HR Metrics Case- Missing Department

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This document is authorized for use only by Sara Qazi at HE OTHER until August 2014. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

CASE: HR-3

DATE: 02/1997 (REVD. 11/19/04)

Professor Jeffrey Pfeffer prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright 2004 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any

HUMAN RESOURCES AT THE AES CORPORATION: THE CASE OF THE MISSING DEPARTMENT

Dennis Bakke, the CEO of AES, a company that develops, builds, and operates electric power plants, sat in his office late in 1996 and thought about the question that was perennially posed to him: could AES, soon to have some 25,000 people located literally all over the world following a recent purchase of power plants in Kazakhstan, continue to operate with virtually no staff functions and, specifically, without any human resource staff anywhere in the corporation? The absence of centralized staffor, for that matter, much staff at allhad been one of the themes guiding the design and operation of the corporation since its founding. The company, in addition to having no personnel department, had no public relations, legal, environmental, or strategic planning departments. Its chief financial officer, Barry Sharp, saw his job not so much as running a centralized finance function but rather as helping all the AES employees as they made important decisions about financing and investments in a very capital intensive business. But the company was becoming much larger and increasingly geographically dispersed. Perhaps those early decisions needed to be rethought. Could what worked for so long continue to work as the corporation grew and operated increasingly on a global basis? Could the advantages of flexibility and having virtually every employee feel responsible for almost all aspects of the corporations operations continue to outweigh the costs of an absence of specialization and the need to have people always learning new tasks and new things? Was this continuous learning of new things really a disadvantage at all, or as Bakke thought, how one created a real learning organization? What Bakke recognized was that AES was different from most other corporations. How different should and could it remain? And if it remained different, how should it deal with the strains that growth and geographic differentiation would inevitably place on an organization that had always been managed by a strong set of values and a shared culture?

means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 2

BACKGROUND AND HISTORY

AES (originally called Applied Energy Services) was founded in 1981 by Roger Sant and Dennis Bakke. Originally supplying consulting services to the energy industry, the company began operating its first power plant in Houston in 1986 and went public as AES in 1991. By the end of its 1995 fiscal year, AES was selling electricity to customers in the United States, England, Northern Ireland, Argentina, and China, and had plants under construction in Pakistan. A list of AES operating facilities, their size, and fuel source, is provided in Exhibit 1. The company saw itself as the global power company and had as its mission supplying electricity to customers world-wide in a socially responsible way.1 The electric power generation business had always been very competitive and the competition was increasing. Many subsidiaries of large oil and gas companies, organizations with substantial financial resources, were entering the business. The business was also complex. Building or purchasing existing power plants was a process that was heavily influenced by governmental decisions and actions, and often took two to four years at least to complete. AES owned and operated its plants under a number of different financial arrangements. Some plants were wholly owned by AES. Others were owned under various joint venture arrangements. For instance, the Medway plant in England was a joint venture between AES and two privatized British utilities, Southern Electric and SEE-BOARD. The plant in San Nicolas, Argentina was owned by a partnership in which AES held 70 percent interest and Community Energy Alternatives, Inc. and the people at the plant held the rest. AESs operations in China were conducted by a separate subsidiary, AES China Generating Company Ltd., that was capitalized in February 1994 with funds from AES and an initial public offering. The company was traded on the over-the-counter market, but recently AES had announced plans to purchase the interest in the subsidiary it did not own. Thus, financing and ownership arrangements were varied and often required protracted negotiations and the ability to work with a number of different partners. Most of the growth in demand for electricity, as well as most of the privatization opportunities, were occurring in developing or emerging economies and three-quarters of AESs development people and financial resources were focused on those markets in 1996. AES saw as its competitive advantage against larger and better financed competitors its agility or speed and its ability to commit corporate equity and to arrange complex financial transactions. It also had some disadvantages, particularly its emphasis on integrity that precluded the company from doing some things to obtain business that not all of its competitors were as reluctant to do. The companys two founders both had extensive experience in government prior to founding AES, and to some extent this helped steel their determination to avoid creating a bureaucratic organization resembling the government. Bakke, a 1970 MBA graduate from Harvard Business School, had worked following graduation at the Department of Health, Education, and Welfare and then in the Office of Management and Budget before moving to the Mellon Institutes Energy Productivity Center in Washington, D.C. There, he and Sant, another Harvard MBA who had headed the Ford administrations energy conservation efforts, worked together and wrote a book, Creating Abundance: Americas Least-Cost Energy Strategy. Out of the research for that book and their work on energy policy for the Ford and Carter administrations came the idea to start AES as a participant in the new independent power producer industry.

1 AES 1995 Annual Report, p. 1.

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Both Bakke and Sant were individuals with strong moral convictions and indeed both had a touch of the missionary in them. Bakke was very active in both charitable and Christian church (Baptist) activities. This social conscience and sense of a higher purpose or calling pervaded the operation and management of AES since its inception. For example, Bakkes description of the purpose or mission of AES was to steward resources to meet the needs of society.2 From the beginning, AES had a strong set of core values and beliefs about people that it worked hard to operationalize on a continuing basis. The four core values were:

Integrity . . . Integrity comes from the Latin word, integra, which means wholeness. By carefully weighing all factorsethical concerns, stakeholder interests, and societal needsAES strives to act with integrity in all of its activities. Fairness . . . the term fairness means justice. Often fairness is confused with sameness . . . We dont mean that. AES aspires to give everyone special treatment. Everyone is unique . . . And the effects of treating people justly in corporate systems and organizations can be profound. Social responsibility. The most socially responsible thing a corporation can do is to do a superb job of meeting a need in society. Therefore, companies must carefully manage capital, employees and intellect to meet a societal need. For AES, the first step in this process is to ensure that every generating plant is operated in a clean, reliable, safe, and cost-effective manner. But we have chosen to go beyond these essentials . . . That is why we plant millions of trees to offset carbon dioxide and build new schools and take numerous other steps to improve our environment and build communities. Fun . . . For us, fun means establishing an environment in which people can use their gifts and skills to make a difference in society without fear of being squelched. Creating a fun workplace environment requires a positive view of humanity that begins with the people who work in the corporation.3

