9659339 Beyond Budgeting Case Study Aes

AES Corp

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Outperformance

International Center for

Beyond-Budgeting-Case-Study

AES Corporation “the power of being global”

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“God made us all a certain way. We’re all creative, capable of making decisions, trustworthy, able to learn, and perhaps most important, fallible. We all want to be part of a community and to use our skills to make a difference in the world.” Dennis Bakke

“A joy-filled workplace gives people the freedom to use their talents and skills for the benefit of society, without being crushed or controlled by autocratic supervisors”

“Everything about how we organize gives people the power and the responsibility to make important decisions, to engage with their work as businesspeople, not as cogs in a machine.” “We abhor layers. We avoid them like the plague. The more authority figures you have above you, the Dennis Bakke more likely it is that you won't make decisions yourself. So we organize around small teams.”

Dennis Bakke

Dennis Bakke

"If you're interested in moving up in a traditional hierarchy, you' re not going to choose to work at AES.” Dennis Bakke

"It is okay to make most mistakes. We are all human. Its part of AESs values to accept mistakes." Dennis Bakke

"We try to reinvent the wheel every time we get a chance. The process of learning and doing is what creates engagement – fun." Roger Sant

"Managers control people and things. Leaders give up control and serve people. There's a huge difference—and that's the essence of creating joy at work." Dennis Bakke

“We broke all the rules. No overtime. No bosses. No time records. No shift schedules. No assigned responsibilities. No administration. And guess what? It worked!” Oscar Prieto, AES manager and director of Light Servicios de Electricidade, Brazil, October 1998 Page 3

Table of contents:

Introduction to the Case Study..........................................................................................................................5 AES Corporation: „The power of being global“ - past to present.......................................................................6 Company Overview.....................................................................................................................................6 Worldwide expansion from the United States and IPO..............................................................................10 AES' two dramatical crisis .........................................................................................................................11 AES' culture...............................................................................................................................................13 Leadership model of AES...............................................................................................................................16 Introduction................................................................................................................................................16 Assumptions held about human nature at AES..........................................................................................18 Management Practices listed by Beyond-Budgeting-Principles.................................................................19 Adopting the AES way at new plants ........................................................................................................34 Appendices.....................................................................................................................................................36 Appendix 1: Theory X / Y...........................................................................................................................36 Appendix 2: Beyond-Budgeting-Principles.................................................................................................37 Appendix 3: Typical evolutionary path within an organization's life............................................................39 Appendix 4: The Double Helix Transformation Framework........................................................................40 Appendix 5: „Joy at Work“: Dennis Bakke's approach to leadership..........................................................41 Appendix 6: Bakke's Top 10.......................................................................................................................42 Appendix 7: AES' stock price ....................................................................................................................43 Resources.......................................................................................................................................................47 License...........................................................................................................................................................47

(Version 1.2, May 2009) (Version 1.1, January 2009) (Version 1.0 June 2008)

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Introduction to the Case Study What makes AES so special among the Beyond-Budgeting-Pioneers? While keeping its entrepreneurial spirit, its unique culture, consisting of shared values and principles, and its way of organization entitled the “Honeycomb” since its foundation in 1981, AES did thus not transform to Beyond Budgeting. But it transforms newly acquired plants to Beyond Budgeting! Moreover AES demonstrates that the BeyondBudgeting-Model works verbally „beyond“ national cultures, in AES' case over five continents in 29 different countries and many different national cultures. Secondly AES demonstrates that even Beyond Budgeting leads in a traditional-minded, capital-intensive, highly-regulated and controlled industry to industry leadership using a “joy at work” approach for a product, that is without doubt a commodity. Further more we will experience the effect of the Beyond-Budgeting-Principle “Transparency” when a Beyond-BudgetingOrganization is publicly listed at the stock exchange. Forth we will learn the importance of AES' lived shared values and mission when it comes to profit and financial issues, and last but not least, that the complete management model from AES was build upon “try-and-error”. As Tom Tribone, AES' most creative new business developer calls this: “We tried it out in practice and then see if it works in theory.” The AES Case was investigated by the BBRT in 1998 stating: “The immediate impression is that of a

profound principle-based, small enterprise, in which everyone is involved and engaged. The philosophy of AES has its roots in shared vales, teamwork, and the acceptance of responsibility.”

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AES Corporation: „The power of being global“ - past to present

Company Overview

AES' slogan „The Power of Being Global“ hits the grounds: founded in 1981 by Roger Sant and Dennis Bakke, AES can today be truly described as a global company operating on 5 continents and in 29 countries with 129 plants, 28.000 AES people and an overall turnover of $13.6 billion (in 2007). Focusing on power generation and electric utilities, AES has developed itself within 25 years to one of today's world’s largest global power companies, achieving worldwide industry leadership. The AES 2005 Annual Report points out the companies slogan “The power of being global”: Bakke Dennis BakkeDennisSharing “AES is all about being global. And for good reason. Being global helps spread innovation.

knowledge across our enterprise fosters excellence and yields remarkable results. A best practice for turbine life cycle management found in Africa provides the power to improve performance across Europe and the Middle East. Deep local insights and presence in the Southern Cone help mitigate the cross-border impacts of a gas shortage in Argentina. Globally, we command a robust and well-balanced portfolio of businesses. With practical expertise in almost every form of power generation, we can identify the right fuel technology for each particular market —helping to lower costs for consumers and supporting continued economic growth and expansion in the markets we serve. Globally, regionally and locally, AES seeks out ways to drive strategic growth. And our people are as dynamic as our global footprint, cultivating deep roots in each local culture and economy. Wherever we do business, we deliver results. These qualities make AES a good investment, a good partner and a great place to work. At AES, that’s the power of being global.”

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Being today one of the “poster companies” for empowerment, Roger Sant and Dennis Bakke never indented to: “Bakke: We knew that we wanted to create a very different kind of company, that's for sure. I

don't think we used the word empowerment-I'm not sure it was even around in 1981. Our main goal at the beginningRoger was to build a company that we ourselves would want to work in. The actual type of business Sant wasn't really important, to tell you the truth. It could have been an energy conservation company; it could have been steel. It ended up being an electricity company. We just wanted to create a company that embodied the four principles that we felt mattered in any kind of community, be it a business, church, Roger Santfairness, integrity, social responsibility, and fun.“ These initial four shared values which village, or whatever:

were changed in 2005 to five shared values (s. below) comprised more values like for example ownership, trust and accountability. Originally defined using the Seven-S Framework, AES initially had no company mission or purpose due to the fact, that the Seven-S Framework had no place for it. When asked where Dennis Bakke and Roger Sant got their idea of creating a complete empowered organization, Dennis Bakke consequently mentions his Christian faith and the concept of Stewardship1 as source. In accordance with the concept of Stewardship AES purpose was defined to serve society needs. Contrary Roger Sant directly refers Douglas McGregor2 and Bob Waterman3: “My ideas about empowerment

are based on experience, stimulated significantly by an integration of theory X and theory Y and by Bob Waterman, our long-time board member and author of In Search of Excellence. Quite a while back, I started thinking about when I had the most fun at work, and I realized it was when I was given responsibility and accountability, when I had the chance to make a difference.” Not only Roger Sant, but also Dennis Bakke was keen on Robert Waterman and “In Search for excellence”, so that they both hired him to serve as a board member. Waterman quickly accepted this offer, so that he see how his idea could actually be implemented. Stanford Professor Jeffrey Pfeffer sums up: “Bakke has described Waterman as his soul mate,

and Waterman's influence on how the company operates is evident.”

