Leading Beyond Authority

I have had the pleasure of hearing Susan Story, CEO of American Water, speak to industry groups on numerous occasions over the last several years. Her speeches are engaging and carry power that moves an audience to action.

I realized that the persuasive power of her public speaking and her approach to leadership demonstrate quintessential qualities for effective leadership beyond the boundaries of the corporation that she leads.

A key measure of success for our industry is continuously achieving safe, clean, reliable, affordable delivery of service. These objectives are dynamic and their parameters are often dependent on public policy, legislation, and regulatory relationships.

Industry leaders, therefore, must advocate in these areas by leading and influencing beyond the boundaries of their corporations. They must lead beyond their authority.

But what is leading beyond authority? There are three types of authority, according to the sociologist Max Weber.

There is authority based on legal rules. There is traditional authority, based on traditions, customs and historical precedents. Weber posited an additional authority structure called charismatic authority.

Charismatic authority is conferred on someone not by established norm or rule, but by an individual's personal history, achievements and leadership qualities. Weber defines charisma as possessing exceptional qualities regarded as exemplary in the eyes of his or her followers.

A utility executive leads beyond the boundaries of the corporation with charismatic authority. Leadership effectiveness in this sphere of charismatic authority, above and beyond the corporation's boundaries, requires unique characteristics and competencies often overlooked.

There are many descriptors for the general qualities of the effective leader. But there are very few specific frameworks for effective leadership with charismatic authority. In 1951, Northwestern University professor Franklyn Haiman established a list of qualities desirable for a leader engaged in democratic processes.

These qualities include social sensitivity, which includes a respect and concern for others, extroversion, and a belief in the value of the individual. This sincere interest in other people is the most important attribute of this type of leader. Other qualities include sensitivity to the basic trends and moods of the group; knowledge and expertise in the area where they are expected to lead; facility in verbalizing the ideas of a group; vitality; maturity and patience.

Susan Story has those qualities. They are evident throughout my interview with her. These attributes enable her to successfully lead and influence people beyond her corporate authority into the areas of corporate social responsibility and public policy.

Tom Linquist: American Water is the largest publicly-traded water utility in the country. It serves one of the basic human needs of about fifteen million customers across forty-seven states, and in Ontario, Canada.

The company serves in a mission-critical infrastructure sector. Susan, you continue to be active in policy-oriented activity with a wide array of critical stakeholders. What are the key issues you are discussing in your talks, currently?

Susan Story: When I look at national water policy, there are four issues that jump out. The first issue is water supply. The second is water infrastructure, and the aging nature of water infrastructure and wastewater infrastructure.

The third is water quality, and the emerging issues around water quality. The fourth area is customer connectedness. Utilities in the future will have to connect with customers more along the lines of how they have become accustomed to connecting with Amazon and other service providers.

First, there's a finite amount of fresh water. You get water from underground. You get water from the surface sources such as rivers and lakes. You desalinate and produce fresh water from brackish or salt water, or you recycle and reuse. That's it.

Those are the only options that you have with the exception of conservation, which can also be viewed as a source, similar to the way people consider energy efficiency to be part of the energy supply equation.

The second issue facing everyone in the United States is aging water and wastewater infrastructure. In this country, there are over a million miles of pipe that convey water.

Every year, we lose twenty percent of treated water, or two trillion gallons. We've gone through the expense of getting the water, treating it, putting it in pipes. But before it ever gets to its destination, we've lost it because of leaks and main breaks, generally caused by infrastructure well beyond its useful life.

On the wastewater side, there are about seven hundred thousand miles of wastewater pipes around the country. Every year we have nine hundred billion gallons of untreated sewage that's going into our rivers and streams.

The issue of aging infrastructure is a critical one, because it's also tied in with supply. We can't afford to be losing treated water. We can't afford to have the environmental impacts of untreated wastewater being improperly disposed.

The third element, water quality, has been brought to light with the toxic lead-tainted water in Flint, Michigan and the algae blooms in Lake Erie and the Ohio River. An important context that is unknown to most people is the fact that there are more than fifty million identified chemicals in this country.

