INNOVATION / MICHAEL SCHRAGE : Can Competing Software Firms Have One Boss?

As Microsoft Corp.’s chief, Bill Gates vows that his company will lead consumers to a dazzling, new multimedia future that seamlessly blends the best of audio, video and computer technology. As the world’s richest and most powerful software entrepreneur, he’s got the vision, the cunning and the money to do it.

There’s just one catch: Microsoft’s chairman is also chairman of Continuum, another software company that wants to invent the multimedia future.

Wholly-owned by Gates and described as “totally independent” from Microsoft, Continuum employs some of America’s best multimedia design talent--the kind of people that a company such as Microsoft might want to hire. Continuum’s chief executive used to run multimedia development at Lucasfilm.

And, like Microsoft, Continuum is also looking to license intellectual properties, such as books and graphics, that can be woven into multimedia formats.

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Presumably, International Business Machine’s directors wouldn’t want the company’s chairman to double up as chairman of a company that supplied Apple Macintosh software. And General Motors’ shareholders would be furious if they found their chairman owned a Toyota dealership in Los Angeles.

So how does Gates manage to place himself in an apparent conflict-of-interest situation that could draw the attention of federal securities regulators? Has America’s top techno-preneur become a little too entrepreneurial? Or does Microsoft’s board believe that it’s all right for Gates to run two multimedia companies?

David Marquardt, a Microsoft director and Silicon Valley venture capitalist, doesn’t see any conflict at present. “If it becomes a conflict in the future, we’ll resolve it in a way that benefits the Microsoft shareholders. . . . I continue to feel that the separation serves the interests of both companies,” he says.

Bill Neukom, Microsoft’s corporate counsel, also says Gates’ venture creates no conflict at this time. Gates “has regularly provided substantial information to the board,” he says. “If the time comes when there appears to be a possible convergence, the board can decide then. . . . The board is satisfied that Bill is spending more than an adequate amount of time, energy, creativity and effort on Microsoft.”

There’s no question that Gates has done exceptionally well for Microsoft’s shareholders. However, much of his company’s extraordinary $25-billion stock market valuation--and Gates’ own substantial personal wealth--comes from the belief that Microsoft will dominate future software markets, including multimedia. The market is investing in the Gates vision.

But because Microsoft is a publicly held company, Gates and his board should know that the company’s top executives aren’t supposed to privately fund competitive companies.

Given that Microsoft is now under scrutiny by the Federal Trade Commission for possible anti-competitive business practices, one would think Microsoft’s directors would be particularly sensitive to potential conflicts of interest. The role of corporate directors, some experts would say, is to prevent conflicts, not just deal with problems after a shareholder or someone else files a lawsuit.

“If there is a conflict of interest, it’s the responsibility of the directors to deal with it,” says Harvard Business School professor Jay J. Lorsch, a specialist on corporate directorships and author of “Pawns or Potentates: The Realities of America’s Corporate Boards.”

“This sounds like a conflict of interest. . . ,” Lorsch says. “If Microsoft were a major shareholder (in Continuum), the game changes. . . . Because there isn’t a joint ownership, there is a conflict of interest.”

To be sure, Gates didn’t originally intend to compete against himself. He personally launched Interactive Home Systems in late 1989 to create high-resolution multimedia art galleries for his own home use. Even though he was then traveling the world as Microsoft chairman, preaching the gospel of home multimedia and the digital convergence of art, audio, video and video games, his board didn’t think much of it as a business opportunity.

However, Gates apparently underestimated the intensity of his own ambition. Interactive Home soon evolved into Continuum.

So when Bill Gates chats with Fortune, Forbes and CNN about the future of multimedia, is he talking about Microsoft’s multimedia future? Or Continuum’s? When multimedia developers show their ideas to Microsoft’s Gates, are they also showing them to Continuum’s Gates? Will Continuum enjoy any special insights into Microsoft’s multimedia plans because it shares the same chairman? If Microsoft’s stock drops and Continuum goes public at a high valuation, how many Microsoft shareholder suits will the lawyers entertain?

These are precisely the kind of legal and ethical questions that the industry’s leading entrepreneur should want to avoid. It’s likely that by year’s end, Gates and Microsoft’s directors will have to decide what to do with Continuum or possibly face the prospect of shareholder suits and SEC scrutiny.

Entrepreneurs at public companies can be too entrepreneurial; their boards can be a little too lax and short-sighted. But as the leader of one of America’s most important public companies, Gates and his board should be held to the same legal, ethical and fiduciary obligations as a GM or IBM.