1 2 3

Bakke's main resource book on Stewardship is “Stewardship – Choosing Service over Self-interest” by Peter Block. Stewardship is itself a concept, that assumes that the resources that we use belong to s.o. else; and we are only protecting them, taking care of them and make them useful for the owner. Like accountability without control or compliance. See Appendix 1 for Theory X and Theory Y from Douglas McGregor Co-author with Tom Peters of the landmark management bestseller “In search of excellence” in 1982; the eight principles can be summarized on overall as “entrepreneurship” and “decentralization” Page 7

Despite being a For-Profit-Company, Dennis Bakke and Roger Sant share the belief of many BeyondBudgeting-Pioneers, that profit is just a condition, but not the goal of the organization:

“Bakke: Profits are a consequence of doing a good job of stewarding and of meeting a need. And they are essential so that we can pay shareholders the returns they deserve. Profits in and of themselves, however, are not the central purpose of AES. Sant: You have to make money because the enterprise can't be sustained unless you do. And profits often measure how effectively you are carrying out your mission. Bakke: We don't operate with the traditional notion that the company exists, first and foremost, for the benefit of the shareholders. Shareholders are one important constituency of our company, but they are not the most important. We have many other stakeholders: AES people, our customer, the communities we build and run our plants in, suppliers of debt and other services, the governments of the countries where AES operates. I used to say that our competitors were stakeholders, too, but my colleagues laughed at me and made me stop. But I still think it's true. Our competitors are critical to us because they make us better, and they make us credible. If we don't do things better-if we don't surpass them in meeting the world's needs for safe, clean, reliable electricity-then we'll disappear, as we should.” Further they add: “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, 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. My desire is that the principles to which we strive would take preeminence.” Bakke insists: "We do this because it maximizes our ability to have fun and make a difference." “Companies have to exist primarily in order to contribute to society, to meet its needs. Businesses have to help people live better lives. They have to operate in ways that help communities cohere and thrive.” Finally Bakke defines the “ultimate” purpose not only for AES, but also for any given company: “[...] and by

far most important, the principles embraced by AES stand on their own merits whatever the company's share price. Winning, especially winning financially, is second-order goal at best. Working accordingly to timeless, true, and transcendent values and principles should be our ambition.” In Bakke's broader definition for organzational success he emphasis a workplace filled with joy and decision-making for ordinary working people using their talents. “Our experiment at AES showed that this kind of workplace can be the

cornerstone of an organization that is vibrant and economically robust.”

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AES' mission is to “to serve society in an economically sustainable manner with safe, clean, reliable, electricity”. In this manner, AES serves today more than 100 million people worldwide with safe, clean, reliable and sustainable electricity. AES' business model can be described as follows: •

Supplying energy to customers at the lowest cost possible, taking into account factors such as reliability and environmental performance;

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Constructing, acquiring, and operating projects of a relatively large size in geographically dispersed markets;

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When available, maximizing the amount of non-recourse financing

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To the extent possible, entering into longer-term power sales contracts or other arrangements with electric utilities or other customers with significant credit strength

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If possible, participating in distribution markets that grant concessions with long-term pricing arrangements; and

•

When available, entering into hedging, indexing, or other arrangements to protect against fluctuations in fuel costs, currency, and electricity prices.

•

AES has attempts to establish an operating environment that leads to safe, clean and reliable electricity generation, distribution and supply. Due to this emphasis, the AES prefers to operate all facilities and businesses which it develops or acquires; however, there can be no assurance that AES will have complete operating control of all of its facilities.

•

Furthermore AES attempts to finance each project (domestic and foreign) mainly under loan agreements and related documents which require the loans to be repaid solely from the project’s revenues and provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts and cash flow of that project subsidiary or affiliate. This type of financing is usually called a non-recourse debt or project financing.

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Worldwide expansion from the United States and IPO Originally founded in the United States of America in Arlington, AES soon started a huge worldwide expansion with the opening of the power markets in the early 90s to the United Kingdom, Argentina, Pakistan, China, Hungary, Brazil and other emerging markets worldwide followed by Qatar, Oman, Sri Lanka, Cameroon—and more recently Bulgaria, southeastern Europe, India, and China, Spain, Jordan, Indonesia and Vietnam. Country

Number of AES people in 2007

Number of plants/utilities in 2007

In the county since

Argentina

1600+

8/3

1993

Brazil

5400+

11/2

1997

Bulgaria

40+

1 under construction/0

2006

Cameroon

2500+

12/1

2001

Chile

400+

16/0

2000

China

370+

7/0

1994

Colombia

80+

1/0

2001

Czech Republic

90+

1/0

2001

Dominican Republic

1400+

7/1

1997

El Salvador

900+

0/4

1996

Hungary

500+

3/0

1996

India

15+

1/0

1998

Jordan

10+

1 under construction/0

2007

Kazakhstan

6200+

3/0 (management of 3 plants and 2 utilities)

1996

Mexico

200+

3/0

2000

Netherlands

30+

1/0

1998

Nigeria

70+

1/0

2001

Oman

50+

1/0

2003

Pakistan

100+

2/0

1997

Panama

100+

4/0

1999

Qatar

80+

1/0

2004

Spain

40+

1/0

2006

Ski Lanka

40+

1/0

2003

Ukraine

4500+

0/2

2001

United Kingdom

90+

2/0

1992

United States

3500+

30/1

1885

Source: Single Country Fact Sheets available on aes.com, accessed 1st June 2008

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While still expanding into new geographic markets, AES nowadays concentrates more on expanding into new business lines, e.g. like wind, climate change and other alternative energy. Former known as “The global power company”, AES nowadays transforms itself to a “global power and alternative energy company”. AES went public on 28th June 1991 at the New York Stock Exchange (NYSE). Staying to its former four shared values of integrity, fairness, fun and social responsible, Dennis Bakke and Roger Sant formulated the following letter to AES people and shareholders in March 1991:

We have contemplated the pros and cons of being public since the beginning of AES. We have until now concluded that staying private made the most sense. However, we now believe that registration as a public company may ultimately be inevitable. ... We continue to be committed to the purpose and values of AES. ... To that end, we have established “Going Public Principles” for ourselves. ... These principles are: Make the process fun; if its stops being fun, we should change the way we are doing or quit. ... If we find ourselves tempted to change any significant elements of the way we do business, we must consider the change to be a major red flag and we should make the change only if our current rationale for acting as we do doesn't make sense-independent of the public offering process ... We well do our best to uphold these principles.”

