UTF-8 wasn't a thing when the decision to go with UTF-16 was made.
UTF-8 became a thing shortly thereafter and everyone started laughing at MS for having followed the best industry standard that was available to them when they had to make a choice.
UTF-16 also didn't exist when the decision was made. It was UCS-2.
Microsoft absolutely made the right decision at the time and really the only decision that could have been made. They didn't have the luxury to ignore internationalization until UTF-8 made it viable for Linux.
UTF-8 became a thing shortly thereafter and everyone started laughing at MS for having followed the best industry standard that was available to them when they had to make a choice.