AES also had a set of core assumptions about people that it tried to use in designing and managing its organization. These assumptions were that AES people:

1) Are creative, thinking individualscapable of learning and making decisions, like to control their environment and can be trusted;

2) Are responsiblecan be held accountable; 3) Are fallible; 4) Desire to make positive contributions to society, associate with a winner and

a cause, like a challenge; 5) Are unique persons, deserving respect, not numbers or machines.4

2 Terry Eastland, This Is Not Ours: Good Stewards Hold All Things Lightly, The Washingtonian, July 1991, p. 32. 3 Dennis W. Bakke, Erecting a Grid for Ethical Power, The Marketplace, May/June 1996, p. 4. 4 Basic Assumptions About People Underlying Fun Value and Honeycomb, from AES presentation overheads.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 4 AES held to its values so strongly that in its initial public offering prospectus, it was required by the Securities and Exchange Commission to list its adherence to its values as a possible risk factor:

Adherence to AESs ValuesPossible Impact on Results of Operations. An important element of AES is its commitment to four major shared values . . . AES believes that earning a fair profit is an important result of providing a quality product to its customers. However, if the Company perceives a conflict between these values and profits, the Company will try to adhere to its valueseven though doing so might result in diminished profits or foregone opportunities. Moreover, the Company seeks to adhere to these values not as a means to achieve economic success, but because adherence is a worthwhile goal in and of itself. The Company intends to continue these policies after this offering.5

To AES, simply maximizing profits was not the primary objective of the corporation. Dennis Bakke wrote:

Where do profits fit? Profits . . . are not any corporations main goal. Profits are to a corporation much like breathing is to life. Breathing is not the goal of life, but without breath, life ends. Similarly, without turning a profit, a corporation, too, will cease to exist. . . . At AES we strive not to make profits the ultimate driver of the corporation (although I admit we slip from time to time in this regard). My desire is that the principles to which we strive would take preeminence.6

AES operationalized its values and its commitment to them in myriad operating policies and practices. An example, drawn from a common stock offering prospectus in 1993, helps to illustrate how the company turned its values into actions:

Most of the Companys plants operate without shift supervisors. The project subsidiaries are responsible for all major facility-specific business functions, including financing and capital expenditures. . . . Every AES person has been encouraged to participate in strategic planning and new plant design for the Company. The Company has generally organized itself into multi-skilled teams to develop projects, rather than forming staff groups . . . to carry out specialized functions.

Two examples illustrate these principles of decentralization and empowerment in action. Most financial decisions at this financially-leveraged company were not made by the chief financial officer, Barry Sharp, but rather by AES project teams comprised largely of people with no formal training in finance. For instance, hard as it is to imagine, CFO Sharp has raised less than $300 million of the approximately $3.5 billion of funding for AESs 10 power plants. The multidisciplinary project team working on each new plant is charged with that task, even if the team has little finance experience. Bankers phone Sharp expecting him to call the shots, but he demurs,7 and instead would give the bankers a list of the team members so the bankers could call them directly. At the AES plant in Thames, Connecticut, a task force including front-line 5 AES Common Stock Offering Prospectus, 1991, p. 12. 6 Bakke, op. cit., p. 5. 7 Bill Birchard, Power to the People, CFO, 11 (March 1995), p. 41.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 5 people invested the plants debt reserves, negotiating directly with investment bankers and, in the process, learning a lot about finance and financial markets. Pam Strunk, the financial superintendent at the plant, said that it was important that they have the fun and novelty of doing something thats different from what they do all day. If we lose 100 basis points for a few days, then thats the price we pay.8 Another example came from a description of how the corporation built a $404 million project in Cumberland, Maryland. The project took ten years to put together and was handled by a team of 10 people who secured 36 separate permit approvals involving two dozen regulatory agencies and arranged financing that involved tax-exempt bonds and 10 lenders. Normally, such projects require hundreds of workers, each with small specific tasks to perform within large corporations.9 What was particularly noteworthy was the composition of the team. With two exceptions, they were all under 40 years old and many had little or no previous experience doing what they did on the project. Paul Burdick, a mechanical engineer with no MBA or any formal training in finance, handled the complex financing of the project. Ann Murtlow, the team leader, was a thirty-five year old chemical engineer who also did not have an MBA degree. The composition and operation of the team illustrates a core AES concept of allowing people to try new things. Although eschewing the pursuit of profits or maximizing shareholder value as the primary objective of the company and, in fact, doing numerous things to operate according to the four core values, the company was nonetheless very financially successful. As seen in Exhibit 2 using data drawn from its 1995 Annual Report, the firm enjoyed a 105 percent growth in revenues between 1991 and 1995 and during that period grew its earnings per share more than 113 percent while its total assets grew almost 70 percent and its shareholders equity grew 289 percent. The annual report also illustrated some other unique things about the company and how it viewed itself. The document listed by name each of the 1,258 people who worked for the company on pages 49 to 53. The first section of the discussion of operations in the letter to the shareholders was on Shared Values/Principles. That section reported on the results of the annual employee survey and discussed both improvements (there is less concern this year about an imbalance between shareholder and other stakeholder interests. There is also less fear that our principles will erode as we create businesses in many nations) as well as problems (Some of our people at Thames suggest they are not having as much fun as in the past and are concerned with the priority given their views compared to those of other stakeholders).10 In fact, AES used four measures to assess the companys performance and progress:

Shared ValuesHow did we do in having an organization that is fun, that is fair, that acts with integrity, and is socially responsible? Plant OperationsHow safe, clean, reliable, and cost effective were our facilities? AssetsWhat changes occurred in our assets, including AES people, during the year? That is a measure of our project development and construction progress and an indicator of future earnings potential. Sales BacklogWhat happened to our backlog of contract revenues during the

8 Ibid. 9 Kirstin Downey Grimsley, The Power of a Team, Washington Business, The Washington Post, February 12, 1996, p. 12. 10 AES Annual Report, 1995, p. 6.