AES' two dramatical crisis During AES' aggressive worldwide expansion the company suffered to two dramatical crises in 1992 and in 2002, but is since 2003 stable.4 The 1992 crises even conflicted with AES core shared values and the management model build upon them. Bakke explains: “That's what happened after the incident in Oklahoma. You know, our stock dropped $400

million in one day-one-third of the company's value at the time-and the board and others started saying, "Okay, your experiment is over. It failed. It's time to revert to the traditional way of doing things." And the people at the plant agreed. They went to shift supervisors like conventional industrial facilities have; a deputy plant manager was installed; and a bunch of functional departments were put insure as environmental regulation, planning, and safety. And the plant manager basically fired me. He called me and said, "Please don't come out here anymore." I spent about four months talking to people all over AES. I 4

See Appendix 7 for stock prices charts Page 11

asked, "How can we stick with our fundamental principles and not move backward?" Finally, step by stepand there were a lot of conversations that took place-we agreed that we believed in our principles, and we would not waver. As for the Oklahoma plant, it didn't happen all at once, but eventually the people there undid what they had done to themselves. They got back to the AES way.” At October 2000 AES' stock price reached its until nowadays not topped value of 70,82 US $. But the economic environment in 2002 was much changed: The independent power sector which had boomed with privatization and deregulation was no longer filled with opportunity and optimism. The California power crisis, the collapse of Enron, risks in in the European and American business, currency crises in Latin America and the problems of power producers in several emerging market countries had cast a pall over the entire electricity sector. Meanwhile, competition had sky-rocked within the sector. While AES had been a pioneer of independent power production, it was now a crowded sector with competition. Competitors for electricity supply contracts included independent power producers (IPPs) such as AEP, Calpine, and Reliant Resources; traditional utilities such as Duke Power, Dominion Resources, Consolidated Edison, Electricité de France, and British Energy; gas companies such as Vectren, Centrica, and Gaz de France; and oil majors such as BP Amoco, ExxonMobil, and Shell. Finally in October 2002 AES' stock price dropped to its ultimate bottom line of 1,77 US $. At this time in AES' history Dennis Bakke, who served as CEO since 1994 withdraw from the company; Paul Hanrahan became the new CEO and massive restructuring program aimed at the company's financial health then followed.

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AES' culture Shared values At the core of AES lies it unique culture based on the premise that AES was founded on the principle that strong businesses are built on trust, accountability and an environment which allows people to reach their full potential. AES' culture itself comprises the five shared values or principles of “Put Safety First”, “Act With Integrity”, “Honor Commitments”, “Strive For Excellence” and “Have Fun Through Work” which underpin all company-wide decision-making like talent hiring, talent development, talent compensation or customer relationships.5 These values are even prioritized despite of plans and directions and paid attention to in the annual report.6 Furthermore AES demands that the five shared values are not only lived within the organization at work but also in the free time. The notion “shared” indicates the transformation of (the founders) personal values to organizational values. Sant and Bakke explain: “Shared implies that members

of an organization agree on the definition and importance of a value. [...] If individuals, whether they are vice presidents or board members, interpret values individually, the values are not shared.” AES five core “shared “ values

Put Safety First. We will always put safety first—for our people, contractors and communities. Act With Integrity. We are honest, trustworthy and dependable. Integrity is at the core of all we do—how we conduct ourselves and how we interact with one another and all of our stakeholders. Honor Commitments. We honor our commitments to our customers, teammates, communities, owners, suppliers and partners, and we want our businesses, on the whole, to make a positive contribution to society. Strive For Excellence. We strive to be the best in all that we do and to perform at world-class levels. Have Fun Through Work. We work because work can be fun, fulfilling and exciting. We enjoy our work and appreciate the fun of being part of a team that is making a difference. And when it stops being that way, we will change what or how we do things.

Source: http://aes.com/aes/index?page=culture_and_values, access 1st June 2008 5 This approach is in best defined by Harvard Professor Shart Paine “Values are not a “management” tool, or a specific type of management system that runs parallel to a company's audit or compensation system. [... they are] beliefs, aims, and assumptions that undergird the enterprise and guide its management in developing strategies, structures, processes, and policies. They constitute an organizational “infrastructure” that gives a company its distinctive character and ethos – its moral personality ”. The European business ethics approach based upon Prof. Dr. Wieland reflects the same European perspective on values. 6 AES has in 2005 changed to original four shared values to the above listed five shared values due to capture the increased focus on safety and excellence. Page 13

The SEC (Securities and Exchange Commission) requires AES to list its adherence to its “shared” values and principles as a possible risk factor when it offers stock to the public. The following statement has to accompany each public offering:

"An important element of AES is its commitment to four [five] 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 forgone 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.” Very special about the culture at AES is its shared value fun. Dennis Bakke and Roger Sant explain, by what they mean with the notion “fun”:

“[Bakke:]"We never set out to be the most efficient or most powerful” or richest company in the world-only the most fun. And I think we're getting there. Sant: I would agree. But the word fun can be misleading. We're not talking about having parties all the time. That's not why AES is fun. It's fun because the people who work here are fully engaged. are accountable for results. What they do every day matters to the company, and it matters to the communities we operate in. We do celebrate a lot-because lots of great things are happening. We just did a billion-dollar deal, for instance, and that called for a party. But it's what happens before the celebrations that's really fun. Bakke: The struggle before the deal, for instance, the challenge and the creativity required to make it work, taking risks, even the sleepless nights. Believe it or not, those things really are fun because they engage people - heart, mind, and soul. And that was the kind of company we set out to create, one in which people could have engaging experiences on a daily basis.”

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AES' Corporate Responsibility Since its foundation, AES has committed itself to be environmentally responsible and claims itself to be also the industry leader on environmental issues, despite supporting global infinitives like the UN Global Compact 7 or having detailed code-of-conducts with extensive rules. The company itself sees its corporate responsibility not as a program—but about how it conducts business and about the overall impact it has on society and on the lives of the people it serves based on its lived shared values. This corporate responsibility also comprises the responsibilities for the local communities in which the company is engaged. The 2007 annual report reflects a good picture of AES commitment for social responsibility:

“At AES we see the impact of our business on people’s lives every day. The energy we produce provides comfort and convenience, keeps production lines churning and illuminates computer screens. But beyond the present is a broader, more enduring impact that comes from the work we do. The new plant we construct in Chile not only lightens a dark street today, it helps ignite and stimulate the local economy, and build community infrastructure. The facilities we make more efficient in Mexico and the Philippines not only bring power to more homes and businesses, they also enable rigorous expansion of commerce and educational opportunities for children. The new wind farms we’re building in Huanghua, China and Abilene, Texas, and the climate change solutions we’re developing in Malaysia contribute to improved air quality today and help ensure the environmental future of our planet. We are using our global footprint, along with our development and operational expertise, to explore energy initiatives that support both immediate and positive gains for our business, while also addressing the critical issues of our time: demand for cleaner, more reliable and sustainable energy. The diverse portfolio of energy solutions we are building today reflects the values that built AES and will define our company’s future for decades to come.”

As part of Corporate Responsibility AES' tries to compensate for the emissions that it generates. E.g. when it built a coal-fired plant in Montville, Connecticut, it calculated that it would generate 15 million tons of carbon over 40 years, it planted 52 million trees in Guatemala - enough to offset those emissions. As AES has expanded into the developing world, its social initiatives have moved beyond environmentalism. For example it has funded medical care in Kazakhstan, organized food banks in Argentina, and built schools in China. Roger Sant says AES started shifting gears when it built two 340-megawatt power plants in Pakistan, where the adult literacy rate is less than 40%. "You can't go to Pakistan and say that the number-one priority is global warming," he argues.

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AES is not listed in the participants list of the UNGC up to 31st May 2008, but conducts since 2006 a worldwide Environment Management System (EMS) applied in all plants Page 15

Leadership model of AES

Introduction

AES' management model can be be described like the one of Semco by stating, what AES NOT has:

AES has NO: Central staff Organizational charts Corporate Strategy Management

Policies Employees Hourly wages

Source: ito lean on “Joy at work”, page 26

Although developed under a try-and-error approach, AES’s unique organization and management systems are the direct result of AES' shared values on which the company was established and continue to define every aspect of its management. According to this approach Roger Sant advices that if other companies would like to transform to AES way and thus to Beyond Budgeting, they have to first adopt to shared values:

“But I would not recommend that other businesses adopt only our mechanics. They'd have to adopt some shared values first, because the mechanics flow from them. You can't have one without the other.” To create a fun working environment for its AES people and to implement its strategy of operational excellence, AES has adopted decentralized organizational principles and practices, fostering entrepreneurship throughout the company.

