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

February 10, 2014, 8:14 PM UTC

FORTUNE — Last week’s hire of Microsoft’s new CEO, Satya Nadella, reminded me of a talk I recently gave to a group of senior executives in Seattle about how companies should do more to groom leaders from within, as opposed to looking outside for their next star.

At the time, succession was a big topic; Microsoft chairman Bill Gates and outgoing CEO Steve Ballmer were actively planning exits from their everyday roles. In the audience, a woman raised her hand and said that many employees were concerned about who will be brought in and what kind of cultural changes they could expect. Employees, she added, wanted someone capable of transforming the culture of the company so it could compete for talent against competitors, such as Google (GOOG), Apple (AAPL), as well as others in the mobile world as it begins to capitalize on its acquisition of Nokia.

Back in Nov. 14, 2013 when I gave my talk, Microsoft’s (MSFT) employees weren’t sure what was going on since they had heard little from John W. Thompson, the board member heading up the search. The most information he had shared to date was a list of some 100 candidates that he included in a blog post. All that mystery was having a negative impact on the current employees I spoke with, most of whom admitted to feeling anxious and of spending time dusting off their résumé as they waited to see what would happen.

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As I explained to the audience, the mistake so many boards make these days, as in the case of Microsoft, is that they think succession is all about identifying candidates. But it’s really about organizational thinking, not just about one person.

It’s no longer enough to simply hire a search consultant who goes and finds candidates they think will fit or a board of directors coming up with a short list. It’s about first tapping the collective wisdom of the organization, the shareholders of the community, to mine for the best ideas for the future evolution of the company and the characteristics of someone who could lead it forward. Search is still important but only after the organization has done its pre-thinking on the parameters of strategy and the future.

These themes are covered in my new book, Fall of the Alphas: The New Beta Way to Connect, Collaborate, Influence — and Lead. Unlike the Alpha way, where the board owns the entire process, the Beta approach involves a group of highly-placed, influential employees and community members — what I call, a “tribal council.” The council helps the board select the right leader who fits with the organization’s goals and cultural traditions. It would not only help the board gain clarity on what needs to be done, but it would also take a leadership role in helping integrate and guarantee the success of the new executive into the company culture.

In many ways, Microsoft could have selected its new CEO differently: First, it should not have just been the sole job of the board of directors to identify candidates. That’s such an Alpha way to go about it. They also waited too long; the board should have better communicated with internal and external candidates long before the CEO job was open. That forced them to conduct a search under duress with the world watching.

Microsoft missed an opportunity to have a succession plan in place where internal candidates would already have a relationship with the board and with the organization’s leadership. If Nadella was on the short list of prospects, they also could have developed a development plan to integrate him into all the strategy discussions across the company and given him exposure to the Board prior to the transition taking place.

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Beyond Microsoft, succession is a big issue for just about every company. The Center for Creative Leadership has estimated that 40% of new CEOs fail in their first 18 months.

You need only check the news or perform a quick Google search to find a list of failures. Look back at the issues at Walt Disney Co. (DIS) when Michael Eisner brought in Michael Ovitz; the two clashed almost immediately and could not co-exist. AT&T (T) used search firms who didn’t take cultural fit into account when they hired John Walter, who abruptly resigned barely nine months into his job. And when GE (GE) searched for Jack Welch’s successor, he and the board chose three internal candidates, but the two who weren’t picked for the top job left the company. That, in turn, caused the company to lose valuable human capital assets while also creating a cultural setback for the organization.

The Beta approach is to give the people in the organization, the community, a voice in choosing their next leader rather than solely giving the board that authority.

Dana Ardi is the founder of Corporate Anthropology Advisors, an executive search and consulting firm. She has served as a partner/managing director at CCMP Capital and JPMorgan Partners Private Equity, and was a partner at Flatiron Partners. Dr. Ardi has a bachelor’s degree from the State University of New York at Buffalo and a master’s degree and doctorate from Boston College.