AES (Applied Energy Services)

Annual survey: Many organizations cultivate discussion about values and ground rules through an annual survey. At AES, for instance, a task force of volunteers devised a new set of questions every year and sent them out to the entire organization. Each unit had the obligation— it was one of the ground rules— to discuss the outcome of the survey, in whatever format it thought would be useful.

An employee of AES explained: "bad hire" is someone who is a chronic complainer, who is not happy, who blames others, who doesn’t take responsibility, who’s 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.”

For AES, environmental and social initiatives start with inner rightness. Here is how AES expressed it in a public filing with the U.S. Securities and Exchange Commission when it offered stock to the public: "An important element of AES is its commitment to four major 'shared' values ^[1]. If the company perceives a conflict between these values and profits, it will try to adhere to its values ― even if 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."

AES planted millions of trees to offset carbon emissions. This idea came from an employee in in Los Angeles, not the senior team. Initially there was no budget for this. Using the advice process, she built support for the money AES should put into tree planting. ^[2]

A recently hired financial analyst at AES informed the CEO, Dennis Bakke, that he was intending to leave his role to go back to his native Pakistan and research the opportunity for electricity-generating capacity there on behalf of AES. Bakke expressed skepticism, telling him that despite encouragement from the U.S. Department of State to expand into Pakistan several years earlier, they declined due to concern over high levels of corruption there.

Despite the CEO’s recommendation, the analyst decided to go to Pakistan, effectively creating a new position for himself as business developer, retaining his previous salary. Six months later, he invited Bakke to Pakistan to meet the prime minister. Two and a half years later, a $ 700 million power plant was running.^[3]

Like their counterparts at FAVI and Sun Hydraulics, teams at AES were responsible for decisions relating to all aspects of day-to-day operations including investment related budgeting, hiring, training, evaluations, compensation, capital expenditures, and purchasing, as well as long-term strategy and charitable giving. AES is an energy provider, operating thermal and hydroelectric power plants as well as electrical grids. This equipment is absolutely central to the lives of many people and businesses. A front-page article in the Wall Street Journal by reporter Alex Markels illustrates with a story how far teams at AES went with taking on responsibilities typically handled by headquarters:

MONTVILLE, Conn. –– His hands still blackened from coal he has just unloaded from a barge, Jeff Hatch picks up the phone and calls his favorite broker. “What kind of rate can you give me for $10 million at 30 days?” he asks the agent, who handles Treasury bills. “Only 6.09? But I just got a 6.13 quote from Chase.” In another room, Joe Oddo is working on J.P. Morgan & Co. “6.15 at 30 days?” confirms Mr. Oddo, a maintenance technician at AES Corp.’s power plant here. “I’ll get right back to you.” Members of an ad-hoc team that manages a $33 million plant investment fund, Messrs. Oddo and Hatch quickly confer with their associates, then close the deal. … It sounds like “empowerment” gone mad. Give workers more autonomy in their area of expertise? Sure. Open the books to employee purview? Perhaps. But what good could possibly come from handing corporate finance duties to workers whose collective borrowing experience totals a mortgage, two car loans, and some paid-off credit-card debt? Plenty of good, says AES. … “The more you increase individual responsibility, the better the chances for incremental improvements in operations,” argues Dennis W. Bakke, the company’s chief executive and one of its founders. … “And more importantly” he says “it makes work a lot more fun.” Is giving coal handlers investment responsibility risky? Mr. Bakke thinks not. He notes that the volunteer team in Montville does have a financial adviser, and they work within a narrow range of investment choices. They aren’t exactly buying derivatives. What the CEO likes about the arrangement is that “they’re changed people by this experience. They’ve learned so much about the total aspect of the business, they’ll never be the same.” ^[4]

At AES, every team established its investment budget once a year. Budgets would be added up at the plant level, sometimes running as high as $300 million in a year. When teams were satisfied with the consolidated budget for the plant, it was reviewed, together with those from all other plants, by a budget task force that would suggest possible changes and improvements (but didn’t have power to enforce changes). That task force was staffed with a few people from headquarters with relevant expertise, but predominantly with people from local units with all sorts of backgrounds - a security guard could sit next to a technician and an engineer. Internal audits were performed in the same way, by volunteer task forces: each plant would be audited by colleagues from other plants.