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Like the traditional tayloristic command-and-control management model is a relict of the old Industrial Age, such is our vocabulary. Dennis Bakke lists several of these dehumanizing terms: Labor, Labor cost, personnel, personnel departments, human resources, employees, workers, management, and efficiency. Therefore terms such as “HR” or “Employees” or “worker” are declined by AES, instead every person at AES (and in this publication) is called an “AES people” or an “AES person”. Bakke expands this view even by the notion “Our employees are our best assets.” due to the fact that people are not assets that can be used, bought, sold, depreciated or disposed. Also the term “management” is disliked and unused by AES. Furthermore no traditional employee rating does take place at AES, only annual employee surveys are used as indicator of the importance which is accorded to the company’s shared values and principles. Former CEO Dennis Bakke has commented that he devotes more attention to studying the annual employee surveys than the annual financial statements of AES. AES doesn't also like to talk about efficiency; this term is regarded as a concept from engineering, a ratio from input and output. Jeffrey Pfeffer sums up: “It is a concept that sees people as analogous to machines,

and is consistent with a tayloristic, scientific approach to management . This is anathema to AES.”

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Assumptions held about human nature at AES All assumptions about human nature made at AES do not even completely comply with Theory Y from Douglas McGregor but are even inspired by it. Dennis Bakke states correct: “God made us all a certain way. We’re all creative, capable of making decisions, trustworthy, able to learn, and perhaps most important, fallible. We all want to be part of a community and to use our skills to make a difference in the world.” “ It

amazes me - in our society, we tend to treat children like adults, and in the workplace, we treat adults like children. Think about the responsibilities we give kids - the TV programs and movies they watch or the subjects we expect them to know about and understand, like drugs and violence. But then,when they grow up, we put them in work environments where every decision is made for them. We say, "Here are the rules,here are the systems,- here is how you do your job." At AES, we're trying to turn that on its head.“ AES culture and value statements: “AES was founded on the principle that strong businesses are built on trust, accountability and an environment that allows people to reach their full potential.” In summer 1992 Dennis Bakke put up a paper stating the characteristics of AES people: 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

•

want to use their talents and skills to make a positive contribution to the organization and the world”

Bakke hypotheses by creating this “fun” workplace at AES was, that this workplace would allow people to work in an environment that is most consistent with humans true nature.

“Why do people work so hard so that they can escape to Disneyland? Why are video games more popular than work? Why is driving an automobile more exciting and enjoyable to many people than their work? [...] The reason is simple and dispiriting. We have made the workplace a frustrating and joyless place where people do what they're told and have few ways to participate in decisions or fully use their talents. As a result they naturally gravitate to pursuits in which they can exercise a measure of control over their lives.”

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Management Practices listed by Beyond-Budgeting-Principles

Customers The concept of Stewardship upon which AES' is based focus verbally everyone on their customers: The frontline decision-making AES people and the team-based network cells on their external customers, the society (in accordance with AES mission “to serve society in an economically sustainable manner with safe, clean, reliable, electricity”) or in internal customers.

Organization Although having five layers of hierarchy8, AES' organizational structure entitled the “Honeycomb” can be truly described as a devolved network/cell structure each team within a plant representing an accountable cell within the network. Central departments like HR, Purchasing, Finance, Marketing, Operations, Central Planning, Quality Assurance, Legal Affairs, Business Development, Safety, Environmental Compliance or CSR do not exist. Although having a “HQ” in Arlington with about 100 AES people, they mainly serve as advisors like for example the CFO. Business Development is on overall done by every AES person, incl. Juniors. All these functions are handled at the plant level: plant managers assign them to volunteer cells comprised of hands-on AES people who develop expertise in their area and take on responsibility and decision making. Every plant manager oversees 5 to 20 cells within the plant, each comprising about 5 to 20 AES people, including a team leader. Task forces comprising volunteer team members take on special assignments like for instance security audits for the plants. The 80/20 Rule at AES defines, that about 80% of the working times are spend within the network cell and the remaining 20% of the working are spend in task forces, giving advice, or learning new skills or working on a special project.

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Thomas W. Malone decribes in his landmark book „The future of work“ this type of hierarchy as a „loose hierarchy“ in which no direction takes place and decisions are met at the front-lines. Page 19

These small, flexible, and self-managed cells are able to operate cooperatively without any centralized direction. At the basis of this “Honeycomb” cell structure lies the belief that organizations do not need to be managed. Denis Bakke states on the “Honeycomb”: “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 down the Kazakhstan plant into four units. How can we stay small and be big? By breaking the organization into groups with chief operating officers.” Further he adds: “Many

people have asked us about our team structure and how it works. To begin with, there is no one person in charge of teams and there is no Human Resources department. Teams are the basis of our structure, and they encompass the four values of our company. They are fluid; many people are members of more than one team at one time. A team is somewhat autonomous; all decisions about a project are made within that team, with final say granted to that team. Decisions are made not from the top-down, but from the bottomup. Furthermore, responsibility is pushed to the lowest level possible, encouraging everyone to be part of a decision. As a result, each team member views the project in terms of a whole. Colleagues and team members must trust each other to follow through to the best of their ability. Because people are what make up AES, we have decided not to resort to an organizational model. Instead, we give you the following comments from AES people regarding teamwork. In general, AES teams work extremely well in both achieving a common goal and having fun while doing so. The following ideas provide insight on what makes teams work well and what can stimulate true and productive teamwork.” Finally he adds: “Teams imply friendship; not only the ability but the desire to work together. Starting with the wonderful example set by the original AES team, Roger and Dennis, working together in small groups has been a natural way to get big things done while preserving the dignity of each person.” Tom Tribone completes: “There are two reasons why teams are successful at AES: the type of people we have here and the environment in which they work. People at AES tend to be independent and thrive in a loose environment where roles and responsibilities are not always clearly defined. The environment at AES is one where responsibility is pushed down to the lowest level possible, encouraging everyone to take ownership for not only their piece of the project, but for the project in its entirety.”

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Sphere of activity: 5 AES core shared values, AES' code of conduct, AES' business model, AES' mission, AES' brand Network cell comprising a fully accountable team String: formal or informal relationships, communication and/or networking Market-pull: e.g. external customers, internal customers, competitors, shareholders, environmental groups and initiatives and other stakeholders

AES's Cell Structure. Source International Center for Outperformance, BBTN

This delegation of authority to the single cells (the teams within each plant) can be for example very good

described in the case of the missing HR department: For sure within this “Honeycomb” cell structure no centralized HR department does exist: At the HQ in Arlington are no central HR staff or specialists who deal with salary ranges, or annual review procedures, or personnel policies, or contract negotiations with unions, or central guidelines for separate HR processes. There is only a person whose responsibility is to track 401k retirement plan benefits and send out the necessary reports left at the AES HQ in Arlington. Instead HR decisions are made at plant level within the plants teams like for example:

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Recruiting: The complete recruiting and even the dismissal process is done at the plant level assigned to individual cells without any support or guidelines from the corporate headquarter, but by using the AES advice consultancy process. Hiring the right people at AES is like in every company essential to company success: The complete AES system would fall apart if there haven't been a lot of people who were passionately excited by the company's five shared values or who didn't care about becoming businesspeople. Sant and Bakke point out: “The same

thing can be said about people who are fearful of ambiguity or don't like to make decisions. They usually don't apply here for jobs. We attract people who want to be treated as responsible adults, who say, "I want to be a teacher, a nurturer, a servant leader." They are typically people who are ready to make decisions and he held accountable for them.” The hiring process itself generally involves an initial CV review, and a phone interview followed by a group interview. And there is a lot of peer review. Teams interview candidates, and there are several meetings in which they try to get the sense of the person and whether he or she will be comfortable with the AES-way. Sant and Bakke point out: “We've made our biggest mistakes in hiring when people have said "We need

someone with such and such expertise" and put cultural fit second. We've been much better off when we've hired people who don't just accept our values but are evangelical about them.” Interviews normally do not include technical questions. Instead, they focus on characteristics that help determine if the candidate will fit with AES' shared values ad their general competence and talents like e.g. learning and rotating within the worldwide plants. Only a few importance is given to the candidates’ educational background or experience.

