Gates Seen Taking Bigger Products Role as Microsoft Switch Looms

Feb 03, 2014 8:44 am ET

Feb. 3 (Bloomberg) -- Even as Bill Gates weighs giving up his title of chairman of Microsoft Corp., he’s poised to remain involved at the company he co-founded in an area of its deepest need: crafting must-have products.

As the board prepares to appoint Satya Nadella as Microsoft’s next chief executive officer, it’s considering replacing Gates as board chairman, people with knowledge of the matter have said. Gates would remain a director and be involved in product development, focusing less on administration, the people said. He’s weighing going to work at Microsoft at least one day a week, a person briefed on the matter said.

Gates championed Nadella’s candidacy during the months-long CEO search, a person briefed on the matter said, suggesting that the two will be able to collaborate well. Nadella is an insider who’s well-versed in Microsoft’s tools for businesses, while Gates was instrumental in building innovative products that ushered in the personal computing age.

Even so, the company under his chairmanship has struggled to replicate those early successes in new areas, including mobile devices and Internet services, falling behind Google Inc., Apple Inc. and Facebook Inc. in making things people want to buy.

“Bill’s product reviews were legendary, and Microsoft’s products would benefit from his input,” said Todd Warren, a 22- year Microsoft executive who left in 2009. “My concern would be that the tech landscape has shifted away from the PC in recent years.”

Watershed Event

Whatever role he takes, Gates’s resignation from the post he’s held for 33 years will be a watershed moment. He and fellow founder Paul Allen set the software standard for personal computing in 1981 when they persuaded International Business Machines Corp. to use their fledgling operating system inside the company’s new personal computer. Microsoft went on to become the most valuable corporation, helping make Gates the world’s richest man.

Gates’s high standards and attention to detail place him alongside Apple co-founder Steve Jobs in the pantheon of technology visionaries, said Geoffrey Moore, author of “Crossing the Chasm.” The executive will have a positive impact on products, Moore said.

“The more time Bill spends on product development, the better,” said Moore, whose book chronicled the challenges of marketing technology products to a widening market. “He and Steve Jobs seem very different on the outside, but at their core they were very similar. They both see things that others don’t see, and they’re both very demanding.”

Two Predecessors

Nadella, 46, would replace Steve Ballmer, 57, who on Aug. 23 announced plans to retire as CEO. Microsoft has had just two CEOs -- Ballmer and Gates -- and one chairman.

Director John Thompson, who led the CEO search committee, may succeed Gates, according to the people. Gates, 58, would remain on the board. Ballmer is also a director.

Frank Shaw, a spokesman for Microsoft, declined to comment.

Nadella, a 22-year Microsoft veteran, might find it easier than an outsider to operate with his predecessors on the board, said Joseph McCool, president of the search-advisory firm McCool Group in Amherst, New Hampshire. “That issue is off the table because they’ve appointed someone from inside, and someone Gates sees as a technology ally.”

Nadella has had leadership roles in cloud services, server software, Internet search and business applications. In tapping him as CEO, the board could be signaling it agrees with investors who contend the biggest shortcoming at the world’s largest software maker is a lack of top-notch, gotta-have products and services.

Technology Battle

“This is them realizing that they are in a battle to the death in technology and, by the way, Google is ahead,” said Moore, whose Chasm Group is based in San Bruno, California. Gates could make a difference in creating new software, hardware or services even if he’s on the Redmond, Washington, campus just a few days a week, he said.

Gates’s greater involvement in technology strategy at the company may have prompted some outside candidates to take themselves out of the running because of concerns they’d be second-guessed, according to Bill George, a Harvard Business School professor who’s a director at Exxon Mobil Corp. and Goldman Sachs Group Inc.

“It’s very significant that Gates may play a role in product development, and could explain why some outside candidates turned the CEO job down,” George said.

Brilliant Strategist

Gates is a brilliant strategist who spearheaded the creation of monopolies with the Windows operating system and Office productivity application suite. It was under his watch that Microsoft began to develop smartphones and tablets long before Apple considered them, only to fail to deliver.

Apple’s iPod was released in 2001, and the iPhone in 2007, when Gates was chief software architect at Microsoft.

Gates took that title after leaving the CEO post in 2000, and in 2008 he stepped away from daily operations to focus on his philanthropic work at the Bill & Melinda Gates Foundation.

“My full-time work will be the foundation for the rest of my life,” Gates told Bloomberg TV Jan. 21. “I’m not going to change that.”

The next CEO will take over in the midst of a sweeping reorganization, which includes closing the acquisition of Nokia Oyj’s handset unit. Newer products such as SharePoint and Office 365 are propping up profits as traditional programs continue to languish along with PC shipments, which dropped by a record in 2013.

Independence Concerns

Just nine companies in the Standard & Poor’s 500 index have two former CEOs as directors, according to Equilar Inc., which tracks executive compensation.

Some external candidates who discussed the CEO job with Microsoft expressed concerns they would lack independence if both Ballmer and Gates stayed on as directors, according to people familiar with their thinking.

Gates and Ballmer together own 8.3 percent of the stock; Gates is Microsoft’s largest individual shareholder with a 4.3 percent stake. The company’s shares have risen about 17 percent since the day before Ballmer announced his retirement, to $37.84 on Jan. 31.

Once the CEO is named, the board should consider adding more independent directors and replacing some long-tenured members, said Joel Koblentz, who advises companies on succession and isn’t involved in the Microsoft CEO hiring. “This board needs a clean break,” said Koblentz, whose firm is based in Atlanta.

Morfit Joins

A new director set to join early in this quarter is Mason Morfit, president of activist shareholder ValueAct Holdings LP, which people familiar with the situation have said is eager to see Microsoft emphasize its business software and Internet-based cloud services rather than consumer technology.

The nine-member board includes seven independent directors. Three of the seven have been on the board for more than eight years, including 33 years for David Marquardt, an early investor in the software maker.

Pressure is growing on all boards to cut tenure and age and seek new input as economic growth remains slow and competition for customers is increasing, said Tom Flannery, a managing director of Boyden Global Executive Search in Pittsburgh.

“This is a stolid board, not a solid board,” Flannery said. “A lot of the members hit their peak 20 years ago. They need to add some younger members with some audacity.”

--With assistance from Jeff Green in Southfield, Michigan. Editors: Anne Reifenberg, Reed Stevenson, Tom Giles, Kevin Miller