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.

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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 whollyowned 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.

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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.

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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.

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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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.. 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").1° In fact, AES uses four measures to assess the company's performance and progress: Shared Values--How did we do in having an organization that is fun, that is fair, that acts with integrity, and is socially responsible? Plant Operations--How safe, clean, reliable, and cost effective were our facilities. Assets--What 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 Backlog--What happened to our backlog of contract revenues during the year? This is one indicator of success in business development activities."
I

In eight years, the value of a share of AES stock went from $2 to $250, and $10,000 invested in AES in 1982 would now be worth $10 million. In late 1996, the company's shares were near an alltime high and were selling at a multiple of about 30 times earnings, indicating that Wall Street appreciated — even if it did not always fully understand — at least the financial aspects of the AES story. THE THAMES, CONNECTICUT PLANT Although no plant at AES is exactly like any other, in part because of the value placed on decentralization, the operation in Connecticut is typical of AES. The Thames plant is located in Uncasville, Connecticut, near New London, and about 45 minutes from Providence, Rhode Island. The plant is located on only seven acres and is in close proximity to neighboring houses. The plant cost $260 million to construct and uses 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 Container's paper recycling plant that is adjacent to AESThames. The plant has 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 strives to be a "good neighbor" to those living nearby. A visitor to the plant is immediately struck by its cleanliness, and the people who work in the plant are proud of its appearance. The walls of the plant exterior are 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 is unloaded from the barges that bring it up the Connecticut River is also immaculate. The coal handling system is covered to avoid excess dust or debris getting into the surroundings and the unloading dock and surrounding area is swept by a mechanical sweeper after the once a week delivery. There is no smell of sulfur in the air, and in fact, no odor at all. The attitude of cleanliness extends inside the plant as well. For instance, there are two "lunch rooms," although both have stoves, and one has a microwave oven, cooktops, refrigerator, and
10

AES Annual Report, 1995, p. 6. " AES Annual Report, 1991, p. 3.

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dishwasher as well, which makes them more than a typical plant eating area. Quite elaborate meals are cooked there. Both lunch rooms are clean with no dirty dishes sitting around. The cabinetry is of excellent quality and appearance as are the appliances. The turbine rooms are also immaculate. In keeping with AES's social responsibility and concern for the environment, the AES Thames plant has 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 adininistration, 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 is 63 positions, and hiring was occurring at the time. A number of the plant's employees had previously worked either for the Navy or General Dynamics at the nearby Groton, Connecticut shipyard. About 20% of the people in the plant have college degrees, including Associate's degrees. Recall, these are the people that are handling the investment of the plant's debt reserves of several millions of dollars and essentially making all of the decisions in a collaborative environment. There is very little emphasis on formal credentials in the hiring process. And this is true throughout AES. The company has about twenty to thirty MBAs, many of whom have been in the company a while. Most have come from their home (non-U.S.) countries. At AES, no one gets hired into the company at a senior level, and the company tends not to use headhunters for jobs at any level. The company also has tried not to hire directly into project director (new development) positions. AES-Thames has an extremely low turnover rate, as does AES generally. One of the reasons for the low turnover is that AES is a different and special place and people know it and value that fact. To be written about in the Wall Street Journal and other publications, to receive many visits, reinforces the pride and feeling of uniqueness that AES people share. People do often move within the company. Out of perhaps 70 people who were in the Thames plant when it began, only 4-5 people have left the company in seven or eight years. The low turnover is also because, as one person put it, "we all have the ability to expand what we do." The plant organization has three levels — the plant manager, the seven area superintendents, and the front-line people. Because the facility operates continuously, there is some shift work. After some experimentation, people now work three twelve-hour shifts and then have three days off. They then rotate between the night and day shifts. The first shift is from 6:30 in the morning until 6:30 at night, and the second shift is from 6:30 P.M. to 6:30 A.M. Maintenance has a standard 40 hour week but the individuals have pagers, and they rotate responsibility for off-hours coverage.