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Typical interview questions are: •

Should everyone be treated equally?

•

What do you do when something needs to be done and no procedure exists?

•

What self-improvement efforts are you making?

•

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 fairness?

•

For what have you been counseled about the most?

•

What is the most difficult situation you have faced? What did you feel? How did you react?

•

Describe two important achievements.

•

Tell me about a time when a decision was needed and no supervisor was available.

•

What kinds of rewards are most satisfying to you?

•

What does "fun on the job" mean to you?

Training and development: In line with its shared values, AES persons are empowered to make decisions about their own development. Training is mostly done on-the-job, supported by advice. Being always encouraged to expand their abilities, AES people are free to take outside courses, AES reimburses 80% of the costs. If the AES person achieves a B, even 90% are reimbursed, and if the AES person gets even an A, to complete course is reimbursed.

Career paths: Regarding personal development, there are no fixed career paths at AES. Rather, the company encourages job flexibility, that is necessary requirement in such a dynamic industry. AES people are encouraged to move within the company worldwide if seek new challenges.

Compensation and benefits: AES does not have a fixed salary and compensation schedule for any job, therefore salaries are determined on what others person are being paid inside and outside of AES.

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Furthermore using this cell structure, employee specialization does not take place at AES. This approach, according to former CEO Dennis Bakke fosters the entrepreneurial spirit within the people. Even AES persons deny the dogma that specialization leads to economies of scale mainly arguing that specialization causes higher cost and prevents adaptability. Furthermore specialists are less innovative due to their permanent work repetition. Unlike AES people who take over new assignments, who challenge existing approaches and use the common AES practice of consultation from AES persons. Roger Sant sums up: “For

the system to work, every person in the company has to become a well-rounded generalist who understands all aspects of our operation, who understands the economy in which we work, and who has the good of the whole company in mind when he or she makes decisions. It's like every AES person is a mini-CEO.” Dennis Bakke adds:"Specialization is the root of a lot of boredom," “As soon as you have a specialist who’s very good, then everyone else quits thinking,”, “The better that person is, the worse it is for the organization. The information goes through the specialist, so all the education is to the person who knows the most.” Finally Bakke believes that it's the well-rounded AES person who delivers extraordinary performance. Moreover, AES relies strongly on expertise from the outside. A key aspect of AES' system is that individuals and teams have to seek the best advice available, whether it is within the company or outside. For example in finance if AES’s financial management and project management teams lack great depth in financial expertise, they draw upon the knowledge of outside bankers and financiers. "The modern manager is

supposed to ask his people for advice and then makes a decision," says Bakke. "But at AES, each decision is made by a person and a team. Their job is to get advice from me and from anybody else they think it's necessary to get advice from. And then they make the decision." Also having to seek advice, AES people are not dependent on it and can make their individual decisions.

For example had AES in India a team member, who had been to AES for three years. He and this team wanted to buy two coal plants for AES. He asked for advice on how much to bid. Because the board members of AES were at that time very interest in getting these two plants, they advised to bid $ 170 million. He refused the board's advice due to the fact, that the estimated return were not enough. He decided regardless of the board's advice individually to bid $ 143 million – and he won the deal.

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To give you two example on how the AES team-based-cell structure works:

Cumberland plant Using this cell-building approach, AES has for instance developed and financed a $400 million plant in Cumberland with, Md., with a team of just 10 people. This team secured 36 different permit approvals involving about 24 regulatory agencies and further arranged financing that involved tax-exempt bonds and ten lenders. Within the power industry, such a project would normally involve well over a hundred specialized employees.

Uncasville plant Due to the fact, that AES has no central Finance department, of course these task are assigned to voluntary teams at the plant level. In Uncasville, Connecticut, the plant's teams were asked which team would like to invest the plants money reserves with a value of $ 12 million. The maintenance crew comprising 15 people wanted to do this task. Sant and Bakke point out: “They didn't have a clue about how to invest short-term

money in the market, but they thought it would be fun to learn. So they hired a teacher who told them what a spread was, who to call on Wall Street to get the process going, and so forth.” After a few weeks of studying, they began calling up brokers and looking for the best vehicle for investing. You should have heard them: “I'd get a little note saying, "Man,you won't believe what happened such and such broker reneged on the deal! They've been lying to us!" Bakke further adds: “By the third month, they actually beat the returns of the people who were investing the money for the company's treasury at the home office. They were so proud. My point is this: Did letting the maintenance crew invest that money make a huge difference in our bottom line, for better or for worse? Probably not. But those people will he changed forever. They have become better businesspeople. And there is no other way to do that than by doing.” After the maintenance crew figured out to invest the money, they passed this task to other teams at the plant. “And, by the way,

we don't have a a maintenance crew anymore at that plant. Their work is all distributed to the other teams. As we've said, we're trying not to separate operations and maintenance.”

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Autonomy AES people at the front-line make even crucial individual and team-based decisions and take on actions by themselves and do not require explicit approval or direction from top management (and are of course accountable for their decisions). Furthermore individual initiatives are encouraged. Former CEO Dennis Bakke describes himself the delegation of authority to the front line and the consultation-process through AES people as the heart of the governance model of AES. Due to the fact, that mistakes may arise by this approach AES has established a culture that supports mistakes and therefore AES people do not get any punishments or are afraid of dismissal. Furthermore due to the extent job rotation that takes place, AES gives AES people enough time to learn the new assignments. Many of these above mentioned individual initiatives are recorded at AES:

Oscar Prieto Oscar Prieto had no idea how much his life was about to change when he sat in meeting and did't payed to much to it in May 1996. Oscar Prieto, an independent producer of electrical power and new to AES, visited the Arlington Headquarters of AES, and attended an meeting which was led Thomas, one of AES most creative new business developers.

"I've got fourteen people from France and some guys from Houston coming in to talk about buying a business in Rio de Janeiro," Tribone stated. "We've only got two AES people. Could one of you show up?" Oscar Prieto raised his hand and walked to a conference room down the hall, where the executives had gathered to discuss the privatization of Light Servicios de Electricidade (known as "Light"), one of Brazil's largest public utilities. The French delegation comprised executives from Electricite de France (EdF) and representatives of Houston Light & Power, was considering to bid on the soon-to-be-auctioned Light, seeing saw AES as a potential partner.

Prieto was at this times very puzzled. Why would AES be interested in this deal? His small own company with about 1,100 employees was focused on the power-generation side of the business - building, buying, and operating plants, and selling the electricity from them to wholesale customers. Light Servicios de Electricidade was a massive public utility with more than 11,000 employees and a sprawling distribution system that served more than 2.7 million retail customers in Rio de Janeiro.