It took thirty-three years to register the first thirty million - and only nine months for the last ten million. Every 2.6 seconds a new substance is being synthesized by the breakdown and reformation of chemicals.

There are also fourteen hundred microbes such as bacteria, viruses, and protozoa that can affect drinking water. The EPA regulates ninety. It is not technologically possible or economically feasible to monitor for them all today. Collectively, we have to protect our water resources and find new, innovative technologies that allow us to monitor and ensure that our water supplies are safe.

The last area is customer connectedness. The way we look at the customer is to assume that the traditional utility construct could go away one day. If our customers are given a choice, we want there to be no question in their minds that they would choose us.

What are we doing for the customer experience? What are we doing for customer-facing technology? What are we doing to provide the type of experience that our customers want, so that they enjoy the experience they have with American Water?

Tom Linquist: You are on the board of the Bipartisan Policy Center. The BPC is directly addressing your company's key areas of focus through their unique approach to public policy. What is the BPC's scope and mission?

Susan Story: Jason Grumet leads the Bipartisan Policy Center. He's done an incredible job. They look at numerous critical policy areas: energy, health care, national defense, infrastructure, tax policy.

Senators Bob Dole, Tom Daschle, Howard Baker, and George Mitchell founded the center in 2007. What they said was, "We've got to find a place where both sides of the aisle come in to find ways forward."

They don't say "we're non-partisan." They say "we're bipartisan," which means, "We're not asking you to come to the table and leave what you believe at the door. We're saying, come to the table and together find things that you can agree on." They promote national solutions by bringing people together on elements of major policy issues that they can agree on.

They work with others on proposed legislation, typically starting with the Senate, but sometimes with the House. They go beyond white papers and work to get policy solutions into practical legislation. They measure their success on what actually changes, not on paper output.

Tom Linquist: How is it that they go beyond a white paper?

Susan Story: They build support and momentum for legislation through the coalitions of people that they get involved to work on projects, from political, governmental, corporate, environmental, and NGO arenas.

I was first exposed to the BPC when I was at Southern Company. As part of an energy project that the BPC led, we met over an eighteen-month period with electric companies, oil and gas companies, environmental organizations, Democrats, Republicans. You name it, they were all around the table.

We hammered out what we thought was good policy, and found a way for people with very divergent views to come together on several key issues. Once the paper came out, not only was it the BPC carrying the message, but also BPC's advocacy counterpart. They took over and had built-in support from the people who'd been part of the effort to directly influence change beyond the white paper.

Tom Linquist: How is the BPC addressing aging infrastructure and public-private partnerships?

Susan Story: In 2015, the BPC put together an effort to look at infrastructure investments with the view of public/private partnerships taking the lead. The Center is helping to address this daunting challenge for the United States. Doug Peterson, the CEO of S&P Global, and I were named co-chairs of that effort.

We had CEOs of many different companies and private equity partners involved, but we also had a very strong political advisory council providing strong leadership and input throughout the process.

The leaders of this council included Antonio Villaraigosa, the former mayor of Los Angeles, and Henry Cisneros, former mayor of San Antonio and former HUD secretary under President Clinton. They are both Democrats. It also included Steve Bartlett, former Dallas mayor and congressman, and former Governor of Mississippi Haley Barbour, both Republicans. These folks came together and said, "We all can support the efforts of this work on infrastructure."

The council's report was issued in May 2016. It mainly focuses on transportation and water and wastewater infrastructure, although it provides a model for overall public-private infrastructure investment. It emphasized that we need to give public entities, municipalities, and governmental entities full optionality to address the range of challenges they have.

Their challenges include the ability to get financing from private equity. Municipalities with distressed systems face impediments to the sale of their distressed assets to entities like American Water. They may be better situated to buy, improve, and operate those assets.

Having options is especially relevant for those municipalities having wastewater or water systems that are decades old. They may be in violation of EPA regulations, and might use an infusion of cash for the numerous competing priorities their cities are facing, such as building schools, roads, parks, or unfunded pension liabilities.

One option may be selling those assets. At that point, they get an infusion of cash into the city, and are able to bring expertise on board. These are local people backed by the national operational and R&D strength of a company whose only business is water and wastewater. Then they are able to avoid the type of rate shocks they would face if a city, on its own, tried to address and solve these issues.

