The Story of AES: Business as Unusual
Gunther
Imagine a company where profits took second place to values; where workers could decide whether to be paid by the hour or get a salary; where there was no HR or PR or strategic planning department; where executives were trusted to make deals without approval from headquarters; and where people were encouraged to have fun. That was the old AES — a radically decentralized and entrepreneurial power generation company where revenues grew to $7.5 billion and the headcount swelled to more than 50,000 people — until it all nearly came crashing down, post-Enron.
Since then, AES has since recovered. My story about the Arlington, Va.-based company, called “A Powerful Comeback,” appears in the Oct. 26 issue of FORTUNE. It was a fun story to report. AES is easily one of the most unusual companies I’ve run across, and the people who work there, who haven’t been written about much lately, were uniformly thoughtful, interesting and cooperative. Unfortunately, space is tight these days in the magazine biz, so FORTUNE was only able to publish a fraction of what I wrote. Because there’s much to say about this pioneering firm, whose goal is to bring clean, reliable and safe electric power to billions of people around the world, I’ll add a few thoughts here.
AES was started by two men who, by all accounts, were brilliant thinkers. Dennis Bakke and Roger Sant. Both were evangelists, in a way — Bakke was a deeply religious man who wanted his company to reflect his belief that people are here to serve others, while Sant, an environmentalist, saw opportunities to make the utility business more environmentally friendly. (While AES is a leader in the carbon finance business, the company generates more than 70 percent of its electric power from coal and natural gas.) Bakke, Sant and AES’s current CEO, Paul Hanrahan, a company veteran, all have MBAs from Harvard Business School and resumes that include government or military service. A U.S. Naval Academy graduate, Hanrahan served on a nuclear-powered spy submarine before joining the company — but that’s another story.
In any event, Bakke and Sant were so determined to build a different kind of company — one driven by values, integrity, fairness and social responsibility — that they wrote in an early letter to shareholders:
You may have noticed the absence of profits and shareholder wealth maximization from the statement of values. We believe profits are important. They are, however, not the goal of our enterprise. Rather, they are the likely and necessary results in a company that produces a quality product or service.
In the prospectus for the 1991 IPO, they emphasized the point:
AES believes that earning a fair profit is an important result of providing a quality product to its customers. However, if the company perceives a conflict between these values and profits, the company will try to adhere to its values — even though doing so might result in diminished profits or foregone opportunities. Moreover, the company seeks to adhere to those values not as a means to achieve economic success, but because adherence is a worthwhile goal in and of itself.
This wasn’t rhetoric. AES hired carefully, but then devolved authority to its employees around the world. Joel Abramson, an executive who joined AES in China in 1995, said: “The culture was one whose philosophical underpinnings are that ‘people are good and they can be trusted.’ … People were buying multimillion-dollar businesses who had never talked to Dennis.” AES had a phenomenal decade in the 1990s, borrowing as much money as it needed to buy and build power plants all over the world. But financial controls were lax, and when lenders got skittish after Enron’s implosion, AES faced a liquidity crisis. Its share price plummeted. If you want to know more, I’d recommend Bakke’s book about the company, “Joy At Work: A Revolutionary Approach to Fun on the Job.”
Hanrahan, 51, has spent the last few years cleaning up the mess at AES, with the help of Victoria Harker, the chief financial officer, who came over from MCI. He thrived in the old AES culture, which gave people lots of opportunity in a hurry, as he became the chief operating officer of a publicly traded subsidiary in China at age 35. “You were encouraged to come up with new ways to do things,” Hanrahan said. “That’s really what made AES fun.” Other executives said the same thing: AES was a great place to learn and experiment during the ‘90s. Early on, for example, before most utility companies even thought about climate change, AES financed tree-planting in Guatemala to offset the emissions from its coal-fired power plant in Connecticut.
But, as so often happens, the company’s strength became a weakness. Without proper controls, financial reporting was poor. Absent a hierarchy, AES was undisciplined about deploying capital. “There was no portfolio management,” one insider said. Hanrahan said: “We really did test the limits of how fast can a company grow before things start to fray around the edges.” Those days are gone: Controls are now in place, as is financial discipline. Harker has seen to that. “We don’t get a second chance to restore investor confidence,” she said.
One reason you may not have heard much about AES is that the bulk of its business is overseas. Today, the company owns power plants and utilities in 29 countries on five continents. Its 2008 revenues were $16 billion. I saw Hanrahan twice — once before and once after he visited Vietnam, as part of an effort to build an AES plant there. He’s been to just about every country in the world, he said
As AES continues to grow, Hanrahan and Harker will try to manage the business carefully without crushing the “can-do” spirit and willingness to innovate that made AES a success. Let’s hope they succeed — remember, roughly 1.6 billion people around the world still live without electricity.
Last 5 posts by Marc Gunther
• Investing in Good Corporate Conduct - April 22nd, 2010
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• Will the Crisis Launch an Investment Revolution? - November 4th, 2009
• UPS Tries to Outgreen FedEx - September 23rd, 2009
• Nothing Blue About This Airline - September 8th, 2009
