had absolutely no idea who was on Microsoft’s Board beyond Ballmer and Chairman Bill Gates. I had to Google it. I was even more surprised by the results. I have no idea who any of these people are.

Of course, me not knowing any of the members of Microsoft’s Board doesn’t necessarily mean anything by itself. Maybe I’m just ignorant. But the more I thought about it, the more I was amazed that I really didn’t recognize a single name. That’s not true of the Boards of any other of the major tech companies that I can think of.

I’ve covered the technology industry as closely as anyone for the past six or seven years. I just don’t know these people. Either I’m out of touch or Microsoft is. Time will tell, but I like my odds here.

And I’m not alone.

A couple weeks ago, Joachim Kempin wrote a guest post for ReadWrite entitled: Microsoft’s Board Of Directors: Time For A Change. In it, he argues that Microsoft’s Board has let the company down in failing to get ahead of the major trends in computing over the past decade. And Kempin isn’t just some 30-something blogger who loves Apple products, he’s a former SVP at Microsoft. He ran the company’s division selling operating software to PC manufacturers for 15 years.

So who is on Microsoft’s Board? Beyond Ballmer and Gates, we have:

Dina Dublon, Former Chief Financial Officer, JP Morgan Chase
Maria M. Klawe, President, Harvey Mudd College
Stephen J. Luczo, Chairman, President and CEO, Seagate Technology PLC
David F. Marquardt, General Partner, August Capital
Charles H. Noski, Former Vice Chairman, Bank of America Corporation
Dr. Helmut Panke, Former Chairman of the Board of Management, BMW AG
John W. Thompson, Chief Executive Officer, Virtual Instruments

Of the seven directors, three of them are best known for roles they formerly held, at least in Microsoft’s eyes. Looking over their bios, there are some impressive resumes, no doubt. But I’d argue they were all more impressive a decade ago — or two decades ago. I have a hard time believing any of these people remain well tapped into the technology ecosystem where Microsoft has been failing to compete.

So count me in with Kempin, I’m not convinced this Board has been doing its job for some time now. The trouble is that solid revenue and profit numbers mask much of this. It’s like the quarterback who throws two touchdown passes when his team is down 30 points late in the fourth quarter. The numbers can deceive. And I’d argue that’s exactly why Microsoft is eventually going to find themselves at the cliff quite suddenly, not realizing how they got there.

The good news for Microsoft is that unlike Nokia or RIM, the company has multiple businesses, three of which are quite large (and another that does little but bleed money). This will undoubtedly help the company avoid the complete dives that Nokia and RIM have taken. Instead, I believe that first the consumer business will hit the cliff, at which point, Microsoft will evolve into a full-on enterprise company. But then the enterprise cliff will come too.

Some believe that Microsoft has all the time in the world to weather such declines — plenty of time to adapt and see the company re-born as a company for the 21st century. But just look at those PC numbers. Not good. And not going to get better. Microsoft may think they are safe. They are not.

I understand that this post will be taken as yet another anti-Microsoft diatribe. And Microsoft has withstood thousands of those throughout the years, and they remain a strong company, the critics will argue. I’m just anti-Microsoft, they’ll say. But why? Why am I anti-Microsoft? Because I like Apple products? That’s silly. My only agenda is to point out what I see. And ultimately, to be right. And I simply believe I’m going to be right here.

But at least I’m giving a potential fix this time! Or rather, I’m endorsing Kempin’s fix. It’s time for a major Board shakeup at Microsoft. They need some fresh blood in there. People who are tapped into the current technology and startup ecosystem. People who will stand up to Steve Ballmer or even replace him, if need be. People I have heard of.

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A few notes in postscript:

It’s worth noting that Microsoft did have one very relevant and tapped-in Board member in recent years: Netflix founder and CEO Reed Hastings. But Hastings stepped down from Microsoft’s Board in November 2012, after serving for five years. He said at the time it was to allow him to focus more of his time on Netflix (which seems to have worked, at least from a stock price perspective) as well as put more energy into helping California’s school systems. Interestingly, he opted to maintain his role on Facebook’s Board.

Hastings seems like exactly the type of Board member Microsoft should have — though it appears that he too was wrong about Microsoft’s position with Windows 8 and touch-based PCs. Not surprisingly, some people are floating his name as a potential replacement for Ballmer in the CEO role. That seems highly unlikely — if the CFO is first to see that winter is coming, and the CEO is second, Hastings, as a Board member, would have been in the top 15 to see this as well. Would he really want the role?

Update: And here’s a little nugget from an AllThingsD report this evening:

Gates — who has always been and remains the key decision-maker on Microsoft’s board — had always been Ballmer’s major backer, despite increasing pressure both externally and from other directors for him to step down.

Gates had rejected such suggestions for years. That included former director and Netflix CEO Reed Hastings, who many sources said had been one of the first to urge that the company replace Ballmer as CEO, as well as from a spate of Wall Street investors complaining about the company’s declining value in the Ballmer years.

Hastings was also the lead independent director on Microsoft’s Board at the time of his departure. Now that role is filled by John Thompson, the man tasked with chairing the committee looking for Ballmer’s replacement. So it’s probably safe to assume that it would have been Hastings who would have been leading this committee if Ballmer’s announcement had happened just a year earlier.

Alas…

Both Thompson and Seagate CEO Stephen Luczo joined Microsoft’s Board only last year. So perhaps it’s fair to say that Microsoft has already shaken up the Board quite a bit recently. Thompson, in particular, had an interesting — one might say antagonistic — history with Microsoft before joining the Board.

But Microsoft’s board has long had a tumultuous history. Only two of the independent directors from 2005 remain on the board today. Perhaps that was a part of the problem as well — no one stuck around long enough to properly help shake things up. Or perhaps they weren’t allowed to stay around long enough…

Perhaps Thompson and Luczo did in fact help lead to Ballmer stepping down (again, Thompson is the lead independent director, and now Luczo is also on his committee to find a replacement). Though it seems just as likely that Ballmer is making the smart move here: by stepping down now, one could easily see a scenario where in a few years, as Microsoft really shows signs of struggle, everyone will look back at Ballmer’s tenure as “the good old days”. Pure speculation, of course. But it would be a pretty savvy move from a legacy perspective.

Undoubtedly, we are now in the single most important period for the future of Microsoft. Will the Board select an internal candidate to take over the show? Or will they really shake things up and select an outsider? Does this Board, which let Microsoft reach this troubling time in their history, have the right people to find and convince the right person to take the top job?

The removal of Steve Ballmer was really just step one.

[image: Paramount]