Electrifying results Featured

8:00pm EDT June 25, 2007

Reliant Energy Inc. was a company without a future in the fall of 2002.

After being spun off from CenterPoint Energy as an independent, publicly traded company, Reliant developed a growth strategy based on the notion that the electrical business was a consistent growth business, and that it would be difficult to overpay for assets.

But that’s exactly what the company did.

“The market had literally collapsed, so the cash flows were drying up very quickly,” says Joel Staff. “We had a cost structure that was focused on what I would call value extraction, as opposed to value creation.”

By the time Staff stepped in as chairman and CEO, Reliant had amassed about $7.8 billion in debt, much of it due within six months. The massive debt helped fuel a widespread feeling among Reliant employees that the company was not managed well, which, in turn, strained the working relationship with them.

Many employees viewed management as inept and their peers as adversaries. Passing the buck and passing the blame were daily activities, and as a result, the company’s communication infrastructure was falling apart.

The deteriorating atmosphere within the company was affecting its shareholders. On Oct. 18, 2002, Reliant’s stock, once worth about $30 a share, traded at less than $1 per share.

On top of that, the financial problems, combined with a prominent role in the California energy crisis of 2001, put Reliant under the microscope of federal watchdog agencies, adding another black mark to the company’s reputation.

Staff knew he had to change everything about Reliant, from the way the company did business to the way employees interacted with each other. And he had to do it fast.

The first steps

The company was in such bad shape that Staff likened the first months of his tenure to performing triage.

The first and most important step was to tame Reliant’s growing debt monster, which was threatening to pull the company under.

“The company was in such a bad financial situation that we had to get a refinance in place with all that debt coming due,” he says. “Our CFO at the time did a great job of laying that out for us. He said that if we couldn’t get refinancing, we’d better go into bankruptcy.”

Company leaders worked through various avenues to find a way to buy Reliant more time to pay off its debt and reached a last-minute refinancing agreement.

“Literally, we got refinancing on a Sunday night, and we were preparing to file bankruptcy on Monday morning,” Staff says.

It was only an initial win, but it was a huge one. “I think a lot of people were really surprised at the financing we were able to arrange,” he says. “That gave us three years to work out the problem, and that was absolutely key.”

With the company’s financial picture becoming clearer, Staff turned his attention to the governmental investigations of Reliant.

“It’s tough to exaggerate how debilitating and time-consuming that is to an organization,” he says. “We really felt we had to set those as a priority and get those behind us.”

By 2003, Reliant had settled with the various agencies performing investigations, largely because Staff had helped implement new best-practices guidelines within the corporate governance. Along with the new guidelines, Staff and his senior leadership rewrote the company’s ethics policy and began a process of cascading it throughout the organization.

Staff says each initial victory was important in contributing to the net sum of turning Reliant around.

“Everything we did was interrelated,” says Staff. “One of the words I use a lot is integrity. It’s a really rich word. If you go to the root word in Latin, it means ‘whole’ or ‘complete.’ Everything has to be complete and whole.

“It isn’t good enough to just have a good corporate governance policy. You have to be able to stand and do the things that are consistent with who you say you are.”

Building trust

The next step was to rebuild the trust of the work force while enacting changes to put the business back on the right track.

In a time of radical change, Staff says communication from management must always be open, honest and consistent.

Staff says employees developed a cynical attitude about the company because they were able to find, at least in their own minds, evidence of mismanagement all around them.

“So many negative things had happened in the company that you could almost look in any corner and find a problem you could logically assert was caused by, for instance, the trading group or the people running the plants,” he says.

Staff had to convince Reliant’s employees to trust management and each other again, and he says the only way the management of a rebuilding company can gain the trust of employees is to perform trustworthy actions repeatedly.

“If I come backward from trust, trust really, to me, is founded on credibility, which is founded on integrity,” he says. “If people know where you stand, if people can really count on you to do what you say you’ll do, that’s when you really start to build trust.”

Staff refocused Reliant’s communication strategy on the company’s new core values of integrity, efficiency and high ethical standards, and he used his daily and weekly communications to reinforce those core values.

Every morning at 7:30, employees all across the company received a voicemail message from Staff. The voicemails were mostly informational, notifying employees of upcoming events or recent accomplishments, but he says the underlying theme is hammering home the core values and showing employees that their coworkers are embracing the core values.

