How do the companies like Microsoft appoint CEOs?

A great question
Someone asked this on Quora, and I felt compelled to try and answer.

A giant in transition

I think these giant companies follow this process:

Step  1. Identify potential talent within the organisation that can be ultimately elevated to the top post (the corner room, as it's called). 
Explanation. In some cases, outsiders can be considered, but that rarely proves to be a good decision.

Step 2. See if the identified talent has stayed long enough with the company. 

Explanation. Long enough can vary from a few years to a whole lot of years, depending on the type of work the company does, to have absorbed the company's culture (dna, as they call it!) And obviously if an outsider is chosen for the top post, then this step loses meaning.

Step 3. Take confidential feedback on the potential candidates' integrity, honesty and genuine loyalty for the company. Try to gauge which candidate would go the extra mile to ensure that the company survives the changing landscape of technology.
Explanation. There is no point in having a genius in the corner room if she/he is dishonest, a perpetual liar and a potential internal time-bomb for the company.

Step 4. Try to shortlist the potentials' list based on whose mindset and skills best match what the company needs in the next 10 years. That in turn depends on the competitive landscape that's evolving.
Explanation. A company may employ Nobel laureates, but they must be able to contribute to the company's bottomline. Genius does not necessarily make a great CEO; genius coupled with business acumen and the ability to learn new skills does.

Satya shall prevail!

Step 5. Speak with the small list of potentials (left after the above steps) to find if they would be interested in the hot seat, and if yes, explain to them how hot it's going to be. 
Explanation. Many talented people may just not want to don the mantle of CEO as it drastically reduces the amount of personal output one can provide and dramatically increases the amount of external environment management and HR management that is required.

Step 6. Get the clearance of the biggest shareholders and the Board of Directors for the names that are left.

Steve Ballmer and Bill Gates

Finally, make the announcement and pray to God that the new CEO is able to stay long enough to make a difference, and that the company itself stays in the game to be relevant enough! Microsoft incidentally has had a very small number of CEOs in its history. It does not believe in frequently changing the top guy, as many other companies do routinely. In that sense, it is like GE or the People's Republic of China (PRC)!
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