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After this meeting, Thomas Tribone asked Oscar Prieto if he would like to play a lead role in this potential acquisition - a $1.7 billion deal that would cost AES about $400 million. "But Tom, we're not in the

distribution business," Prieto added. "And I've never done this before." Prieto, being a chemical engineer, had worked for AES for just two years and has never been to the power industry before. He was hired by AES to turn around a struggling 650-megawatt power plant in his native Argentina - the company's first joint venture in Latin America.

"You've been through a very difficult partnership," Tribone said. "You know what makes them work." Oscar Prieto soon left for Paris to negotiate an agreement with EdF: "I said to myself, What the hell am I

doing? I'm handling such a huge, huge job all alone." But Oscar Prieto got the job done. He moved afterwards to Rio de Janeiro and became one of Light's four directors. Then the job got really interesting for him. In short order, AES completed a couple of deals: E.g. it signed a joint-venture agreement to buy CEMIG - an even-larger Brazilian utility, with more than 4 million customers. Then it led the foundation for a a new power plant in Uruguaiana, near Brazil's southern border. Furthermore it took over the company that supplied electricity for Buenos Aires. And finally in October 1996, it won a bid to distribute electricity to 800,000 customers in southern Brazil. 18 months after that fateful meeting in Arlington, Oscar Prieto works out of a 15th-floor office overlooking downtown Rio de Janeiro. He is now a director of a major Brazilian company and a key figure in AES's rapid expansion in South America. He helicopters from one plant to another and oversees hundreds of millions of dollars in construction projects. His division has now a combined customer base of 8 million homes and businesses."That's what happens when you raise your hand around here," Prieto states with a smile.

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Scott Gardner Scott Gardner joined AES in 1992 right after his graduation from Dartmouth College. Gardner joined a team who was developing a $200 million generation plant in San Francisco. “It involved a lot of work and few

people to do it,” he says. “I took on tasks that ranged from designing a water system to negotiating with the community to buying and selling pollution credits.” Gardner also helped to lead a bid for a $225 million generation plant in Vancouver, British Columbia. When a comparable deal has to be met in Australia, Gardner volunteered for that assignment and was two weeks later on his way to Brisbane. “My task was to

understand an unfamiliar regional power system, develop a design for the plant, and prepare a financial and technical bid document – all in six weeks,” he says. When Gardner’s proposal made the final round of competition, his division manager had him to negotiate the terms of the $75 million deal. “The stress was

incredible, but I was having fun,” he says. His bid won. “I held a press conference and was interviewed by local TV stations,” says Gardner. “I had to pinch myself to be sure this was happening.”

Paul Burdick

Paul Burdick, a mechanical engineer, had only been at AES for a short time when he was asked to purchase $1 billion in coal. “I’d never negotiated anything before, save for a used car,” he said. Burdick spent three weeks asking for advice people both within and outside of the company on how to accomplish the task . At AES, he says, “You’re given a lot of leeway and a lot of rope. You can use it to climb or you can hang

yourself.””

Jeff Hatch & Joe Oddo 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 is in charge for handling 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 Oddo, a maintenance technician at AES's power plant: “I’ll get right back to you.” Oddo and Hatch quickly consult with their associates, then close the deal. “It’s like playing Monopoly,” Mr. Oddo says,“Only the money’s real.”.

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Alessandra Marinheiro In Brazil, AES's bid for CEMIG decreased as a joint-venture partner couldn't make up its mind. "We made our

decision within days," says Alessandra Marinheiro, the AES project manager who has helped to place the bid. "But our partner had to ask its board for approval, and that board had to ask another board. We delayed the bid - only to have the company pull out because it couldn't get final approval." But this action did not delay Marinheiro, 24, an entry-level financial analyst who became a project manager with responsibility for more than $2 billion in acquisitions - after less than a year working at AES. On the day before the CEMIG auction, she found a new partner and reworked the bid. "We called Tom Tribone and made a decision," she recalls.

"Other companies can't do that."”

Responsibility One of the goals of Dennis Bakke is that all AES people think and accordingly act like business persons. Even in 1997 Dennis Bakke tried to give a definition: An AES business person must “steward resources (money,

equipment, fuels) ... to meet a need on society, while balancing the contributions and needs of all the stakeholder groups. This means providing a profit to shareholders, a fun workplace and fair compensation to employees, taxes and a clean environment to governments, and reliable electricity at reasonable prices to customers. A per may very well an engineer, or a heavy equipment operator or a financial wizard or an instrument technician, but a business person performs all those functions in the context of balancing the interests of all stakeholders.” Furthermore an AES businessperson has to ask for advice before settling decisions and is encouraged to take on new business development of AES. As a consequence AES Corp. would see a person that needs direction and waits to be told what to or or person who does not trust not in other people as bad hire.

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Values AES operates with the above described five shared values, a very lean code of conduct 9 and without any written policies or procedures. Issues such as hiring practices, leave periods, and promotion criteria, which in more conventional companies would be spelled out in a “Policies and Procedures” handbook, are left to the individual teams. Sant and Bakke explain:“When trying to find out” how much time she could take off after

the birth of her daughter, a Project Director for AES Puerto Rico discovered that the company did not have a policy about maternity leave. After investigating what other “AES people” had done, she decided to do what made sense for both herself and the business requirements of the project. In the end she decided to take three months, but she made herself available at critical points in the project’s execution.”

Transparency Each AES person is allowed to access the full financial information, operating information and market information. Due to this information transparency, AES people are treated as “insiders“ by the Securities and Exchange Commission (SEC). Dennis Bakke and Roger Sant also advocated to transparency on compensation, but however only a few of the plants decided to share compensation information. But AES does not put all required information to the people, but people share their information with others. This can be described for instance on the following case: Elora Zhou, a business development manager made a bid at the Vietnamese government concerning the supply of a region with about 400 megawatts of electricity for 20 years. She knew that the Vietnamese government decided up to 70% on the price. So she sent out an email referring to the bid to about 200 to 300 AES people for advice. Sarah Slusser, a group manager in Central America, had experienced a similar situation with a plant in the Yucatan. Sarah sent Flora a three-page e-mail that contained a wealth of information about what to pay attention to with that technology. A few days later, Elora made the bid (and it was the lowest by two-tenths of a percent). Sarah did not tell the actual dollar amount to bid, but Sarah and other plant leaders and even board members shared all information with Elora. 9

Compared for example to the worldwide benchmark Code of Conduct from Nortel Page 30

Goals & Controls Although having no strategy, AES has for sure a goal. A very big goal. And a relative goal: to be the leading global power company, to be the global industry leader (which AES actually is). Roger Sant commented on this relative goal: “The biggest target I can't tell you how important that is ... It is magical how it

transformed the way business. ... It's a big statement to make. It's very different from saying we want to grow 20 percent a year. ... I think it indicates that we were operating under some constraints before, when we asked ourselves, “How do we get rid of those constraints? If we're really trying to be the leading global power company, would we have done this or that?” .... The company exploded afterwards.”

Planning AES does not do a lot of strategic analysis or has a long-term five year plan (not even a strategy), but does have dynamic and flexible planning processes, however with only little meaning. Dennis Bakke sees longterm planning as a waste of time, because conditions change so dramatically within the industry. Further he realizes that “Strict financial planning often serves to centralize control of the company among a few leaders

at the top of the organization.”