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year? This is one indicator of success in business development activities.11 In eight years, the value of a share of AES stock went from $2 to $250, and $10,000 invested in AES in 1982 was worth $10 million by late 1996. At the time, the companys shares were near an all-time high and were selling at a multiple of about 30 times earnings, indicating that Wall Street appreciatedeven if it did not always fully understandat least the financial aspects of the AES story. THE THAMES, CONNECTICUT PLANT Although no plant at AES was exactly like any other, in part because of the value placed on decentralization, the operation in Connecticut was typical of AES. The Thames plant was located in Uncasville, Connecticut, near New London, and about 45 minutes from Providence, Rhode Island. The plant was located on only seven acres and was in close proximity to neighboring houses. The plant cost $260 million to construct and used coal for fuel. It began commercial operations in March 1990, supplying 181 megawatts of electricity to Connecticut Light and Power and up to 100,000 pounds of steam per hour to Stone Containers paper recycling plant that was adjacent to AES-Thames. The plant operated on average at over 95 percent of capacity since it opened, compared to 83 percent for the industry as a whole. Consistent with the AES value of social responsibility, the plant strove to be a good neighbor to those living nearby. A visitor to the plant would immediately be struck by its cleanliness, and the people who worked in the plant were proud of its appearance. The walls of the plant exterior were very light colored (off-white), so that any dirt would be immediately visible. The color of the walls was intentionally chosen to encourage respect for the physical environment and cleanliness. The place where the coal was unloaded from the barges that brought it up the Connecticut River was also immaculate. The coal handling system was covered to avoid excess dust or debris getting into the surroundings, and the unloading dock and surrounding area were swept by a mechanical sweeper after the once a week delivery. There was no smell of sulfur in the air, and in fact, no odor at all. The attitude of cleanliness extended inside the plant as well. For instance, there were two lunchrooms, although both had stoves, and one had a microwave oven, cooktops, refrigerator, and dishwasher as well, which made them more than a typical plant eating area. Quite elaborate meals were cooked there. Both lunchrooms were clean with no dirty dishes sitting around. The cabinetry was of excellent quality and appearance as were the appliances. The turbine rooms were also immaculate. In keeping with AESs social responsibility and concern for the environment, the AES-Thames plant funded a project to plant 52 million trees in Guatemala, designed to reduce the greenhouse effect produced by the burning of coal to produce power. The number of trees was selected based on estimates of the number required to absorb the entire amount of carbon dioxide produced in the plant during its anticipated 40-year life span. In the fall of 1996, Thames employed a total of 59 people, including five in administration, seven area superintendents, nine in maintenance, five in material handling and processing, eight instrument and electrical repair technicians, and 20 operations technicians. The full staffing level for the plant was 63 positions, and hiring was occurring at the time. A number of the plants employees had previously worked either for the Navy or General Dynamics at the nearby

11 AES Annual Report, 1991, p. 3.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 7 Groton, Connecticut shipyard. About 20 percent of the people in the plant had college degrees, including Associates degrees. Recall, these were the people that were handling the investment of the plants debt reserves of several millions of dollars and essentially making all of the decisions in a collaborative environment. There was very little emphasis on formal credentials in the hiring process. And this was true throughout AES. The company had about twenty to thirty MBAs, many of whom had been in the company a while. Most came from their home (non-U.S.) countries. At AES, no one was hired into the company at a senior level, and the company tended not to use headhunters for jobs at any level. The company also tried not to hire directly into project director (new development) positions. AES-Thames had an extremely low turnover rate, as did AES generally. One of the reasons for the low turnover was that AES was a different and special place and people knew it and valued that fact. To be written about in the Wall Street Journal and other publications, to receive many visits, reinforced the pride and feeling of uniqueness that AES people shared. People often moved within the company. Out of perhaps 70 people who were in the Thames plant when it began, only four to five people left the company in the following seven or eight years. The low turnover was also because, as one person put it, we all have the ability to expand what we do. The plant organization had three levelsthe plant manager, the seven area superintendents, and the front-line people. Because the facility operated continuously, there was some shift work. After some experimentation, people worked three 12-hour shifts and then had three days off. They then rotated between the night and day shifts. The first shift was from 6:30 in the morning until 6:30 at night, and the second shift was from 6:30 p.m. to 6:30 a.m. Maintenance had a standard 40-hour week but the individuals had pagers, and they rotated responsibility for off-hours coverage. Hiring

Hiring, like almost all other things, was done by the plant personnel without the support of any staff human resource people, because there were not any. People volunteered to look at resumes, particularly people from the area in which the vacancy existed. Based on an evaluation of the resumes submitted, there were telephone interviews. A suggested phone interview guideline is shown in Exhibit 3, but, of course, everyone was free to ask whatever questions they found the most useful. For those who passed the phone interview screen, there were a series of one-on-one interviews. A guide and rating form for these interviews is shown in Exhibit 4. The one-on-one interviews were followed by a group interview. At that point, if there was interest in hiring a specific candidate, that person received a sales pitch interview by the plant manager, in which the purpose was as much to sell the organization and the specific employment opportunity as it was to screen the person. During the hiring process, if one person said, you dont fit, then you did not get hired. The hiring process could take from one week to a month and a half, but in any event took a long time. The interviewers typically did not ask technical questions. The people at AES believed that technical skills could be learned. Rather, the questions looked for self-motivated, dependable people. One AES person said, We hire people who want to keep learning new things. Interviewees were frequently thrown off by the questions because they did not focus on specific job requirements and whether or not the individual had a set of relevant skills and job experiences that matched those requirements. The hiring process essentially sought people who would fit with the company. AES people at all levels were committed to the hiring process,

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 8 believing that getting the right people was key to the companys success, and were actively involved in it. Interviewing was done by a cross section of all of the levels, not just the plant manager or the superintendents. In response to the question, what would make a bad hire?, Professor Pfeffer was told:

Someone who is a chronic complainer, who is not happy, who blames others, who doesnt take responsibility, who is not honest, who doesnt trust other people. A bad hire would be someone who needs specific direction and waits to be told what to do. A poor hire would be someone who wasnt flexible and who says, Its not my job.