AES found out that using voluntary task forces instead of fixed staff functions has multiple benefits. Employees find avenues to express talents and gifts that their primary role might not call for. They develop a true sense of ownership and responsibility when they see they have real power to shape their company. Founder Dennis Bakke insists on another point: these task forces are formidable learning institutions. At any point in time, thousands of people would be involved in task forces, picking up technical and leadership skills from more experienced colleagues. It’s a modern-day form of apprenticeship, scaled to a massive level. No classroom training could ever provide the amount of learning that was taking place day in and day out in the voluntary task forces.^[5]

In fall of 2001, after the terrorist attacks and the collapse of Enron, AES’s stock price plummeted. The company needed access to capital markets to serve its high debt levels but found them suddenly closed. Swift and drastic action was needed to prevent bankruptcy. A critical question was: how many and which power plants would need to be sold off to raise the necessary cash? With 40,000 people spread around the world, Dennis Bakke, the CEO, could hardly convene everybody and stand on a soapbox like Zobrist at FAVI. And the problem was so complex that he couldn’t simply send out a blog post with two alternatives, like Jos de Blok did at Buurtzorg.

Bakke chose a course of action that temporarily suspended the advice process in a way that nevertheless minimized the risk of under-mining trust in self-management. He didn’t work out a plan behind closed doors with his management team; instead, he publicly announced that top-down decision-making would be made during a limited time for a limited number of decisions, albeit critical ones. The advice process would remain in force for all other decisions. To investigate the best course of action and make the tough calls, Bakke appointed Bill Luraschi, a young and brilliant general counsel. Luraschi wasn’t regarded as one of the most senior leaders nor as someone who would seek a leading role in the future. The signal was clear: the senior leaders of the organization were not looking to exert more power. Top-down decision-making would be handled by someone with no thirst for power, and it really would be temporary.

If the advice process needs to be suspended in times of crisis, these two guidelines can serve to maintain trust in self-management: give full transparency about the scope and timeframe of top-down decision-making, and appoint someone to make those decisions who will not be suspected of continuing to exert such powers when the crisis is over.

Here is how Dennis Bakke (CEO of AES at that time) summarizes the assumptions workers feel bosses have about them:

• Workers are lazy. If they are not watched, they will not work diligently.
• Workers work primarily for money. They will do what it takes to make as much money as possible.
• Workers put their own interest ahead of what is best for the organization. They are selfish.
• Workers perform best and are most effective if they have one simple repeatable task to accomplish.
• Workers are not capable of making good decisions about important matters that affect the economic performance of the company. Bosses are good at making decisions.
• Workers do not want to be responsible for their actions or for decisions that affect the performance of the organization.
• Workers need care and protection, just as children need the care of their parents.
• Workers should be compensated by the hour or by the number of "pieces" produced. Bosses should be paid a salary and possibly receive bonuses and stock.
• Workers are like interchangeable parts of machines. One "good" worker is pretty much the same as another "good" worker.
• Workers need to be told what to do, when to do it, and how to do it. Bosses need to hold them accountable.

And here are the new assumptions :

AES people :

• Are creative, thoughtful, trustworthy adults, capable of making important decisions;

• Are accountable and responsible for their decisions and actions;

• Are fallible. We make mistakes, sometimes on purpose;

• Are unique and

• Want to use their talents and skills to make a positive contribution to the organization and the world.

AES, an energy generation and distribution powerhouse was co-founded in 1982 by Roger Sant and Dennis Bakke. Under Sant’s leadership as CEO until 1994, and then with Bakke at the helm, it grew from a two-person firm into a global energy producer employing 40,000 people in plants located in more than 30 countries around the world.