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Rewards At AES compensation bonuses are not rewarded on individual performance, but on the performance of single facilities and the entire organization. Furthermore AES people are motivated to become shareholders of the company. The results of this approach is best described by the one the AES persons himself. “We feel we're

part of the entrepreneurs. The fluctuation are 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 people gain and lose accordingly makes people feel like they are more of an owner of the company”. Even when AES' stock are declining, most AES persons want to buy more stocks. AES has experimented with allowing people to set their own salaries, but abandoned this practice. Sand and Bakke explain:“The individuals who participated in this approach were changed by the process. They had a

much better understanding of how compensation affected the overall economies of the organization. They learned that the value of seeking advice when they had to balance competing interests. They put the interests of other stakeholders on a par or even ahead of their own. The process pulled team members together and helped some make the transition from workers to to business people. It made them “owners” of their business. For the first time, they understood what it meant to be stewards. This methods of setting compensation was stressful, successful, and fun.”

Resources Although AES does some forecasting (entitled budgeting), this “budget” has only little meaning and serves mainly as a guideline, not as hard and fast constraints, and is taking out by the actual people in the plants on what they think require next year based on the previous year and upcoming assignments. Moreover it is used to understand and improve resource use and to determine costs.

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Coordination Due to the fact, that AES has no strategy, Dennis Bakke maintains that AES follows Waterman's idea of “ready, fire, aim”, which means actually retro perspectively determining your strategy after you done it. Since the NYSE insists to know AES's strategy, former CEO Bakke claimed to tell them: “[W]e try a bunch of stuff,

we see what works, and we call it our strategy.” Further Bakke and Sant see their strategy further as “disciplined opportunism”, which means, that every AES person can propose and work on new business development. Another way of asking about AES strategy is to ask what differentiates AES, the industry leader, from its competitors and its relative success factors. Roger Sant immediately mentions the AES people and the underlying assumptions about human nature. Dennis Bakke further adds: “There are some things about the

way we do things in terms of freeing up people that are amazingly adaptable to a world that's going topsy turvy and changing all the time ... We're faster than anybody in the world. We may be one of the fastest companies in being able to act and respond to the world that's ever been created. ... We have more people, in more places, spending less money than any other company in our business. We're just everywhere.”

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Adopting the AES way at new plants Usually AES takes over new plants to expand its business and dismisses huge parts of the original workforce. This task can be true described as a Beyond-Budgeting-Transformation of the acquired pants because these are transformed most from traditional command-and-controls system to the AES-way.10 That this not an easy or smooth task is be sure of. Dennis Bakke describes this process: “We start telling them [the people] at the

acquired plant what we believe. Sometimes that's a plant manager or someone coming from afar, usually bringing in some new leadership. ... We bring in someone who really believes this stuff, who's an outsider. If you're going to be something radical ... you are better off having somebody from outside, someone who can communicate the values and principles. There will be other people that will infiltrate the plant, too, not just as top leadership. Enough people so that folks can ask them and can try the model we're talking about. I come sometimes ... and I teach. We do a value survey immediately, and we do it every year, asking people the questions. It doesn't really matter how they answer it. What is does force people to think about what all of this is about. Then we bring people to orientation and have them experience the AES way. We let them go on other plants to look at what really happens.” Usually giving the new AES people time to adopt to the new system, AES advices the others, who do not fit in it to, leave.

Transformation of the Pakistani plant In Pakistan for example the plant manager thought that he didn't had the right people and only 20% of them would making it. Dennis Bakke advised that he should keep working on this issue. When he returned 6 months later, the plant manager reported that there had been a huge change and now 80% had adopted to the AES way. Even the Pakistani AES people shared their new values and assumptions about human nature at their homes: On a trip to the Pakistani plant Dennis Bakke asked AES people if something had changed in their lives and one of the AES persons replied after a long pause: “Yes, at home something has changed.

You know these assumptions about human nature – that we have about AES people – that every human being is thoughtful, creative, trustworthy and capable in making decisions. I have appreciated that I have to treat my wife the same way. Now I let her make decisions.” Another follows with a smile: “Yes, at home I am no longer get around making my own decisions.”

10 About 90% of AES' workforce came in by acquisition, only 10% by “Hiring the right people” Page 34

Transformation of Santa Branca

A good case that explains the transformation of former tayloris organizations is thqt of the plant in Santa Branca, a small Light facility that sits along the Paraiba do Sul river, northwest of Sao Paulo. Until AES took over Santa Branca, its only function was to redirect water to another hydro station located down the river. With 32 permament staff. "How many people do you need?" Prieto marvels. Prieto has chosen Santa Branca as his initial experiment in transplanting AES's bottom-up culture into Light's top-heavy command-andcontrol bureaucracy. First he announced a massive downsizing, but then he unveiled an upgrade - a $35 million construction project that will enable Santa Branca to fuel two hydroelectric generators. Then he asked for volunteers who would run things the AES way and quickly picked Carlos Baldi, 34, an engineer from Fontes, to be his leader in Santa Branca. "I knew he was the right person," says Prieto. "He was

young, eager to do more." Then, after agreeing on shared goals and expectations ,zero accidents, and thrifty construction budgets , Prieto passed the leadership of Santa Branca over to Baldi.

But didn't Prieto worry about distributing too much power too fast? "I trust people - without fear or

hesitation," he says. "The best way to let them perform is with absolute freedom:I release you of all constraints, including the constraints imposed by your boss."Freedom" was very scary at the beginning," adds Baldi. "Every time I had to make a decision, I thought, 'Should I call Oscar?' But he just said, 'You know better than I do - you decide.' "

Now Baldi operates the AES way with his people. E.g. Claudio Jorge Coelho de Souza, 36, runs electricalengineering projects at Santa Branca. "I'm always getting his opinion," says Baldi. Aldir Cardozo Carreiro, 47, a former maintenance supervisor, who now oversees the facility's entire $1.3 million operating budget. "Aldir

had never done anything like this," notes Baldi. "So we got him an accounting program. Now he budgets salaries, writes contracts, oversees all maintenance."

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Appendices Appendix 1: Theory X / Y The notions Theory X and Theory Y was established by Harvard Professor Douglas McGregor who investigated leadership styles and summed them up in two opposite approaches named Theory Y and Theory X. Theory X and Theory Y both represent a collection of assumptions held about human nature. Theory Y represents human's true nature, whereas contrary Theory X describes the traditional view of people within a command-and-control culture.

Theory X believes held about human nature

Theory Y believes held about human nature

Attitude –

Attitude –

People dislike work, find it boring, and willavoid it if they can.

People need to work and want to take an interest in it. Under the right conditions, they can enjoy it.

Direction –

Direction –

People must be forced or bribed to make the right effort.

People will direct themselves towards a target that they accept.

Responsibility –

Responsibility –

People would rather be directed than accept responsibility, which they avoid.

People will seek, and accept responsibility, under the right conditions.

Motivation –

Motivation –

People are motivated mainly by money and fears about their job security.

Under the right conditions, people are motivated by the desire to realize their own potential. Creativity –

Creativity – Most people have little creativity - except when it comes to getting round management rules.

Creativity and ingenuity are widely distributed and grossly underused

Source: BBTN

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Appendix 2: Beyond-Budgeting-Principles

Processes

Leadership

Principle

Beyond Budgeting: Do this!

Not that!