Compensation and Benefits

Pay was determined by looking at what others were being paid, both inside and outside of the company. There was no set salary schedule for each job and salaries were not public. There was, however, discussion within the corporation as a whole about making individual salaries public to deal with concerns about fairness. The Thames people were always comparing what other companies were paying, and were also encouraged to ask questions and talk to people at other AES plants. AES did not pay the highest for its jobs. As one person noted, If you pay the highest, people will fake it in terms of liking the culture and the values. He noted that the company wanted people to be there who really liked the place, believed in the AES system, and enjoyed what they did. Sue Lettrich, the assistant to the plant manager, stated that about two-thirds of the people in the facility at the time of start-up took less money to come to AES-Thames. She noted that she herself turned down a higher offer to work at AES, I like the people, the freedom, the pleasant atmosphere, and the friendliness. Raises were given once a year. Superintendents determined raises after discussing the individuals performance review and salary with others in the plant, including obtaining information from the persons peers and other superintendents. As part of the performance review process, individuals performed a self-evaluation. The performance appraisal form is reproduced as Exhibit 5. Proposed salaries were the subject of a superintendents meeting in which each superintendent received advice from his peers regarding his proposed raises. In addition to a persons salary and the potential for an annual raise, there were also three forms of incentive pay: 1) individual bonuses; 2) a plant performance bonus, based on safety, the plants environmental record, costs, and electricity production; and 3) a corporate-wide bonus based on the overall results of AES. The plant performance bonus was distributed equally to everyone, and the amount was typically between $4,000 and $6,000. The corporate-wide bonus was typically about 10 percent, so the total bonus was between 20 percent and 25 percent of salary. The companys retirement system was a defined contribution system that featured 100 percent corporate matching for the first five percent of pay put into the system. People said that in some cases about 20 percent to 25 percent of salaries were put into the retirement system, mostly in AES stock. Virtually every employee owned stock in the company. Because of the emphasis on stock ownership, youve got to stick around to get the pay out, one individual noted, because of the five-year period before pension benefits were vested. On the other hand, the five-year vesting period (instead of the more typical ten-year period) was done intentionally in an attempt

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 9 not to put handcuffs on peopleAES wanted people to stay because they wanted to, not strictly for financial reasons. People watched the stock price. One issue with employee share ownership was how the people felt when the stock price went down. When the stock price went down at AES, most people wanted to buy more. As one person said, We feel were part of the entrepreneurs. The fluctuations in stock price reinforce the fact that were responsible. If there were only upside, were taking a free ride. The fact that the stock price fluctuates and that they gain and lose accordingly makes people feel like they are more of an owner of the company. For promotions, job vacancies were always posted. Anyone in the Thames plant, or for that matter, from other plants, could bid for a job. Job applicants interviewed with the superintendents, and promotion decisions were made at an area superintendents meeting. Most promotions were filled from within the company. Training and Development

The plant and the corporation took performance problems seriously and did everything possible to help individuals improve. People had every opportunity to correct mistakes. Several individuals said, it is mostly our fault if people dont work out. Problem employees were mentored. The company would move people to other areas in an effort to improve performance. The plant used family counseling services to help with personal issues that might be adversely affecting performance. As for training, for the most part, we train ourselves, said one person. Experienced employees trained new employees. Operators would train other operators. We book a course if we think we need it. People felt free to take courses outside of AES or to get together and hire an instructor to do internal training on an issue that seemed important. There was a lot of cross training. There was, however, no centralized training (because there was no training staff) and no coordination of individual training activities. Individuals were responsible for determining what training and development activities were most appropriate to benefit themselves and the corporation. With respect to career development, there were no formal career paths. Rather, flexibility was the watchword and individuals were encouraged to ask, where can I contribute? Because the company afforded so much freedom and hired people who were interested in learning and growing, there was an internally-generated pressure for growth. As one person noted, AES needs to keep growing to use the skills of its people. AES had a tuition reimbursement program, in which individuals received 80 percent of the tuition money in advance of taking the course (or courses) to pay the necessary tuition and fees. Employees received 10 percent more if they earned a B in the course they were taking, and 10 percent more if they earned an Aso to get 100 percent tuition reimbursement, the individual needed to earn an A in the course. In order to qualify for tuition reimbursement, the courses needed to be work-related, although one got the feeling that the definition of work-related was fairly broad. The tuition reimbursement program would reimburse people who were working on a degree.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 10 Employment Security

AES had no formal policy of job security. Security was in the skills and abilities that people developed while they were working at the company. The corporation as a whole never had a general, organization-wide layoff. AES reduced the number of people working in plants, particularly plants they acquired, that were overstaffed and that could be operated more efficiently. Reductions in staffing were made as voluntary as possible. The key was to treat people with respect. On a short-term basis, the company tried to absorb the extra costs from having too many staff, and the company did not focus on the numbers of people or explicitly manage headcount. When the AES-Thames plant began operations it had about 70 people compared to about 60 at the end of 1996. At start-up, the plant was intentionally overstaffed to meet the unusual demands of starting a new facility. Also, a pelletizing system for the ash did not come online, resulting in some surplus staff. Finally, Thames had some extra people because they knew that some folks would want to go on to other plants and the experience at working at Thames during start-up would be valuable and an important training experience for these subsequent moves. One of the things that growth in the corporation as a whole permitted was for people to move to new locations, as fewer were needed because of efficiency gains at a given location. The plant made only limited use of part-time people. They had only one part-timer who worked in accounts payable, and that person formerly worked full-time. They did use contract employees during outages when the workload increased. But for the most part, the plant had gone away from using contractors and over time brought more tasks in-house. A consistently heard theme was we do as much as we can in-house. Work Organization