AES became a Wall Street darling after it was publicly listed in 1991. For years, while the company was going from success to success, the board members were supportive of AES’s radically decentralized and trust-based decision-making. And yet as Bakke commented, “Most board members loved the AES approach primarily because they believed it pushed the stock price up, not because it was the ‘right’ way to operate an organization.”

AES’s fortunes turned in the early 2000’s. Following the dotcom bubble burst, the 9/11 terrorist attacks and the Enron bankruptcy, which caused near panic among energy investors, AES’s stock price, which had peaked at $70, declined to as low as $5. AES’s earlier decisions to invest in “merchant plants” that sold electricity in the spot market as opposed to under long-term contracts and to finance much of its growth with debt no doubt contributed to its troubles. However, these decisions could not be attributed solely to its decentralized structure as they had been discussed and agreed to all the way up to the board level. Nevertheless, fear took over among board members, and they imposed greatly increased oversight including the hiring of lawyers and consultants as well as a co-CEO whose directives Bakke was asked to carry out. After nine frustrating months, Bakke left, which freed the board to direct the conversion of AES to traditional management practices.^[6]

With 40,000 people scattered around the globe but only around 100 staff in its headquarters in Arlington, Virginia, AES had no central maintenance or safety departments, no purchasing, no HR, and no internal audit departments. The company came up with the "80-20 rule": every person working at AES, from cleaning staff to engineer, was expected to spend on average 80 percent of their time on their primary role and make themselves available for the other 20 percent in one or more of the many tasks forces that existed around the company.^[7].

Note that AES was handed over to new management in 2001, who decided to revert to more conventional management approaches.

AES has demonstrated a distinctively Teal approach to layoffs due to structural overstaffing after buying power plants previously owned by governments. After the acquisition, AES had to lay off hundreds of people and managed to do that relatively painlessly through a special voluntary severance program. Here is Dennis Bakke‘s, CEO, perspective on the matter:

"The right size of a workforce is equal to the number of people needed to make the workplace fun. Having too many employees demoralizes colleagues and causes turf battles. A very astute AES plant manager in Northern Ireland told me that arguments over turf are good indicators that the facility has too many people. No one worries about who does what when there is enough work to go around. My belief that business should not carry unneeded employees does not mean that they should be given pink slips and hustled out the door. Departing employees need time to make the transitions to new work. Organizations should be generous with severance arrangements. We encountered overstaffing almost every time we made an acquisition. One of the first things we did after acquiring a business was to set up a generous and voluntary severance program. Only rarely were individuals asked to leave. In Panama, AES created a loan fund for employees who took the severance package. A year later, I traveled to a celebration lunch with former employees who had left the company. Seventy-one new businesses had been started by these former employees, most of whom tapped the AES loan fund. Even with generous voluntary severance arrangements, the changeover from a company you know to one you don’t can be traumatic. I strongly believe that these difficult transitions are a necessary evil that forces employees and organizations to adjust to a dynamic world. Part of the joy of work is learning new roles and taking on new responsibilities. Job security is attractive gift wrapping, but seldom is there anything of lasting value inside."^[8]

AES, with its 40,000-employees, functioned in self-managing teams of 15 to 20 people during its period under Teal practices. Believing that bad things start to happen when any site becomes too big, AES also tried to limit the number of employees in a site to a maximum of 300 to 400 (15 to 20 teams of 15 to 20 people)―the natural limit, they felt, for colleagues to more or less put names and faces together and enter into a casual discussion with any colleague.

Teams at AES were responsible for decisions relating to all aspects of day-to-day operations: budgets, workload, safety, schedules, maintenance, hiring and firing, working hours, training, evaluations, compensation, capital expenditures, purchasing, and quality control, as well as long-term strategy, charitable giving, and community relations.

