Microsoft's historic transition is a risky passage

February 10, 2014: 11:46 AM ET

The transfer of power from founders to a new generation is always fraught with peril

by Geoff Colvin

FORTUNE—Now that Microsoft (MSFT) has finally put a stop to six months of media chatter by naming a new CEO, Satya Nadella, it's easy to miss the profundity of what is still going on there. In ending one process, the company has just begun a far larger and more important one: transferring top-level guidance of the business from the founders to a new
generation, becoming a genuine institution rather than the reflection of one or two people. History says it's a highly risky passage in any company's life – one that, if botched, can damage a business irreparably —and its outcome at Microsoft is far from certain.

The problem is that even founders who have managed a business brilliantly for decades often become emotional and irrational about saying goodbye. Running the company has typically consumed their entire adult lives, defining them to the world and to themselves, and they have no idea who they are beyond that role. They look past it and see only a void, as Yale's Jeffrey Sonnenfeld described vividly in his classic work, The Hero's Farewell. The danger is that they hang on far too long, even as the company declines.

Example: CBS (CBS) founder William S. Paley, who over the years hired not one, not two, but four designated "successors," none of whom succeeded him because ultimately he could never bear to step aside. So he marched
on into the 1980s, when he was in his 80s, entirely missing the significance of cable TV's rise. Those were the years when ABC built ESPN and NBC started CNBC, fabulously profitable cable networks for which CBS still has no match. He was pushed out of his beautiful 35th-floor office only after investor Larry Tisch accumulated more CBS stock than Paley himself owned.

MORE: Grooming your next CEO: What Microsoft should have done but didn't

Paley insisted for years that he was always just about to hand off the top job. J. Peter Grace was more realistic. He didn't found W.R. Grace & Co. – his grandfather did – but he still thought of it as the family firm and carried the founder's mentality. When a Fortune reporter asked him, in his 70s, when he would retire as CEO, he snapped, "Ask the
lord." In fact he didn't wait for the Almighty to retire him, stepping down at age 79, two years before his death in 1995.

Even handing over the CEO job to a successor is no guarantee that the founder has really left. Kevin Rollins succeeded Michael Dell as CEO of Dell in 2004, but Michael returned to the job in 2007 and is still CEO. Starbucks's (SBUX) Howard Schultz stepped down as CEO in 2000 but returned in 2008 and remains CEO. Those companies still haven't made the transition.

It's encouraging that Bill Gates is creating a substantial identity beyond Microsoft. He has thrown himself wholeheartedly into philanthropy, which clearly energizes him, and it's a further promising sign that he stepped down as chairman as part of the CEO handoff from Steve Ballmer to Nadella. Less encouraging is that Gates and Ballmer (a virtual co-founder) remain on the board, watching and judging the new guy, and the company says Gates "will devote more time to the company,
supporting Nadella in shaping technology and product direction." Meaning that, despite the sense of closure that came with the Nadella announcement, Microsoft's historic transition is a very long way from done.

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