Trust is a value that was manifest in how AES-Thames organized and managed work. For instance, although the plant did have time cards, there was no time clock. The corporation as a whole had moved towards an all-salaried system in which no one was paid by the hour. Several people noted that at AES, youre your own boss. We all develop a list of jobs to be done, and you do them. You dont report to the supervisor. So, we are able to redesign improvements. Another person noted, the plant needs individual talents and seeks to give people the room to contribute. Each of us, individually, does our share to have a positive effect on the plant. As one employee stated, We all value freedomto be free to make decisions. A bad decision is one in which the person doesnt seek advice and doesnt recognize his or her own limits. The plant and the corporation both used task forces and informal communication to make decisions. There was an audit task force, an environmental task force, and a safety task force. People from throughout the corporation came to review a specific plant. As another example, the plant used task forces to determine human resource guidelines and to make decisions, for instance, on health insurance. Thames offered only one health insurance plan, decided upon by a task force of the plants employees, not by a benefits manager (there wasnt one). The Thames plants plan was not the same nor did it have the same insurance carrier as all other AES plants, but there was nothing that would prevent plants from pooling their efforts to purchase health insurance. The plant also used a task force to review holiday and vacation day issues. For the most part, the task forces were staffed by people who volunteered because they were interested in the particular subject.

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 11 There was a great deal of decentralization in decision making. For instance, technicians in an areathe front-line peoplemight get an idea for capital improvements. They would then obtain bids to see if their ideas were cost effective. If they were, they implemented the proposals. Budgetsincluding training budgets, operating, and capital budgetswere seen as guidelines, not as hard and fast rules. All Thames people were involved in discussing and setting the budget at an annual meeting held in the fall. They used openness and talking it out to see if it was right. This strategy meeting permitted people to discuss where were going and how were going to get there. Budgets were not set unilaterally by the plant manager or the superintendents. Measurement and Information

Information on the performance of the company was widely shared. In fact, all AES people were considered insiders by the Securities and Exchange Commissions rules because of the amount of information that was shared. Consequently, there were about 10 or so blackout periods during the year during which no AES person could buy or sell stock. Information on the financial and operating performance of the Thames plant was shared once a month at a communications meeting. During that meeting, each area in the plant talked about its projects, personal news, and anything that concerned people or was on their minds. Some people voluntarily came in on their days off for these informational meetings. The company paid overtime for this to recognize the value of everyones participation. Exhibit 6 displays the information that was typically presented at one of these monthly meetings. The measurement philosophy was to focus comparatively more on plant-wide measures of performance. There were relatively fewer micro measures. As the plant manager noted, they tried to look at performance globally and focus on a few key measures. Other Cultural Elements

The plant did not have any unions and there had been no unionization attempts. One individual noted, the philosophy of unions doesnt fit our philosophy. However, AES did have unions in one of its other U.S. plants (the union was already organized when AES acquired the plant), as well as in the plants in Northern Ireland, Argentina, Brazil, and Hungary, and had worked with them quite successfully. The Thames plant had a great many social events, because we enjoy each other. We work hard together. Were a family. There was an annual picnic, spring and fall parties, a childrens Christmas party, an adult Christmas party, and each work group had funds to go out to dinner and to do things together. There was a conscious effort to involve the persons whole family in some of these events. Because we spend more hours working than doing most other things, fun is important. New people got together at the Arlington corporate office twice a year. The corporation had many conferences for people at all levels that brought them together to get to know each other, to share ideas and information, and to celebrate our successes and failures. It is clear that one strong cultural value was open and frequent communication, asking questions, and learning from each other. Other values mentioned in conversations with Thames people were: 1) innovation

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Human Resources at the AES Corporation: The Case of the Missing Department HR-3 p. 12 and taking on new things, 2) taking prudent risks, 3) looking at the long-term, and 4) challenge. There was a sense among the people of being able to do anything. We dont know what isnt possible, said one person who worked in the plant. HUMAN RESOURCES AT AES

Although Dennis Bakke liked to say there was no human resources department, John Ruggirello, president of AES Enterprise and a division manager, noted that there was one exceptiona person whose responsibility was to track the 401(k) retirement plan benefits and to send out the necessary reports. And, there were a few people who had been with the company who could recall at one time having a full-time human resources person, shortly after the company was founded, but that position was eliminated. People also claimed to recall having seen copies of an employee handbook with policies that governed vacations, sick days, and other personnel policies. But there were very few copies still in existence and no one had updated or looked at them in quite a whilethey were of interest mostly for historical reasons. Prior to being promoted to his current position, John was plant manager of the unionized AES plant in Pittsburgh. In commenting on how contract negotiations were handled without an industrial relations staff, he stated, we did the contract negotiations. We didnt have a labor attorney. I had some background in labor negotiations and that helps, but we set our own guidelines at the plant for what we felt we should do with these negotiations, and we did it there. Several people commented that there was little difference between the union and non-union AES plants in how they operated. John also recounted an incident from his experience at another company that captured his view and the organizations philosophy as to why there was no human resource group at AES and why there should not be:

I worked for a company, Diamond Shamrock, and I had a wonderful person working for me in traffic. That means he handled the trucks and the shipping. In this one location he worked on his own. He was fantastic. He knew all the dispatchers for the truck lines. He knew the kind of trucks, what truck would handle what products. He was a master at moving this stuff around. I went in for a raise for this fellow. His name was Rudy. Everybody knew Rudy and how effective he was at his job. I was told we cant let you give Rudy a raise because, I mean, hes been here for forty years and his salary is already at the top of his grade level. So, he cant have a raise. I said, but you know hes the best we have and shouldnt he get paid more than this other person? The reply was that this may be true but this other person has two assistants, so he gets more credit because he now has supervisory responsibilities.

