Gentry: Microsoft's Leadership Problem

NEW YORK ( TheStreet) -- Much has been written about Microsoft ( MSFT) since the company reported its third-quarter earnings last Thursday afternoon. While gains in the stock since the announcement have shown that investors are, on balance, more willing to buy the recent news than to sell it, precious little attention has been given to the announcement of another departure from Microsoft's executive team.

On Thursday the company's CFO Peter Klein, an 11-year veteran of Microsoft and the company's CFO for the past 3 and a half years, announced that he would be leaving the software giant at the end of June. Klein's move adds yet another name to a long and growing list of high-level executives that have thrown in the towel at the software giant.

Since Microsoft's earnings release, advocates on both sides of the investment debate have gone to great lengths to share the positives for the stock or to call attention to the pitfalls that lay ahead for the company. The problem is that one basic ingredient has been missing from the debate that will play a critical role in determining the success of investors: the strength of Microsoft's executive management team. The recent developments in the computing industry have accentuated the need for true visionary leadership from the highest levels of Microsoft.

When reflecting on Microsoft's rise to prominence in the technology sector, it is revealing to consider that Microsoft has not been a leader of new product innovation throughout its storied history. The company's dominant position in personal computer operating systems, its control of the suite of personal computer office applications, its position in dedicated server software, and the company's leading position in gaming consoles are all examples of businesses that Microsoft was a later entrant into the market. Through unwavering determination, strong scale and in many cases considerable capital advantages (and, at least from the point of view of the European Union, questionable competitive practices), the company ultimately established a dominant position in these markets.

This is worth noting as taking command of these markets required management vision, commitment and drive to successfully identify the markets soon enough to make a difference and to confidently allocate resources to missions with uncertain outcomes. Sure-handed leadership to the legions of talented employees within the company was needed to promote the development of competitive product offerings.

The technology world has changed since Microsoft successfully rose to the top of the PC software business. The company's major competitors today, such as Apple ( AAPL) and Google ( GOOG), are extremely well capitalized - in both human and financial terms- which hasn't always been true of many of Microsoft's competitors in the past. Furthermore, both of these competitors have shown boldness with new product introductions and an ability to discern consumer preferences much better than Microsoft. Additionally, Microsoft must also contend with the loss of the significance of its once venerable ecosystem.

During its rise to prominence, Microsoft was able to leverage a vibrant and profitable partner system to maintain dominance in many of its markets. Today, few would argue that companies like Hewlett Packard ( HPQ) and Dell ( DELL) can provide the momentum for the ecosystem that they once did.

In recent years, we have seen little evidence that Microsoft's management team is executing at the level that should be expected of such a resource-rich global company. Rather, it seems that disappointment, delay and dogmatism have been more hallmarks of the company in recent years than has excitement, innovation and leadership. Microsoft's recent string of disappointing product introductions bear witness to the reality that the company has lost its way.

To be sure, there is intense pressure on the company's executive team to demonstrate the foresight and the credibility required to lead its talented employees through a period of time unlike any in its history. The problem is that many would-be leaders have left Microsoft to pursue other opportunities. As a result, investors must carefully contemplate whether investing in a company with such a rampant exodus of executive talent is worthy of a long-term investment. After all, when you buy a company you are buying not only the success of its products and services but also the leadership and vision of the company's executive team. If talented managers continue to flee Microsoft, investors must question the company's ability to execute at the level required to overcome the growing challenges the company faces in its core businesses.

--Written by Craig Gentry, chief investment strategist at Destination Wealth Management.

The author has no personal ownership or investment banking relationships.
Craig Gentry is Executive Vice President and Chief Investment Strategist at Destination Wealth Management.