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HIRING

Hiring, like almost all other things, is done by the plant personnel without the support of any staff human resource people, because there aren't any. People volunteer to look at resumes, particularly people from the area in which the vacancy exists. Based on an evaluation of the resumes submitted, there are telephone interviews. A suggested phone interview guideline is shown in Exhibit 3, but, of course, everyone is free to ask whatever questions they find the most useful. For those who pass the phone interview screen, there are 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 are followed by a group interview. At that point, if there is interest in hiring a specific candidate, that person receives a "sales pitch" interview by the plant manager, in which the purpose is as much to sell the organization and the specific employment opportunity as it is to screen the person. During the hiring process, if one person says you don't fit, you don't get hired. The hiring process can take from one week to a month and a half, but in any event takes a long time. The interviewers typically don't ask technical questions. The people at AES believe that technical skills can be learned. Rather, the questions look for self-motivated, dependable people. One AES person said, "we hire people who want to keep learning new things." Interviewees are frequently thrown off by the questions because they do not focus on specific job requirements and whether or not the individual has a set of relevant skills and job experiences that match those requirements. The hiring process essentially seeks people who will fit with the company. AES people at all levels are committed to the hiring process, believing that getting the right people is key to the company's success, and are actively involved in it. Interviewing is 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?", I was told: Someone who is a chronic complainer, who is not happy, who blames others, who doesn't take responsibility, who is not honest, who doesn't 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 wasn't flexible and who says, "It's not my job."

COMPENSATION AND BENEFITS

Pay is determined by looking at what others are being paid, both inside and outside of the company. There is no set salary schedule for each job and salaries are not public. There is, however, currently discussion within the corporation as a whole about making individual salaries public to deal with concerns about fairness. The Thames people are always comparing what other companies are paying, and are also encouraged to ask questions and talk to people at other AES plants. AES does 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-

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thirds of the people in the facility at the time of start-up took less money to come to AESThames. 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 are given once a year. Superintendents determine raises after discussing the individual's performance review and salary with others in the plant, including obtaining information from the person's peers and other superintendents. As part of the performance review process, individuals do a self-evaluation. The performance appraisal form is reproduced as Exhibit 5. Proposed salaries are the subject of a superintendents' meeting in which the each superintendent receives advice from his peers regarding his proposed raises. In addition to a person's salary and the potential for an annual raise, there are also three forms of incentive pay: 1) individual bonuses; 2) a plant performance bonus, based on safety, the plant's environmental record, costs, and the electricity production; and 3) a corporate-wide bonus based on the overall results of AES. The plant performance bonus is distributed equally to everyone, and the amount has typically been between $4,000 and $6,000. The corporate-wide bonus has typically been about 10%, so the total bonus is between 20% and 25% of salary. The company's retirement system is a defined contribution system that features 100% corporate matching for the first five percent of pay put into the system. People said that in some cases about 20%-25% of salaries are being put into the retirement system, mostly in AES stock. Virtually every employee owns stock in the company. Because of the emphasis on stock ownership, "you've got to stick around to get the pay out," one individual noted, because of the five year period before pension benefits are vested. On the other hand, the five-year vesting period (instead of the more typical tenyear period) was done intentionally in an attempt not to put handcuffs on people — AES wants people to stay because they want to, not for strictly financial reasons. People do watch the stock price. One issue with employee share ownership is how the people feel when the stock price goes down. When the stock price goes down at AES, most people want to buy more. As one person said, "We feel we're part of the entrepreneurs. The fluctuations in stock price reinforces the fact that we're responsible. If there were only upside, we're 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 are always posted. Anyone in the Thames plant, or for that matter, from other plants, can bid for the job. Job applicants interview with the superintendents, and promotion decisions are made at an area superintendents' meeting. Most promotions are filled from within the company.
TRAINING AND DEVELOPMENT

The plant and the corporation take performance problems seriously and do everything possible to help individuals improve. People get every opportunity to correct mistakes. Several individuals said that "it is mostly our fault if people don't work out." Problem employees get