I said, so now what youre telling me is I can have Rudy hire two assistants (that he doesnt need) and then I can get Rudy a raise? They said, Absolutely. I said, Thats ridiculous.

So, it went round and round. I wrote the HR vice president and argued and argued and finally got Rudy a raise based on some loophole that I could use. So, we dont have any of that at AES. We dont have salary ranges. We sort of have reviews, but even those are loosesometimes you have them, sometimes you

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dont. We dont use management by objectives and give somebody twenty objectives for the next year. We dont do that because things change too fast.

Its loose, but it puts a lot of responsibility and accountability on the people who are giving out increases . . . So we dont feel we have all the answers. Its just that many of us who have worked in other places really like the fact that we dont have an HR department that eventually takes over. They were all nice people in that department, but they eventually felt that they were responsible for the raises, and it wasnt you that decided, they decided. You had to ask them how to handle an employee problem.

Instead of written employee policies governing aspects of employee relations, people were encouraged to simply use their discretion and good judgment. Dennis Bakke provided the example of leaving to attend a funeral, a common benefit at many companies. Most companies had a rule of so many days off if a person in ones immediate family dies. But, Bakke noted, what if the parent of one of our employees currently working in China dies? Why should that person, who has to spend much more time traveling to and from the U.S., be constrained to have the same amount of time as someone who lives in the immediate area? He further commented on the difficulty of defining who was to be considered immediate family and who was notwhat about in-laws, for instance? So, instead of making up a set of complex rules to try and handle every contingency, AES tried to get everyone to be reasonable, act responsibly, and use their own discretion. As another example of the absence of formal policies covering personnel issues, consider Sarah Slusser, the project director for AES Puerto Rico, who had a masters degree from Yales School of Organization and Management. Sarah was married and, while working on the Puerto Rico project, was pregnant. She tried to find out what AESs policy was with respect to maternity leave. But, she discovered that AES did not have a policy about maternity leave. What Sarah did was to talk to people including her immediate boss and find out what others had done, and then, with her colleagues, decide what made sense for her given both her own individual desires and the business requirements of the project. In the end, she took three months off, more time off than another woman had, but also managed to be available when needed at critical points in the projects closing. John Ruggirello commented on firing and discipline at AES, and in the course of his description argued that the company avoided putting in rules that would hamstring everyone just to cover the one or two percent who were exceptions and needed such rules:

Discipline is a challenge in our company. In most companies, discipline is governed by a set of rules, Heres how it works. Three verbal warnings or written warnings, two days off, five days off, ten days off, and then youre suspended and then you get all the things written upand all of this is to build your defense in case you get sued. And, theres a lot of that and its growing.

We have people that dont fit, and weve had to let some people go. And, you know, maybe we dont always do it perfectly. But to implement a HR program across the 98 percent of the people that dont need it, we resist that. In other words, were resisting putting in a plan that will protect you against a lawsuit from the one percent but hamstrings the 99 percent. We are just not going to do

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it, and weve taken some hits for that. ORGANIZATIONAL DESIGN AND MANAGEMENT PRINCIPLES

In the fall of 1996, AES had only five hierarchical levelsthe three levels in the plant (see the description of the Thames plant above as a typical example), a set of regional presidents or division managers who were expected to oversee the plants and projects in their areas, and the CEO. The regional president position and the divisionalized structure it represented had only been instituted in the past two or three years. It resulted from the fact that with the increasing size and geographic dispersion of the company, Dennis Bakke felt that he could not have as much direct personal contact with the operating units as he wanted. The divisional layer was added to obtain more interaction between headquarters and the plants. The expectation was that division managers should be in each plant at least once a month. The divisions, their locations, and the current general managers of each were listed in Exhibit 7. The corporate culture and organizing principle came to be called honeycomb, which captured the idea of relatively small, flexible, interrelated teams of people working on projects and activities and learning a lot in the process. There were no formal job descriptions and individual responsibilities were very fluid. Paul Burdick commented on some of the advantages of this approach:

My task, when I first came, was to go sign up a billion dollars worth of coal. I hadnt done that before, and I dont think Ill ever do it again, but I knew enough to askto find out who knew something about how to do itwho in the company and who outside. So, you spend three weeks making phone calls. In a sense, youre not getting your job done but youre learning what it takes to get the job done. Then you go and do it and now you know a little bit. For the last eight years, people have called and said, What do you know about coal? Ill say, Not much any more, but heres what I did, and heres what common threads might be applicable to you. We do the same thing with hiring.

And the value, I think, is that you give people the ability to innovate a little bit more if you leave them that latitude. I mean, the minute you systematize something, you suck the life out of it. You impose a set of rules or procedures for doing something, and nobody asks questions any morequestions such as, Why is it done this way? Has the world changed in the interim? And can it be done better now? If you had a person who did the same job over and over, the person will become brain dead. Hell lose his desire to create and innovate. The human spirit needs some variety to maintain its vitality.

John Ruggirello argued that although giving Paul the task of buying coal when he had never done anything like that before might be somewhat inefficient with respect to purchasing coal, if were looking to develop Paul and his managerial talents and breadth of skills, this might be very efficient. Dennis Bakke stressed the goal of making every person a business person, and therefore AES encouraged people to do new things and to seek variety and challenge. Bakke also commented on the basic organizational building block of AES and why he thought the organization did not need to change its way of operating or its structure even as it grew dramatically:

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I think of AES as a conglomeration of small communities. And I dont think theres any company in the world thats so big that you cant organize this way. Even a plant with 400 people can be broken down into smaller groups. Its a small enough community that there is the ability to have an accountability structure within it, you know, a social structure as opposed to a military structure. We will break the Kazakhstan plant into four units. How can we stay small and be big? By breaking the organization into groups with chief operating officers.