“The biggest is describing events and people who are working toward our core message,” he says. “It could be someone who has done something exceptional at a plant. It could be avoiding a lost-time accident. It could be someone who has come up with something innovative. But we do that every week.”

Reliant also reinforced its core values through a multipronged training system that includes educational campaigns and online ethics and compliance training. But Staff says there is no substitute for face-to-face communication. It’s the most effective way to get a point across, and it is the most immediate way to receive feedback.

Every member of Reliant’s leadership team is assigned to visit at least one of the company’s power plants annually. Each visit is an opportunity for senior leadership to bring all employees at a location together, speak to them, listen to their concerns and discuss new strategies.

If the visits produce an idea that could be significant for the entire company, senior management will put out a message to all employees seeking feedback.

Staff says trust is rooted in management following words with corresponding actions, but it’s also rooted in allowing employees to take a sense of ownership in a company. In the case of Reliant, Staff wanted his workers to have a voice in the turnaround.

“When all this started, we really had to step back and say, ‘Look, these really aren’t bad people who can’t do their jobs. We have some fundamental problems that we need to address,’” says Staff.

“I am reminded of Ben Franklin’s quote, ‘We must hang together, or we will most assuredly hang separately.’ While people here were really skeptical about whether we could get this company turned around, they were really hungry to do that.”

Even with all the positive steps Staff and his leadership had taken, there was still a dark side to the turnaround. Reliant had to lop about $300 million in costs from its books, and part of that meant downsizing the work force by nearly 2,000 people.

At the end of 2002, Reliant employed 5,317. By the end of 2006, Reliant’s work force numbered 3,524.

Staff says it was the most difficult thing he had to do during his time as CEO. But he says that frankness and a straightforward approach are the best paths to take.

In a situation where you have to do something negative, such as laying people off, Staff says employees just want the truth. They might be unhappy to hear the news, and you might take some heat for it as the company leader, but sugarcoating the news, or using ambiguous, noncommittal language, will only make the problem worse.

At first, he says, you can’t really worry about morale because nobody is going to take the news well.

“Trying to build morale during that time of layoffs, I don’t think you’re going to be successful doing that,” he says. “My approach is to be honest with people, let’s tell them what the time frame is, and then let’s turn to talking about the future and the things people find motivating. But while it’s going on, all you can do is build credibility by being honest with people.”

Lessons learned

Staff left Reliant’s CEO post in May, staying on as chairman, with a rebuilt company reputation and a successful turnaround to his credit. In fiscal year 2006, the company produced $10.8 billion in revenue, and the stock has recovered much of the ground it lost. The $7.8 billion in debt that saddled Reliant five years ago has been pared down to about $3 billion, much of it slated to be paid off long term.

The company’s culture is much healthier, with well-established lines of communication and the work force focused on a set of well-defined goals that includes creating new revenue opportunities as opposed to simply attempting to capitalize on existing opportunities.

But for Staff, a 30-year veteran of the oil services business who came out of retirement to head Reliant, the past few years made a profound impact on him in the form of new lessons learned and old lessons reinforced.

The first lesson is that a company needs to have good discipline in its process management.

“Being successful in the future meant building highly efficient, customer-focused processes that are scalable,” Staff says. “Scalable parts are important if you want to grow a business.”

The second is that the leader of a company will be called upon to make tough decisions, and he or she must be willing to accept accountability for the consequences.

“You have to stand for what you believe in,” he says.

The third is that a company is, at its heart, made up of people, and every decision you make should be made with an eye toward how it will affect your team.

“You have to treat every decision with the recognition that, every day, in order to be successful, people really are going to make the difference,” he says.

Staff says that aside from providing a paycheck, a company’s primary obligation to its employees is to give them a place to grow professionally. Without that, your company can never be totally healthy, and you will lose your best and brightest employees.

“I think that’s what really gets people excited and makes them want to come to work every day,” he says. “People want to make meaningful contributions, and they’re looking for the three R’s of respect, recognition and reward. That helps provide a compelling future, and that’s really what gets people moving.”

HOW TO REACH: Reliant Energy Inc., www.reliant.com