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mentored. The company will move people to other areas in an effort to improve performance. The plant uses family counseling services to help with personal issues that may be adversely affecting performance. As for training, for the most part, "we train ourselves," said one person. Experienced employees train new employees. Operators would do the training of other operators. "We book a course if we think we need it." People feel free to take courses outside of AES or to get together and hire an instructor to do internal training on an issue that seems important. There is a lot of cross-training. There is, however, no centralized training (because there is no training staff) and no coordination of individual training activities. Individuals are responsible for determining what training and development activities are most appropriate to benefit themselves and the corporation. With respect to career development, there are no formal career paths. Rather, flexibility is the watchword and individuals are encouraged to ask, "where can I contribute?" Because the company affords so much freedom and hires people who are interested in learning and growing, there is an internally-generated pressure for growth. As one person noted, "AES needs to keep growing to use the skills of its people." AES has a tuition reimbursement program, in which individuals receive 80% of the tuition money in advance of taking the course (or courses) to pay the necessary tuition and fees. Employees receive 10% more if they earn a B in the course they are taking, and 10% more if they earn an A — so to get 100% tuition reimbursement, the individual needs to earn an A in the course. In order to qualify for tuition reimbursement, the courses need to be work-related, although one gets the feeling that the definition of work-related is fairly broad. The tuition reimbursement program will reimburse people who are working on a degree.
EMPLOYMENT SECURITY

AES has no formal policy of job security. Security is in the skills and abilities that people develop while they are working at the company. The corporation as a whole has never had a general, organization-wide layoff. AES has reduced the number of people working in plants, particularly plants they have acquired, that may be overstaffed and that can be operated more efficiently. Reductions in staffing are made as voluntary as possible. The key is "to treat people with respect." On a short-term basis, the company does try to absorb the extra costs from having too many staff, and the company does 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 the current level of about 60. 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 on line, 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 permits is for people to move to new

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locations as fewer are needed because of efficiency gains at a given location. The plant makes only limited use of part-time people. They have only one part-timer who works in accounts payable, and that person formerly worked full-time. They do use contract employees during outages when the work load increases. But for the most part, the plant has gone away from using contractors and over time has 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 is manifest in how AES-Thames organizes and manages work. For instance, although the plant does have time cards, there is no time clock. Recently, the corporation as a whole has moved towards an all-salaried system in which no one is paid by the hour. Several people noted that at AES, "you're your own boss. We all develop a list of jobs to be done, and you do them. You don't `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 freedom—to be free to make decisions. A `bad' decision is one in which the person doesn't seek advice and doesn't recognize his or her own limits." The plant and the corporation both use a lot of task forces and informal communication to make decisions. There is an audit task force, an environmental task force, and safety task force. People from throughout the corporation come to review a specific plant. As another example, the plant uses task forces to determine human resource guidelines and to make decisions, for instance, on health insurance. Thames offers only one health insurance plan, decided upon by a task force of the plant's employees, not by a benefits manager (there aren't any). The Thames plant's plan is not the same nor does it have the same insurance carrier as all other AES plants, but there is 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 are staffed by people who volunteer because they are interested in the particular subject. There is a great deal of decentralization in decision making. For instance, technicians in an area — the front-line people — may get an idea for capital improvements. They will then obtain bids to see if their ideas are cost effective. If they are, they implement the proposals. Budgets — including training budgets, operating, and capital budgets — are seen as guidelines not as hard and fast rules. All Thames people are involved in discussing and setting the budget at an annual meeting held in the fall. They use openness and talking it out to see if it is right. This strategy meeting permits people to discuss "where we're going and how we're going to get there." Budgets are not set unilaterally by the plant manager or the superintendents.
MEASUREMENT AND INFORMATION

Information on the performance of the company is widely shared. In fact, all AES people are considered insiders by the Securities and Exchange Commission's rules because of the amount of

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information that is shared. Consequently, there are about-10 or so blackout periods during the year during which no AES person can buy or sell stock. Information on the financial and operating performance of the Thames plant is shared once a month at a communications meeting. During that meeting, each area in the plant talks about its projects, personal news, and anything that concerns people or is on their minds. Some people voluntarily come in on their days off for these informational meetings. The company pays overtime for this to recognize the value of everyone's participation. Exhibit 6 displays the information that is typically presented at one of these monthly meetings. The measurement philosophy is to focus comparatively more on plant-wide measures of performance. There are relatively fewer "micro" measures. As the plant manager noted, they try to look at performance globally and focus on a few key measures.
OTHER CULTURAL ELEMENTS