Tom Linquist: I think there are seventeen states that have serious state law limitations to public-private partnerships, and there might be four or so that have the right environment to encourage P3s. What is it that you're looking for when you envision the ideal public-private partnership at a state level?

Susan Story: Actually, we are finding many of our states are open and welcoming. Whether it's the state government or the utility commission, they're finding that private purchases, especially of distressed systems, are good public policy for the state.

In states such as California, Illinois, Missouri, Pennsylvania, Indiana, and New Jersey, we have what's called fair market valuation.

Traditionally in regulated sectors when you acquire a company, regulators look at the depreciated value or book value of assets as a starting point. That helps them evaluate how much of the total purchase price should go into rate base.

There is a lot of negotiating around value and sharing of synergies to determine how much of the premium the acquiring company can recover. In the water sector, where we typically purchase from municipalities, these systems are older and in need of investment. The depreciated value results in a potential price that's too low for the city to consider selling.

Under fair market value laws, in many cases there is an appraisal from independent third parties to determine the so-called fair market value of the system. Based on the specific process within each state, an appraisal is chosen as the starting point for rate base discussions. As a result, you don't have these big premiums above the book or fully depreciated value.

We've also seen several of our states adopt single tariffs that encompass all water systems. In Pennsylvania the single tariff covers water and wastewater customers. This Pennsylvania combined single tariff is especially important, because ninety-seven to ninety-eight percent of all wastewater systems are publicly owned.

Prior to the legislation, we might have numerous water customers, but very few wastewater customers. So buying a distressed wastewater system would entail large rate increases for the acquired customers. There wasn't a large base of customers for us to spread the costs around.

The legislation, Act 11, allowed companies buying a distressed wastewater system to spread those costs across a broader water and wastewater base. As a result, rather than the bills going up twenty-five percent or more due to needed upgrades, which actually happened, they go up typically less than five percent. And every customer eventually benefits.

Constructive and reasonable legislation and regulations enable us to address aging infrastructure, water supply and water quality. Those are really encouraging signs that we're seeing spread across the country.

Tom Linquist: How do you go about educating stakeholders and influencing policy in other states to enable more of what you're seeing in Pennsylvania?

Susan Story: We are a local company in our sixteen regulated states. Each of our states has a state president. Our employees live, and in many cases, grew up in the communities we serve.

If an issue touches our customers, our communities, state regulators or legislators, it is managed locally. Our states have a lot of autonomy, because running a water utility in California or New Jersey is very different from running a water utility in Illinois or West Virginia.

Our local folks who live in the community share best practices in operations, engineering, and customer service with each other across the country. And in those states where there is constructive legislation or regulation, those are also shared across our footprint.

It's ground up, grassroots, local community-based efforts. It's not done out of our corporate office in southern New Jersey.

Tom Linquist:Back to the Bipartisan Policy Center, and the effort that they're making in terms of P3s, what other areas are they addressing in the P3 construct?

Susan Story: One of the ideas that the next administration has put forth is an infrastructure bank. Let's say you are Apple, or another large multi-national, and you have a billion dollars of profits overseas. That would be subject to a ten percent repatriation tax if you brought it back to the States.

Under one proposal, that company could bring that one billion back. And take advantage of an eighty-two percent tax credit by putting one hundred twenty-one million dollars into an infrastructure bank as an investment, and thereby eliminate the tax payment.

That investment would seed infrastructure projects. It could serve as the twenty-percent equity requirement for the rest of the debt that municipalities might borrow for projects.

Additionally, hopefully it would be open to private companies to enable us to reduce our financing costs for water and wastewater financing for our customers who also pay taxes.

The infrastructure bank could theoretically not only be good for infrastructure investment, but also offset the cost of the tax credits. That's because of the jobs created and the resulting income taxes paid and sales taxes on materials that would result.

I find that intellectually interesting. I think that infrastructure, Tom, is one of the few areas where you really, truly can have bipartisan support.