He and other AES people repeatedly pointed out that even a large plant such as the one they had recently purchased in Kazakhstan (4000 MW) could be readily broken down organizationally into smaller operating units. Coordination across the work teams or communities was encouraged through the sharing of information, making people responsible and accountable for results, and encouraging in numerous ways informal communication across various internal organizational boundaries. The term functional silo (and the problems it represents) was never heard at AES. One of the important elements of the AES structure was that all functions were represented in every division, a process that was encouraged by not having centralized corporate staff. Thus, each division had responsibility for strategy and business development, for finance, for engineering and environmental compliance, for safety, and for all of the other human resource issues, as well as for all aspects of operations. Bakke was proud of the fact that half of the people from the plants were out doing business development. He saw the widespread diffusion of both knowledge and responsibility as a significant competitive advantage for AES. Many of its competitors were single-person focused, with a strong leader who did everything. The organizing principle of decentralization and delegation was taken very seriously throughout AES, not just within the plants. An incident at the Shady Point plant, located in Poteau, Oklahoma, illustrates the strength of the value of decentralization. In 1992, AES officials filed notice with the Environmental Protection Agency . . . that a number of Shady Point employees in the plants water treatment area . . . had been falsifying federally required reports on the quality of the facilitys waste-water discharge for over a year.12 Following the announcement, the price of AES stock fell from $26.50 to $16.50, reducing the companys market value by $400 million. The reaction in the plant was to change the way it operated to reinstitute shift supervisors, to have specialists deal with environmental compliance, and so forth. Bakke said:

When we got in trouble back in 92, the people at the plant decided to chuck the entire system. They went back to shift supervisors, an environmental department, a super environmental group, and a deputy plant manager. I mean, they just went for a total control kind of mentality, because they were scared to death. The lawyers were all over them like crazy, and they basically fired me. They said, Please do not come back to the plant. I felt a little hurt, you know. I own this company (at least part of it). The fact that I almost lost my overall AES job made me worry less about just being fired by one plant. But it was a real test of whether we were going backwards toward centralization or whether we would be decentralized. And we went along with it. I wouldnt go there for a whole year, until they finally called back and said, Wed like you to come back again, wed

12 AES Honeycomb (A), Harvard Business School Case Number 9-395-132, p. 15.

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like to rejoin the company.

That was an amazing time. But it illustrated a couple of things. One was that we did mean it when we were talking about decentralization and autonomy. And second, it proved me wrong when I said the principles are pretty fragile. The support for AES principles was surprisingly strong.

CONCLUSION

Dennis Bakke reflected on the fact that he spent most of his time teaching and talking about the principles of AES. Each year the company administered a 60- to 70-item questionnaire to all employees that assessed their perception of AES and how well they thought the company was living up to its values. To Bakke, this survey was of vital importance. He noted:

The analysts dont understand this. They generally care only about the earnings statementbut Im going to tell them this year. In fact, Ive decided that one way I can illustrate it is to let them know that I spend more time worrying about the values survey and looking at it and reading it, responding to it, than I do on the income statement. Thats where we want to have conformity.

Bakke remained convinced that the absence of corporate staff and the way AES organized and managed itself was of critical importance to developing an atmosphere and culture consistent with its core values. Although he thought changing the companys practices was unwise, he did wonder how AES would operate as it continued to grow and as it faced increasing competition.

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Exhibit 1 AES Facilities Operating or Under Construction at Year-End, 1995

Location MW Fuel On Line Plants in Operation: Barbers Point, Hawaii Beaver Valley, Pennsylvania Deepwater, Texas Placerita, California Shady Point, Oklahoma Thames, Connecticut San Nicolas, Argentina Rio Juramento, Argentina San Juan, Argentina Xiangci, Hunan, China Yangchun-Fuyang, Guangdong, China Medway, England Kilroot, Northern Ireland Belfast West, Northern Ireland

180 125 143 120 320 181 650

112 78 26 15

660 520 240

Coal Coal Pet. Coke Natural Gas Coal Coal Coal, Oil, Nat. Gas Hydro Hydro Hydro Oil Nat. Gas Coal, Oil Coal

1992 1987 1986 1989 1991 1990 1995 1993 1995 1995 1995 1996 1995 1992 1992

Plants Under Construction: Warrior Run, Maryland Lal Pir I, Muzaffargarh, Pakistan Lal Pir II, Muzaffargarh, Pakistan Wuxi, Jiangsu, China Fuling Aixi, Sichuan, China

180 337 337 63 45

Coal Oil Oil Oil Coal

1999 1997 1997 1996

Undetermined

Source: 1995 Annual Report, pp. 2-3 and Company Brochure.

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Exhibit 2 Selected Financial Data on AES Corporation

1995 1994 1993 1992 1991Revenues (in millions) $ 685 $ 553 $ 519 $ 401 $ 334

Net income (in millions) 107 100 71 56 43

Net income per share 1.41 1.30 0.98 0.80 0.66

Total assets (in millions) 2,320 1,915 1,687 1,552 1,367

Project financing debt (long term) 1,098 1,019 1,075 1,146 1,093

Stockholders equity (in millions) 549 401 309 177 141

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Exhibit 3 Phone Interview Guide

Name:_________________________ Date: Interviews: 1. What are you looking for in this job (or your next one)? 2. Why are you looking for a new job? 3. How will you decide among competing job offers? 4. Any problems with rotating shifts, weekends, nights, etc.? 5. When could you start? (How much notice?) 6. Whats your current salary and what do you expect? Disposition: NF O/0 Other Comments:

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Exhibit 4 Interview Rating Form