The plant does not have any unions and there have been no unionization attempts. One individual noted that "the philosophy of unions doesn't fit our philosophy." However, AES does have unions in one of its other U. S. plants (the plant was already organized when AES acquired it) as well as in the plants in Northern Ireland, Argentina, Brazil and Hungary and has worked with them quite successfully. The Thames plant has a great many social events, because "we enjoy each other. We work hard together. We're a family." There is an annual picnic, spring and fall parties, a children's Christmas party, an adult Christmas party, and each work group has funds to go out to dinner and to do things together. There is a conscious effort to involve the person's whole family in some of these events. "Because we spend more hours working than doing most other things, fun is important." New people get together at the Arlington corporate office twice a year. The corporation has many conferences for people at all levels that bring 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 is open and frequent communication, asking questions, and learning from each other. Other values mentioned in conversations with Thames people were: 1) innovation and taking on new things, 2) taking prudent risks, 3) looking at the long-term; and 4) challenge. There is a sense among the people of being able to do anything. "We don't know what isn't possible," said one person who works in the plant. HUMAN RESOURCES AT AES Although Dennis Bakke likes to say there is no human resources department, John Ruggirello, president of AES Enterprise and a division manager, noted that there was one exception — a person whose responsibility was to track the 401(k) retirement plan benefits and to send out the necessary reports. And, there are a few people who have been with the company who can recall at one time having a full-time human resources person, maybe about ten or fifteen years ago, but

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that position was eliminated. People also claim to recall having seen copies of an employee handbook with the policies that govern vacations, sick days, and other personnel policies. But there are very few copies still in existence and no one has updated or looked at them in quite a while — they are 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 that "we did the contract negotiations. We didn't 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 is little difference between the union and non-union AES plants in how they operate. John also recounted an incident from his experience at another company that captured his view and the organization's philosophy as to why there was no human resource group at AES and why there shouldn't 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 can't let you give Rudy a raise because, I mean, he's been here for forty years and his salary is already at the top of his grade level. So, he can't have a raise." I said, "but you know he's the best we have and shouldn't 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 you're telling me is I can have Rudy hire two assistants (that he doesn't need) and then I can get Rudy a raise?" They said, "Absolutely." I said, "That's 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 don't have any of that at AES. We don't have salary ranges. We sort of have reviews, but even those are loose--sometimes you have them, sometimes you don't. We don't use management by objectives and give somebody twenty objectives for the next year. We don't do that because things change too fast. It's loose, but it puts a lot of responsibility and accountability on the people who are giving out increases . . . So we don't feel we have all the answers. It's just that many of us who have worked in other places really like the fact that we don't have an HR department that eventually takes over. They were all nice

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people in that department, but they eventually felt that they were responsible for the raises, and it wasn't you that decided, they decided. You had to ask them how to handle an employee problem. Instead of written employee policies governing aspects of the employment relation, people are encouraged to simply use their discretion and good judgment. Dennis Bakke provided the example of leave to attend a funeral, a common benefit at many companies. Most companies have a rule of so many days off if a person in one's 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 not — what about in-laws, for instance? So, instead of making up a set of complex rules to try and handle every contingency, AES tries 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 has a master's degree from Yale's School of Organization and Management. Sarah is married and, while working on the Puerto Rico project, was pregnant. She tried to find out what AES's policy was with respect to maternity leave. But, she discovered that AES didn't 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 project's 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, "Here's how it works." Three verbal warnings or written warnings, two days off, five days off, ten days off, and then you're suspended and then you get all the things written up--and all of this is to build your defense in case you get sued. And, there's a lot of that and its growing. We have people that don't fit, and we've had to let some people go. And, you know, maybe we don't always do it perfectly. But to implement a HR program across the 98 percent of the people that don't need it, we resist that. In other words, we're 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 it, and we've taken some hits for that.

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ORGANIZATIONAL DESIGN AND MANAGEMENT PRINCIPLES In the fall of 1996, AES had only five hierarchical levels — the 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 is that division managers should be in each plant at least once a month. The divisions, their locations, and the current general managers of each are listed in Exhibit 7. The corporate culture and organizing principle has come to be called "honeycomb," which captures the idea of relatively small, flexible, interrelated teams of people working on projects and activities and learning a lot in the process. There are no formal job descriptions and individual responsibilities are 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 hadn't done that before, and I don't think I'll ever do it again, but I knew enough to ask--to find out who knew something about how to do it--who in the company and who outside. So, you spend three weeks making phone calls. In a sense, you're not getting your job done but you're 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?" I'll say, "Not much any more, but here's what I did, and here's 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 more—questions 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. He'll 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 we're looking to develop Paul and his managerial talents and breadth of skills, this might be very efficient." Dennis Bakke has stressed the goal of making "every person a business person," and therefore AES has 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

