HUMAN RESOURCES AT THE AES CORPORATION – Bakke Graduate University

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GRADUATE SCHOOL OF BUSINESS
                                                     STANFORD UNIVERSITY
                                                                                                                      S HR-3
                                                                                                                FEBRUARY 1997




                  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 staff -- or, for that matter, much staff at all -- had 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
corporation's 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?
This case was prepared by Professor Jeffrey Pfeffer as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. Support for this case was provided by the Human Resources Initiative of the
Graduate School of Business. The author would also like to acknowledge Robert Waterman for his introduction to the
company.
Copyright 0 1997 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
 Human Resources at the AES Corporation SHR 3 _______________________________________ Page 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."'

 The electric power generation business has 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 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% interest and Community Energy Alternatives, Inc. and the
people at the plant held the rest. AES's 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 AES's 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 company's 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 Institute's Energy
Productivity Center in Washington, D.C. There, he and Sant, another Harvard MBA who had
headed the Ford administration's energy conservation efforts, worked together and

 AES 1995 Annual Report, p. 1.
    Human Resources at the AES Corporation SHR 3                                                         Page 3


    wrote a book, Creating Abundance: America's 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.

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

                  Integrity ... Integrity comes from the Latin word, `integra,' which means
          `wholeness.' By carefully weighing all factors--ethical concerns, stakeholder
          interests, and societal needs--AES strives to act with integrity in all of its activities.

                 Fairness . . . the term `fairness' means `justice.' Often `fairness' is confused
          with `sameness' ... We don't 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 has a set. of core assumptions about people that it tries to use in designing and managing
its organization. These assumptions are that AES people:

         1) Are creative, thinking individuals--capable of learning and making decisions,
         like to control their environment and can be trusted;
         2) Are responsible--can be held accountable;

2
 Terry Eastland, "This Is Not Ours: Good Stewards Hold All Things Lightly," The Washingtonian, July, 1991, 32.
Dennis W. Bakke, "Erecting a Grid for Ethical Power," The Marketplace, May/June, 1996, p. 4.
 Human Resources at the AES Corporation SHR 3 _______________________________________ Page 4



         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

  AES holds 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 AES's Values--Possible 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 values--even 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.s

To AES, simply maximizing profits is not the primary objective of the corporation. Dennis Bakke
has written:

                  Where do profits fit? Profits . . . are not any corporation's 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 operationalizes 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 turns its values into actions:

               Most of the Company's 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.



4 "Basic Assumptions About People Underlying `Fun' Value and Honeycomb," from AES presentation overheads.
AES Common Stock Offering Prospectus, 1991, p. 12.
6_
   Bakke, op. cit., p. 5.
  Human Resources at the AES Corporation SHR 3                                                        Page


Two examples illustrate these principles of decentralization and empowerment in action. Most
financial decisions at this financially-leveraged company are 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 AES's 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 and instead gives
the bankers a list of the team members so the bankers can call them directly. At the AES plant in
Thames, Connecticut, a task force including front-line people invest the plant's 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 that's different from what they do all day. If
we lose 100 basis points for a few days, then that's the price we pay." 8

Another example comes 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 is
particularly noteworthy is 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 has nonetheless been very financially successful. As seen in Exhibit 2 using data drawn
from its 1995 Annual Report, the firm enjoyed a 105% growth in revenues between 1991 and 1995
and during that period grew its earnings per share more than 113% while its total assets grew
almost 70% and its shareholders' equity grew 289%. The annual report also illustrates some other
unique things about the company and how it views itself. The document lists by name each of the
1,258 people who work for the company on pages 49-53. The discussion of operations in the letter
to the shareholders has, as its first section, one 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 .

 Bill Birchard, "Power to the People," CFO, 11 (March 1995), p. 41. a
Ibid.
 Kirstin Downey Grimsley, "The Power of a Team," Washington Business, The Washington Post, February 12,
1996, p. 12.
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