Candidates Name:_____________________________ Phone Number:___________________ Date/Time of Interview: ___________________ Interviewed By: _________________________ Type of Interview: One-on-One Group Sales

Rating (1-10) Experience Manageability Culture Fit Appearance Communication Flexibility Self-Improvement Overall Attitude Other: Overall Rating:

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Exhibit 4 (continued) Some Interview Questions

1) Can the person do the job? 2) Do the persons values match ours? 3) Will the person do the job? 4) What special skills/knowledge are required? 5) Whom do you report to now? 6) What would your supervisor say about you? (Good or Not So Good Comments) 7) How did your supervisor get the most out of you? 8) How did you get the most out of your supervisor? 9) Describe the worst supervisor youve ever had. 10) For what have you been counseled about the most? 11) Will you use your present supervisor as a reference? 12) If you could make one comment to your supervisor, what would it be? 13) What have you done that you are proud of? Why? 14) What personal qualities are you trying to improve? 15) What is the most difficult situation you have faced? What did you feel? How did you

react? 16) Tell me about improvements you made on your jobs. 17) Tell me about two most important achievements. 18) Tell me about a time when a decision was needed and no supervisor was available. 19) What do you do when something needs to be done and no procedure exists? 20) What does fun on the job mean to you? 21) Recall a time when people around you werent being totally honest. What did you do?

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Exhibit 4 (continued) Some Interview Questions

22) What does fair mean to you? How important is it? 23) Should everyone be treated equally? Why? 24) What kind of rewards are most satisfying to you? 25) How do you feel about paying the same rates for the same jobs? Why? How would you do

it? 26) What have you done to become more effective in your job? 27) What self-improvement efforts are you making? 28) When could you be available to start work for usif offered a position?

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Exhibit 5 Performance Planning And Career Review Form*

Name ________________________ Date of Review ________________________ Position ________________________ Time in Current Position ________________ Location ________________________ Date Employed ________________________ Date of Last Review ____________________ No. Key Parts of Job: Performance Evaluation: Please rate your performance in these areas: (scale is O=Outstanding; V=Very Good; G=Good; RI=Requires Improvement; U=Unsatisfactory) Initiative Decisiveness: Recognizes problems and takes action to solve them without detailed managerial guidance. Organizing/Planning: Ability to structure tasks, plans and objectives, etc., establish priorities and able to perform them independently and accurately. Leadership: Takes charge, assumes leadership role when appropriate. Analytical/Perceptual: Ability to identify, assimilate and comprehend the critical elements of a situation. Judgment: Shows discretion and the ability to arrive at sound common sense decisions. Interpersonal: Deals effectively with others regardless of level of status, to accept personal differences. Motivation: Has necessary self-discipline and drive to achieve goals. Persistently seeks improvement. Oral and Written Communication: Ability to effectively and clearly present and express information. Work Habits: Completes assignments promptly and in accordance with direction. Past Objectives: What has been accomplished?

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Exhibit 5 (continued) Performance Planning And Career Review Form*

Future Objectives: State and Define Target Date Personal and Career Goals: What, When, Where, How? Potential as stated by Supervisor and Means to Achieve Potential *The form has been reformatted to save space in presentation.

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Exhibit 6 Monthly Feedback Form, AES-Thames, August 1996

Operations August YTD Firm, MW 154.6 173.9 Firm, % 85.4 96.1 Firm, On Peak, MW 151.3 174.1 Firm, On Peak % 83.6 96.2 Capacity Factor, % (Equiv.) 87.0 98.3 Availability, % 85.8 96.7 Steam Availability, % 100.0 100.0 Aux. Load 15.9 17.2 Net Plant Heat Rate (Equiv.) 10,677 10,632 Coal, TPD 1,634 1,849 Limestone, TPD 124 165 Ash, TPD 307 380 Coal Quality Ash, % 10.69 11.31 Sulfur, % 0.94 1.11 BTU/# 12,686 12,619 Citibank Borrowing Rate, % 6.79 6.82 Citibank Investment Rate, % 5.51 5.53 Overtime, % 18.1 16.9

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Exhibit 6 (continued) Monthly Feedback Form, AES-Thames, August 1996

Safety and Environmental

August YTD OSHA Recordables 0 1 Lost Time Accidents 0 0 Environmental NOx .06 .05 SOx .27 .26 Opacity 4 3 Environmental Exceedances Air 0 2 Water 0 6

Plant and People News A tube leak developed in the intermediate section of the FBHE B-Boiler, forcing a shutdown. The problem was the result of thermal creep, which increased a tube rub. Nine tube sections were cut out for repairs. The plant was brought back online on Thursday, Aug. 22. The next day, B-Boiler was shut down again for six hours to repair an ash leak on an expansion joint. Thanks to everyone for their perseverance in getting the plant back to full load. We hosted a visit of investment analysts during August. Thanks to Nadine, Greg R., Stan B., Kevin P., Mitch, George, and Dan for their Honeycomb presentations to the analysts. Feedback from the analysts was positive and the whole event was successful. We welcomed Sue back to Thames after being on family leave for three months.

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Exhibit 7 AES Divisions as of 1996

Division Home Office Division Manager AES Americas AES Electric AES Chigen AES Transpower AES Shady Point AES Enterprise

Arlington, Virginia London, England Beijing, China Singapore Poteau, Oklahoma Arlington, Virginia

Tom Tribone Mark Fitzpatrick Paul Hanrahan Stu Ryan Dave McMillen John Ruggirello

The Case of the Missing DepartmentBackground and HistoryThe Thames, Connecticut Plant

HiringCompensation and BenefitsTraining and DevelopmentEmployment SecurityWork OrganizationMeasurement and InformationOther Cultural ElementsHuman Resources at AESOrganizational Design and Management Principles

ConclusionLocationExhibit 2Exhibit 3Disposition:NFO/0

Performance Planning And Career Review Form*Operations

Plant and People News

HR Metrics Case- Missing Department

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