1. Customers

Focus everyone on their customers

Hierarchical relationships

2. Organization

Organize as a lean network of accountable teams

Centralized functions

3. Autonomy

Give teams the freedom and capability to act

Micro-manage them

4. Responsibility

Enable everyone to think and act like a leader

Merely follow ‘the plan’

5. Values

Govern through a few clear values, goals and boundaries

Detailed rules and budgets

6. Transparency

Promote open information for self management Restrict it hierarchically

7. Goals

Set relative goals for continuous improvement

Negotiated contracts

8. Rewards

Reward shared success based on relative performance

Fixed targets

9. Planning

Make planning a continuous and inclusive process

Top-down, annual event

10. Controls

Base controls on relative indicators and trends

Variances against plan

11. Resources

Make resources available as needed

Budget allocations

12. Coordination

Coordinate cross company interactions dynamically

Annual planning cycles

Source: BBTN

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Traditional tayloristic command-and-control-model (supports efficiency)

Centralized functional hierarchy, “command-and-control“

• “Bosses” rule! • Top-down command and control • Top managementis always in charge • Centralized leadership

Fixed Processes

Fixed Processes Strategy

Fixed performance contract

New Beyond-Budgeting-Model (supports complexity)

Decentralized network, “Sense-and-respond“

• “The market” rules! • Outside-in sense and respond • Front-line teams are alwayas in charge • Devolved leadership

Dynamic Processes Relative Performance Contract

Dynamic coordination

Control

• Fixed, annual processes • Fixed targets and incentives • Centralized and bureaucratic control • Dynamic, continuous processes • Relative targets/compensation • Self-control, transparency and peer pressure

Source: BBTN

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Appendix 3: Typical evolutionary path within an organization's life

Degree of decentralization/empowerment

Low degree of decentralization/ empowerment and fixed performance contracts: in conflict with today's critical success factors!

High degree of decentralization/ empowerment with relative performance contracts: aligned with today's critical success factors!

Differentiation “Stagnation" within the tayloristic model phase

“Buraucratization” through growing hierarchy and functional differentiation

Pioneering phase

Foundation

“Transformation” through radical devolution and functional integration

“Evolution” within the decentralized model

Integration phase

Time line: organization's age

“Sustainment” and deepening of the decentralized model, over the course of generations

Se veSeveral ra l d years e c a dolde s o ld

The three original organizational development phases according to Beyond Budgeting. Source: BBTN

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Appendix 4: The Double Helix Transformation Framework

Organizational change process (John Kotter, “Leading Change” to “Our Iceberg is Melting” to “a sense of urgency”) • Check for complacency and a false sense of urgency (use e.g. guiding questions from the book) • Create and increase a true sense of urgency: Bring the outside in (use e.g. 3D Models, videos, diagnostic, books ...) Behave with urgency every day Find opportunities in crises Deal with the NoNos

3. Beginning

• Change structure • Change management processes • Align projects and decision processes with 12 principles and the values defined in the Case for Transformation

2. The neutral zone Win hearts and minds! 1. Create a sense of urgency

2. Pull together a guiding coalition

3. Develop change vision and strategy

• Write the Case for Transformation • Build awareness through selective action (e.g. abolishing budgets) • Win hearts and minds, train for empowering leadership styles and more transparency

4. Communicate for understanding and buy-in

5. Empower all others to act

1. Ending

6. Produce short-term wins

7. Don't let up!

8. Create a new culture

Individual change process (William Bridges, “Managing Transitions”)

The Double Helix Transformation Framework. Source: To lean on BBTN1 – Techniques for Transformation, slide 14; Kotter, John: “a sense of urgency”, HB Press, 2008

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Appendix 5: „Joy at Work“: Dennis Bakke's approach to leadership

Traditional management (Command-and-

Joy at Work (post-tayloristic approach, fully

Control approach)

compatible with the Beyond-Budgeting-Model, but not compromising all 12 principles)

The principal purpose of the company is creating shareholder

The principal goal or purpose of the company is stewarding its

value although other purposes or goals may be mentioned.

resources to serve in an economically strong manner.

Decisions are made or approved by leaders at the highest

Decisions are made by non leaders at the lowest practicable

practicable organizational level.

organizational level.

Leaders see their role as managing people and resources.

Leaders see their role as serving other employees.

Adopt participative management techniques, in which bosses ask

Allow subordinates to manage resources and make decisions.

subordinates for advice but make the final decisions themselves.

Oversee rigorous advice process and fire people who do not use it appropriately.

Job positions, slots, and titles remain basically the same over

No company-wide job descriptions. Every person is considered

time. Only the names with the boxes change.

unique and must build a job around his or her unique skills and passions.

Management and labor are treated and paid differently. problems

There is only one category of employee within the organization.

between management and labor will often arise

There are no separate management people.

Pay set by bosses.

Ongoing experiments allowing individuals to set their own compensation, after getting advice from colleagues and supervisors.

Shared values are promoted as a technique to improve chances to Shared values are goals to which the company aspires in and of achieve economic goals.

themselves, not merely as a means to financial ends.

Turnover of employees is higher.

People enjoy their work and do not want to leave

Source: http://www.dennisbakke.com/pages/newvsold, accessed on 1st June 2008, a detailed version can be found in the book “Joy at work” by Dennis Bakke on pages 283 to 291

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Appendix 6: Bakke's Top 10

“1. When given the opportunity to use our ability to reason, make decisions, and take responsibility for our actions, we experience joy at work. 2. The purpose of business is not to maximize profits for shareholders but to steward our resources to serve the world in an economically sustainable way. 3. Attempt to create the most fun workplace in the history of the world. 4. Eliminate management, organization charts, job descriptions, and hourly wages. 5. Fairness means treating everybody differently. 6. Principles and values must guide all decisions. 7. Put other stakeholders (shareholders, customers, suppliers, etc) equal to or above yourself. 8. Everyone must get advice before making a decision. If you don’t seek advice, “you’re fired.” 9. A “good” decision should make all the stakeholders unhappy because no individual or group got all they wanted. 10. Lead with passion, humility, and love.” Source: http://www.bluestratus.net/sites/JoyAtWork/bakketop10, access 1st June 2008

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Appendix 7: AES' stock price

Source: http://finance.aol.com, 1st June 2008

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Source: http://finance.aol.com, 1st June 2008

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Source: http://finance.aol.com, 1st June 2008

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Source: http://finance.aol.com, 1st June 2008

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Resources

Direct Resources from AES (all accessed 1st June 2008) • • • •

AES AES AES AES

Annual Reports 2000 - 20007 2007 Form 10-K Fact sheets on all countries, The AES Corporation, AES History, and Environment Homepage: aes.com

BBTN Papers (all accessed 1st January 2009 and available through www.bbtn.org) Articles • • •

Lovell, Nancy: “Interview with Dennis Bakke”, Faith in the Workplace Markels, Alex: “Power to the People”, Fastmagazine, February-March 1998, ffp. 156 “Wetlaufer, Suzy: ”Organizing for Empowerment: An interview with AES Dennis Bakke and Roger Sant” in HBR Jan-Feb 1999, p. 123ff

Books: • • • • •

Bakke, Dennis W: “Joy at work. A revolutionary Approach to Fun on the Job.”, PVG, 2005 Grant, Robert M.:”Cases to Accompany Contemporary Strategy Analysis”, Sixth Edition.”, Blackwell Publishers, 2007 O'Reilly, Charles A; Pfeffer, Jeffrey: “Hidden Value. How Companies Achieve Extraordinary Results with Ordinary People”, HBS Press, 2000 Pfeffer, Jeffrey: “The Human Quotation.”, HBS Press, 1998 Pflaeging, Niels: “Fuehren mit flexiblen Zielen. Beyond Budgeting in der Praxis.”, Campus, 2008

Pictures: •

Front Cover Picture: Creative Commons 2.0 BY NC: by fd: http://www.flickr.com/photos/john/9321856/

License

This paper except all logos and the front cover picture is licensed under a Creative Commons BY-SA License. Credit: "International Center for Outperformance (www.intco.org)" within the reference list

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