This is quite remarkable: AES is an energy provider, operating thermal and hydroelectric power plants as well as electrical grids. This equipment is absolutely central to the lives of many people and businesses. Operating problems can lead to disastrous blackouts, and accidents to the loss of many human lives. And yet millions of customers throughout the world were supplied with energy produced by self-governing teams responsible for such crucial matters as safety and maintenance.

With 40,000 people scattered across different continents, AES only had about 100 people working at headquarters in Arlington―hardly a number that could claim to control what was happening in faraway places like Cameroon, Colombia, or the Czech Republic.

And yet, it worked. A front-page article in the Wall Street Journal illustrates with a story how far teams at AES went with taking on responsibilities typically handled by headquarters:

MONTVILLE, Conn. –– His hands still blackened from coal he has just unloaded from a barge, Jeff Hatch picks up the phone and calls his favorite broker. “What kind of rate can you give me for $10 million at 30 days?” he asks the agent, who handles Treasury bills. “Only 6.09? But I just got a 6.13 quote from Chase.” In another room, Joe Oddo is working on J.P. Morgan & Co. “6.15 at 30 days?” confirms Mr. Oddo, a maintenance technician at AES Corp.’s power plant here. “I’ll get right back to you.” Members of an ad hoc team that manages a $33 million plant investment fund, Messrs. Oddo and Hatch quickly confer with their associates, then close the deal. …

It sounds like “empowerment” gone mad. Give workers more autonomy in their area of expertise? Sure. Open the books to employee purview? Perhaps. But what good could possibly come from handing corporate finance duties to workers whose collective borrowing experience totals a mortgage, two car loans, and some paid-off credit-card debt? Plenty of good, says AES. … “The more you increase individual responsibility, the better the chances for incremental improvements in operations,” argues Dennis W. Bakke, the company’s chief executive and one of its founders. … “And more importantly” he says “it makes work a lot more fun.”

Is giving coal handlers investment responsibility risky? Mr. Bakke thinks not. He notes that the volunteer team in Montville does have a financial adviser, and they work within a narrow range of investment choices. They aren’t exactly buying derivatives. What the CEO likes about the arrangement is that “they’re changed people by this experience. They’ve learned so much about the total aspect of the business, they’ll never be the same.”

With only around 100 staff in its headquarters in Arlington, Virginia, AES had no central maintenance or safety departments, no purchasing, no HR, and no internal audit departments. In a smaller company, when an issue arises in one of these areas, people can simply call a meeting, or delegate a specific coordinating role to a colleague. At AES, with 40,000 people scattered around the globe, that was no longer feasible. The company came up with the “80-20 rule”: every person working at AES, from cleaning staff to engineer, was expected to spend on average 80 percent of their time on their primary role and make themselves available for the other 20 percent in one or more of the many task forces that existed around the company.

Take investment budgeting, normally the prerogative of finance staff at headquarters. At AES, everything happened in the field; every team established its investment budget once a year. Investment budgets would be added up at the plant level, sometimes running as high as $300 million in a year. When teams were satisfied with the consolidated budget for the plant, it was reviewed, together with those from all other plants, by a budget task force that would suggest possible changes and improvements (but didn’t have power to enforce changes). That task force was staffed with a few people from headquarters with relevant expertise, but predominantly with people from local units with all sorts of backgrounds―a security guard could sit next to a technician and an engineer.

Internal audits were performed in the same way, by volunteer task forces: each plant would be audited by colleagues from other plants. Task forces were put in place for topics as diverse as compensation, community service, environmental work, and corporate values.

AES found out that using voluntary task forces instead of fixed staff functions has multiple benefits. Employees find avenues to express talents and gifts that their primary role might not call for. They develop a true sense of ownership and responsibility when they see they have real power to shape their company. Dennis Bakke insists on another point: these task forces are formidable learning institutions. At any point in time, thousands of people would be involved in task forces, picking up technical and leadership skills from more experienced colleagues. It’s a modern-day form of apprenticeship, scaled to a massive level. No classroom training could ever provide the amount of learning that was taking place day in and day out in the voluntary task forces.^[9]