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dramatically: I think of AES as a conglomeration of small communities. And I don't think there's any company in the world that's so big that you can't organize this way. Even a plant with 400 people can be broken down into smaller groups. It's 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 is never heard at AES. One of the important elements of the AES structure is that all functions are represented in every division, a process that is encouraged by not having centralized corporate staff Thus, each division has 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 is proud of the fact that half of the people from the plants are out doing business development. He sees the widespread diffusion of both knowledge and responsibility as a significant competitive advantage for AES. Many of its competitors are single-person focused, with a strong leader who does everything. The organizing principle of decentralization and delegation is 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 plant's water treatment area ... had been falsifying federally required reports on the quality of the facility's wastewater discharge for over a year."12 Following the announcement, the price of AES stock fell from $26.50 to $16.50, reducing the company's 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. How would Bakke respond: 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.
12

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

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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 wouldn't go there for a whole year, until they finally called back and said, "We'd like you to come back again, we'd 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 don't understand this. They generally care only about the earnings statement--but I'm going to tell them this year. In fact, I've 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. That's 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 company's 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 Plants in Operation: Location 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 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 MW 180 125 143 120 320 181 650 112 78 26 15 660 520 240 Fuel Coal Coal Pet. Coke Natural Gas Coal Coal Coal, Oil, Nat. Gas Hydro Hydro Hydro Oil Nat. Gas Coal, Oil Coal On Line 1992 1987 1986 1989 1991 1990 1995 1993 1995 1995 1995 1996 1995 1992 1992

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

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Exhibit 2 Selected Financial Data On AES Corporation

1995 Revenues (in millions) Net income (in millions) Net income per share Total assets (in millions) Project financing debt (long term) Stockholder's equity (in millions) $685 107

1994 $553 100

1993 $519 71

1992 $401 56

1991 $334 43

1.41 2,320

1.30 1,915

0.98 1,687

0.80 1,552

0.66 1,367

1,098

1,019

1,075

1,146

1,093

549

401

309

177

141

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Exhibit 3 Phone Interview Guide

Name: __________________________

D: a e t

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. What's your current salary and what do you expect?

Disposition: Other Comments:

NF

0/0

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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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Some Interview Questions 1) Can the person do the job?

2) Does the person's value match ours? 3) Will the person do the job? 4) What special skills/lmowledge 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 you've 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 are 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?

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Some Interview Questions (continued) 18) Tell me about a time when a decision was needed and no supervisor was available?

19) 20) 21) 22) 23) 24) 25) it? 26) 27) 28)

What do you do when something needs to be done and no procedure exists? What does fun on the job mean to you? Recall a time when people around you weren't being totally honest. What did you do? What does "fair" mean to you? How important is it? Should everyone be treated equally? Why? What kind of rewards are most satisfying to you? How do you feel about paying the same rates for the same jobs? Why? How would you do

What have you done to become more effective in your job? What self improvement efforts are you making? When could you be available to start work for us--if 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: Show 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 Firm, MW Firm, % Firm, On Peak, MW Firm, On Peak % 83.6 Capacity Factor, % (Equiv.) Availability, % Steam Availability, % Aux. Load Net Plant Heat Rate (Equiv.) Coal, TPD Limestone, TPD Ash, TPD Coal Quality Ash, % Sulfur, % BTU/# Citibank Borrowing Rate, % Citibank Investment Rate, % Overtime, % 10.69 0.94 12,686 6.79 5.51 18.1 11.31 1.11 12,619 6.82 5.53 16.9 August 154.6 85.4 151.3 96.2 87.0 85.8 100.0 15.9 10,677 1,634 124 307 YTD 173.9 96.1 174.1

98.3 96.7 100.0 17.2 10,632 1,849 165 380

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Exhibit 6 (continued)

Monthly Feedback Form AES-Thames, August, 1996 Safety and Environmental AUGUST OSHA Recordables Lost Time Accidents Environmental NOx SOx Opacity Environmental Exceedances Air Water 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 on line on Thursday, Aug. 22. The next day, BBoiler 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. 0 0 2 6 .06 .27 4 .05 .26 3 0 0 YTD 1 0

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Exhibit 7 AES Divisions As Of 1996

Division AES Americas AES Electric AES Chigen AES Transpower AES Shady Point AES Enterprise

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

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