As today's utility industry continues to consolidate in the face of globalization and deregulation, all the while providing reliable service at a good price and increasing shareholder value, the role of people and senior management has never been more important—or challenging.
“The Fortnightly 40 Financial Rankings” evaluates the top utilities through a variety of hard, quantifiable metrics. However, one also needs to ask what sort of leadership is required to manage and drive performance today.
While utilities have embarked on a variety of business strategies to succeed—from "back to basics" to growth through mergers and acquisitions—leadership and management strategies to create, deploy, and enhance those business strategies also need to be developed.
A recent Booz Allen Hamilton study of CEO succession showed that utilities ranked second only to industrial companies in CEO turnover during 2004, with almost 20 percent of utilities changing CEO. Clearly, leadership today must not only be bold, but also nimble and adaptive.
What sort of leadership does today's utility need for the future? How does the culture need to change? Who should be hired from within the industry? Who should be hired from outside the industry?
Exelon has sought to answer all of these questions, using human resources as a strategic advantage in transforming itself from the middle of the pack to an industry leader in seven years, even before its recent proposed merger with New Jersey's PSEG.
S. Gary Snodgrass is the chief human resources officer for Exelon. He and his colleagues have played an important role in this transformation in an environment of unprecedented change and competition.
In my role as head of the utility practice for the leading executive recruitment firm Spencer Stuart, I spoke with Snodgrass about leadership needs among utilities today, and how to create a performance-based culture.
Shields: How would you summarize Exelon's greatest leadership challenges in light of the restructured utilities industry?
Snodgrass: First and foremost, we must ensure that we are responsive to all of our constituents, particularly our customers. When I first joined Unicom, a predecessor of Exelon, in 1997, our customers were referred to as "rate payers." It was very indicative of how our customers had been viewed for such a long time. We were not very good or committed to customer satisfaction, and even worse at listening. It is not surprising that in the late 1990s we were rated last in the U.S. utilities survey that ranks customer satisfaction, and the low ratings reflected our financial situation. At the time, Unicom posted an $800 million loss, the stock price was in the lower teens (post-split basis) and the nuclear power plants ran at a dismal 49 percent capacity.
Today, under the direction of our CEO and Chairman John Rowe and our leadership team, everyone in the company understands that we must "keep the lights on" and meet our commitments to our constituents, including the expectations of our customers, in order to maintain a vital role in this industry. While it may seem like a simple strategy, it has changed every aspect of how we do business—from how we respond to customers to our standards of operational output. That is why, today, the situation is completely different from the late 1990s. Exelon has annual operating earnings of $1.7 billion, is ranked No.1 one in nuclear capacity, No.1 in market capitalization, and our nuclear business is at a generating capacity above 94 percent.
Yet creating a new corporate culture to deliver these exceptional business results is no easy task, and it is an effort that continues today. Our management team acknowledged that we needed bold leaders who could be more nimble and more adaptive in an environment of unprecedented cultural change. And, unfortunately, these were qualities not emphasized in the past. It was a different time. Today, those qualities likely will determine our ability to meet the expectations of our more than five million electrical customers.
Shields: Changing a culture, as you mentioned, is not an easy task. How did the human resources function approach this challenge?
Snodgrass: Cultural transformation cannot happen overnight. It also can't be spearheaded by one function alone, such as human resources. It has to be an organization-wide effort. It's a slow process. Human capital strategies often take two to three years to plan and another two to three years to fully implement. Based upon business needs and requirements, including strong inputs from line leaders, human resources, in concert with its colleagues, developed a number of programs that changed the way the company measured individual- and business-unit performance. As part of this process, we also revised our incentive plans. We re-created our rewards programs to place even greater focus on pay for performance and not just effort—and we now hold all employees accountable.
We can no longer be a "cradle-to- grave" employer. In this competitive environment, we need talented people who will excel. That is why we expect 5 to 10 percent personnel turnover each year based on performance. Every year we review all employees—from the very top to the entry level-based on a set of performance-driven metrics, and our program is constructed in such a way that the bar on performance is continually raised higher. For example, if you performed in such a manner that you were rated an "A" employee in 2004, that same performance in 2005 may only have you earning a "B" rating. This approach forces everyone in the organization, myself included, to continually push ourselves to perform better and more efficiently.
Shields: How has Exelon balanced internal development and external recruitment as a means to introduce fresh ideas?
Snodgrass: You have to do both. Great companies build talent from within and we have to leverage and cultivate our internal talent for the future, particularly ensuring an increased focus on the utilization of women and people of color. We now embrace life-long learning compared to just one-time learning, and we encourage our employees to push themselves to an enhanced performance level. In this environment, where regulator, customer and shareholder expectations change continuously, it's necessary for leaders' skills to constantly evolve.