People know that our roads are crumbling, and bridges need repair and replacement, as do water and wastewater infrastructure. The American Society of Civil Engineers has said that over the next twenty years we need a trillion dollars to replace the water and wastewater infrastructure just to keep it operating as it does today.

There's a recognized need. How we get there differs maybe, but I think there is support from both sides of the aisle to fix these problems. I think this can be an area of early success for the new administration trying to bring parties together.

Tom Linquist: We've heard those kind of numbers for years, but there always seem to be barriers to the P3 construct.

Susan Story: Maybe so, but the fact is that there's not enough federal money. There's not enough for the scale of projects that we're talking about.

Tom Linquist: That ability comes from the private sector, then?

Susan Story: Right. It has to be both. It probably can't be one hundred percent from private equity, but I do think private industry, private equity, private companies can provide a boost forward.

For those municipalities who are already at their bonding capacity, the ability to be able to sell some assets when they're comfortable and at their own discretion provides a great relief. We should make it easier for that to happen.

I'll give you another example. There's a defeasance of bonds requirement. A municipality that has utilized tax-exempt bonds to invest in its water and wastewater systems and wants to sell to American Water faces an obstacle if any of that asset investment came from tax-exempt bonds. The municipality would have to pay those off before they can sell the assets.

We don't think the benefit of those tax-exempt bonds should come to us, but why shouldn't the city keep the benefit and use the proceeds of the sale for other needs? The city can still keep the debt.

If they have other needs for those funds, for a new school, or to fix a roadway, or for pension funding, why can't they just transfer those tax-exempt bonds to those efforts and not incur new debt? We need to isolate and remove obstacles that impede that option for these cities and municipalities.

Tom Linquist: Where is that obstacle right now?

Susan Story: It's in the U.S. Treasury. Actually, our understanding is that it's one of those regulations that could be changed by an administration. It does not have to be done congressionally.

Tom Linquist: It's evident that you've been very involved, very active, in a much broader cross-industry manner. What are the leadership qualities that enhance your influence beyond your company?

Susan Story:I think the one thing is to recognize that great ideas come from everywhere. As Americans, we basically all want the same things. We have different ideas about how to get there.

I also find that if we listen to each other more than trying to make sure that we're heard, up front especially, we find that we have more in common than we think we do on the big issues.

It's okay not to agree on everything. In fact, it makes life a lot more interesting when you're around people who are different from you. You don't always learn a lot of new things from people who are too much like you.

To actually seek out and be intellectually curious about differing ideas, to realize that we don't have to think the same for us to both want the same thing, makes life a lot more interesting and productive.

Practically, from an American Water standpoint, we serve states that are blue, and we serve states that are red. We have customers of every political persuasion, and that's great. And they all want the same thing with the water services we provide. They want water that's clean, that's safe to drink, that's affordable and is there when and where they need it.

I think the thing that we've got to get back to is, whether it's on a local, state, or federal level, is the recognition that everybody has something to bring to the table.

The vast majority of people are trying to do the right thing. We need to really listen to find those things that we can actually agree on for the good of the people in this great country. It's not easy to do, but I don't think it's hard to understand why it's important. I think we lose that simple basic fact sometimes.

Tom Linquist: How is it that you draw people's opinions and their positions out in a way that inspires a productive dialog?

Susan Story: Open ended questions. And then really listen to the answers. When you ask someone, for example, "so, what do you think about..."; or "what do you believe we should do?"

I am also big on focusing on the most important things. I am always asking my co-workers, "If you can only do one, two, or at most three things ..."

I like to narrow things down so we put our attention on those things that have the biggest impact. Whether it's an individual's tasks, or a big policy issue. I think if you ask that early, it helps you advance the discussion and provide a common basis for understanding.

I may find that even if you and I take polar opposite positions on some issues, that the specific things that are most important to you I'm okay going along with, because there's a couple of different things that are more important to me.

You can sometimes get past a lot of the dancing around and wasted time on issues that may not matter, and you get to a point of agreement faster when you step back and say, "Here's what I really need. Here's what's most important to me." When you do that, you can get to a resolution much more constructively, and much more quickly.

On a personal basis, I think it helps that I just really find people to be so interesting! Where they came from, why they are how they are, what they think is important, how they view the world, how they see things.

