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Beyond Budgeting Case Study AES

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Information about Beyond Budgeting Case Study AES

Published on January 1, 2009

Author: beyondbudgetingnet

Source: slideshare.net

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Beyond Budgeting Case Study AES
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AES Corp International Center for Page 1 Outperformance

Beyond-Budgeting-Case-Study AES Corporation “the power of being global” Page 2

“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 Dennis Bakke 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 quot;If you're interested in moving up in a traditional hierarchy, you' re not going to choose to work at AES.” Dennis Bakke quot;It is okay to make most mistakes. quot;We try to reinvent the wheel every We are all human. Its part of time we get a chance. The process AESs values to accept mistakes.quot; of learning and doing is what creates engagement – fun.quot; Dennis Bakke Roger Sant “We broke all the rules. No overtime. No quot;Managers control people and things. bosses. No time records. No shift Leaders give up control and serve schedules. No assigned responsibilities. No people. administration. And guess what? It worked!” There's a huge difference—and that's the essence of creating joy at work.quot; Oscar Prieto, AES manager and director of Light Servicios de Dennis Bakke 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) Page 4

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 Beyond- Budgeting-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-Budgeting- Organization 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.” Page 5

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”: Dennis Bakke “AES is all about being global. And for good reason. Being global helps spread innovation. Sharing Dennis Bakke 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.” Page 6

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 to build a company that we ourselves would want to work in. The actual type of business was 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, village, or whatever: fairness, integrity, social responsibility, and fun.“ These initial four shared values which Roger Sant 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 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. 2 See Appendix 1 for Theory X and Theory Y from Douglas McGregor 3 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 Beyond- Budgeting-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: quot;We do this because it maximizes our ability to have fun and make a difference.quot; “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.” Page 8

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; Constructing, acquiring, and operating projects of a relatively large size in geographically dispersed • markets; When available, maximizing the amount of non-recourse financing • To the extent possible, entering into longer-term power sales contracts or other arrangements with • electric utilities or other customers with significant credit strength 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. Page 9

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 1996 utilities) 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 Page 10

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, quot;Okay, your experiment is over. It failed. It's time to revert to the traditional way of doing things.quot; 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, quot;Please don't come out here anymore.quot; I spent about four months talking to people all over AES. I 4 See Appendix 7 for stock prices charts Page 11

asked, quot;How can we stick with our fundamental principles and not move backward?quot; Finally, step by step- and 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. Page 12

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: quot;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:]quot;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.” Page 14

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%. quot;You can't go to Pakistan and say that the number-one priority is global warming,quot; he argues. 7 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 Policies Organizational charts Employees Corporate Strategy Hourly wages Management 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. Page 16

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.” Page 17

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, quot;Here are the rules,- here are the systems,- here is how you do your job.quot; 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.” Page 18

Management Practices listed by Beyond-Budgeting-Principles Customers The concept of Stewardship upon which AES' is based focus verbally everyone on their customers: The front- line 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. 8 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 bottom- up. 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.” Page 20

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: Page 21

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, quot;I want to be a teacher, a nurturer, a servant leader.quot; 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 quot;We need someone with such and such expertisequot; 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. Page 22

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 quot;fairquot; 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 quot;fun on the jobquot; 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. Page 23

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:quot;Specialization is the root of a lot of boredom,quot; “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. quot;The modern manager is supposed to ask his people for advice and then makes a decision,quot; says Bakke. quot;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.quot; 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. Page 24

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, quot;Man,you won't believe what happened such and such broker reneged on the deal! They've been lying to us!quot; 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.” Page 25

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. quot;I've got fourteen people from France and some guys from Houston coming in to talk about buying a business in Rio de Janeiro,quot; Tribone stated. quot;We've only got two AES people. Could one of you show up?quot; 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 quot;Lightquot;), 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. Page 26

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. quot;But Tom, we're not in the distribution business,quot; Prieto added. quot;And I've never done this before.quot; 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. quot;You've been through a very difficult partnership,quot; Tribone said. quot;You know what makes them work.quot; Oscar Prieto soon left for Paris to negotiate an agreement with EdF: quot;I said to myself, What the hell am I doing? I'm handling such a huge, huge job all alone.quot; 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.quot;That's what happens when you raise your hand around here,quot; Prieto states with a smile. Page 27

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.”. Page 28

Alessandra Marinheiro In Brazil, AES's bid for CEMIG decreased as a joint-venture partner couldn't make up its mind. quot;We made our decision within days,quot; says Alessandra Marinheiro, the AES project manager who has helped to place the bid. quot;But our partner had to ask its board for approval, and that board had to

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