Yet, at the same time, we have to be proactive about identifying and securing talent who will bring to our organization the experience that we're currently lacking. These are leaders who can add value and help push us to the next level of achievement. That is why when we have a role to fill or to replace, we just don't want a body—be it someone in the organization or someone from outside. We want talent that's going to come in and contribute and raise the bar for the entire organization. That is why it was so critical that we formed a partnership with your organization. By understanding where we needed to go and utilizing your network of industry insiders, you were able to help us recruit seven of our senior officers from outside of the organization and industry.
Shields: Which leadership and management skills does your organization value the most?
Snodgrass: We need people from different backgrounds, with experiences and capabilities that cut across an entire organization. Right now, we have an adequate supply of strong technical talent; however, for our senior-level talent, we really need people who can manage the relationships with numerous constituents—the state, local and national politicians, regulators, consumer groups, environmentalists, and so on. We need executives who are strategically minded leaders, able to challenge the while also establishing strong relationships with these various audiences. In addition, the utilities industry also needs leaders who possess a strong financial background.
Shields: Interestingly, much is being written in utility publications about going "back to the basics." What does this mean for the utilities industry?
Snodgrass: We exist to keep the lights on. We can't do anything else until we excel at this. So, if someone wants to call that "back to the basics," then I would agree that the basics are critical. It's the fundamentals of operating the business in a safe and reliable way. However, "back to the basics" shouldn't mean that this business is going back to the way we did business in the traditional, regulated environment. We cannot lose sight of our long-term strategy and the sophisticated skills that are required to achieve these goals.
Shields: When looking for talent externally, do you target specific industries from which to recruit, and why?
Snodgrass: To remain competitive, we need to be customer-focused 100 percent of the time. This is why other industry experience, particularly in highly competitive industries, is critical for Exelon. Consumer goods and services companies, obviously, are well-versed in being customer centric. We also look for talent in very capital asset-intensive companies and for people who have gone through a period of cultural change, such as within the banking and telecommunication industries, and we seek diverse talent, experienced, competent women and minorities.
And, while I can't stress enough the importance of having a breadth of industry experience, it's more important for us to hire talent from those companies with the best practices and proven results.
Shields: Prior to joining Exelon, you spent your career with a manufacturer of building materials. What made you decide to join the utilities industry?
Snodgrass: I was at a stage in my career when I needed a great challenge. Rather than spend time tweaking human resource programs and initiatives that were already strong, I wanted the opportunity to make a lasting difference in an industry that I believe is vital to our society. And, in this industry, there were tremendous opportunities for both personal and professional growth.
I don't know of any other company, or for that matter any other industry, where you can make that kind of impact from the instant you walk in the door. It's very invigorating. That is why when I speak with executives who are contemplating changing industries, I look for that same type of infectious excitement and passion.
Shields: What career advice would you give an executive interested in transitioning into the utilities industry?
Snodgrass: It isn't for the faint of heart. Despite all of the opportunities for personal and professional fulfillment, it's a tough industry, a tough business. You've got to be committed to the long haul in an environment of chaos. If you're after the short-term gain, then don't come here. This industry requires commitment, perseverance and boldness. It takes time to change, so you've got to be willing to plant the seed, lay the foundation, nurture change and push the envelope, but while doing all of these things, remember that it takes time.
To manage a career in the utilities industry—be it as an insider or someone coming from outside—I highly recommend that executives seek out different assignments, as the route to the top is no longer linear. I also recommend that executives become financially or business savvy, as it is increasingly important in this industry, and we need talent with this understanding.
Shields: What do you foresee as being most important for the future of Exelon?
Snodgrass: Obviously, we've been doing a few things right. Under the direction of John Rowe and his leadership team, we are the largest—and continuing to grow—utility holding company in the U.S. in terms of market cap. We have the largest number of electric customers. We had the highest operating net earnings last year. We are pushing the envelope and we're leveraging our strengths. Are we perfect? No. Have we got a lot of work to do? Yes, but if you look at where we were before the merger, we were in the middle of the pack. Since the merger [between Unicom and PECO Energy] and the push for a cultural transformation at Exelon, the results speak for themselves. Talent at every level matters, and you can see the impact that our talent is making in our financial results, industry standing, and growth.
That is why, from a leadership perspective, there will always be a need for intellectual champions of change—not just at Exelon but throughout the utilities industry. We need dynamic, flexible leaders who will challenge the and drive results. We've gotten so far at Exelon, but we still have more to do. We're just getting the momentum now. It's time to take it to the next level.