I ask open ended questions like, "Well, tell me about yourself. Why did you choose the job you're in? Why do you do what you do? If you could say, this year, 'If I could only get one thing done, what would it be that's most important?'" I think it helps you get to a good place and truly understand the person you are relating to.

People throw around this idea of win-win all the time, without having any idea of what that really means. Win-win is, at the end of the day, you feel pretty good about what we did. You may not have gotten everything you want, and I may not have gotten everything I want. But I feel good about it, and I feel like we've made progress, and that people are better, things are better, communities are better because of the work we did.

This is very foundational. It's human nature. We spend so much time arguing about an issue before we even understand the person. That's a big mistake. Now, I don't always do it, and no one's perfect at it, and I think we always have to work at it. But listening for understanding, and really trying to figure out what's most important helps us get there.

Tom Linquist: What is your approach to moving issues forward in a broad fashion?

Susan Story: Let's take water quality for example. I was at an employee meeting, and had an employee say, "Do the results of the election change what we're going to do environmentally?"

Having clean, safe water is not a partisan issue. We're going to do what we need to do to be environmental leaders in water resources, and it really doesn't matter who wins an election at local, state, or federal levels.

I think the thing you do is focus on what are those fundamental things that bring people together. Things like making sure all children are safe, making sure the water our customers drink is safe, making sure that people have what they need to live their lives every day.

If you talk with those fundamentals in mind, people get it. It draws everybody together. It doesn't matter where you live, what your socio-economic status is, how old you are. Doesn't matter. Fundamentals for life bring us together as human beings, and we don't spend enough time looking for those things.

I feel very blessed, because our American Water employees see what we do as a calling, not a job. What we do is not just a product or service. We aren't just a utility. Water is critical for life.

We take that responsibility very seriously. I think it's important to do what you're proud to do, and at the end of the day you can say, "This mattered and things are better because we're here."

Tom Linquist: What is your vision for the future of American Water?

Susan Story: Clean water for life. Living our values of safety, trust, environmental leadership, teamwork and high performance. A culture that promotes fully engaged employees, constantly looking for ways to better serve very satisfied customers, leading to constructive regulatory outcomes and financial strength and stability for our company.

Safety is first and foremost for our employees and customers. Every employee goes home to his or her family at the end of each day or shift, and every customer knows that every action made by American Water is for their safety and health.

Practically and specifically, water and wastewater would be a fully integrated system such that we would know immediately and be able to instantly remedy any potential contaminant, leak or main break, or any water quality issue.

We would have highly effective two-way communication with our customers, with every message personalized in the way they wanted to hear it and when they wanted it. They would know that they could either go online, or make a call, or contact us in a way that immediately gave them first contact resolution to any issue.

Municipalities or governmental entities would be able to have full optionality as to their choices, and we would be their first choice. They know if it's New Jersey American Water, Pennsylvania American Water, Missouri American Water, Illinois American Water, California American Water, you-name-the-state "American Water", that those are the folks that will take care of their citizens. We will partner with them to make sure that our customers have the best water and water services.

I think we're moving the obstacles to get there. We are doing things that we talked about earlier. Giving municipalities full optionality. With all these emerging contaminants that I talked about earlier, with all of the threats to water quality, we must ensure that we have the people and the resources to monitor, to train, and to use technology. We will make sure that we can meet all these challenges for water supply, water infrastructure, and water quality. We will give the customer the experience that he or she wants, not just needs, but also wants.

It's exciting to apply technology, to apply customer feedback, and to make policy react to what people want, and what they need. At the end of the day we're after safe, clean, reliable, and affordable water and water services; clean water for life. That's the goal. And I find it hard to imagine that anybody would be against those things.

How do we get there? We sit down at a table, and prioritize how we're all going to get there. We're excited at American Water because of our size, scope, and scale. We want to be right up there at the front, offering solutions, and have people saying, "We feel good. We're going to get there because American Water's part of that solution." 

To hear the full interview, please link to the podcast at Leadership Lyceum: A CEO's Virtual Mentor, available at Apple iTunes. Search iTunes Podcasts, with the keyword Leadership Lyceum.