Charles Koch : Building and Running an Empire

Well thanks for having me on your program. I've watched it a number of times and I don't deserve to be on it given the quality of the others, but I take that as a high compliment and I thank you for it.

Well it has to do with this. Now if you want to make a quick buck you can do it a lot of different ways – you can cheat somebody, you can misrepresent something, you can manipulate the political system to get an advantage. But if you want to be successful over a long period of time, I believe you need to focus first on creating value for others. And that said, I've had people say that's naive, that's utopian. No it isn't, because why will customers want to pay you anything over a long period unless you're creating value for them? Why would your employees want to work for you, or if they did, why do they want to give their best efforts, get excited, wake up at night with ideas? If you're in a community, unless you're creating value for that community, why would they want you there if you're polluting and hurting people and not contributing? So long-term success starts with being dedicated to creating value for others. It's not altruism, it's my whole philosophy to have a system of mutual benefit where both parties gain – a society based on win-win.

It happened because I discovered at an early age I didn't think I was much good at anything. But my father did me a big favor – he had me working in all my spare time from age six. He didn't want his sons to be country club bums; he wanted us to feel grateful for everything and entitled to nothing. At age six I started digging dandelions – you don't pull them, you dig down and get the entire root. I remember a club and pool across the street, and I'm out there in 105-degree heat while my friends are swimming and jumping off the diving board, and I'm thinking why does my father hate me and their fathers love them. But later I graduated to shoveling stalls and milking cows before and after school. I discovered that if you don't learn to do dirty jobs, by your 30s you never learn to work productively. It taught me how to work productively and with others in mutual benefit. Then in third grade I realized I had a math aptitude – the teacher put problems on the board and the answer was obvious to me but not to others. So from then on I took more math and science, and I went to MIT where the language is primarily math, not English. I got all those engineering degrees, but really I maximized my time on courses in math and science because I was better at that than the application of principles. I also got a nuclear engineering degree because I thought it was the future, but I realized it would be government controlled, so I got a chemical engineering degree instead. I learned the physical world is ordered and governed by principles, so I studied philosophy of science – from Aristotle, Descartes, Popper, Polanyi, Einstein, Newton. During that time I was working at Arthur D. Little, a consulting company. One interesting project was designing a plant to make a marijuana derivative for aerosol bombs – a rather dubious use of taxpayers' money.

Actually, that was my plan initially – to get a PhD in math, but I found abstract math beyond me. Then I considered a doctorate in chemical engineering, but a professor told me it would be a miserable slave life if I wanted to go into business. So I got the job at Arthur D. Little, learned a lot, and after two years my father called me to come back. I turned him down because I was learning. A couple months later he called again and said either I come back to run the company or he'd have to sell it because he didn't have long to live. He also said I could run a small company called Koch Engineering however I wanted. I was 25, so I came back. It was a mess but I made great improvements, and it blossomed. He made me president in 1966, and he died in 1967. I got to work with him for those years.

Yes, that's correct. Even when my father was alive I was trying these ideas. I was interested in philosophy of science and came across Polanyi's essay 'The Republic of Science' about how scientists work together to create innovation. Key is gathering dispersed and desperate knowledge and using the scientific method – articulate a refutable theory and try to disprove it. Free societies do that; communist societies don't. So in our company, we built a culture of challenge. If you're a supervisor and your people don't challenge you, you must change or can't be a supervisor. If you're an employee and don't challenge, you're not doing your job – we'd rather get a robot or computer.

It starts with values – our ten guiding principles. They determine who we hire, retain, promote, and how employees are rewarded. The key principle is challenge – you must be skeptical and committed to long-term results. We evaluate and reward on long-term results. It's not easy – when we acquire a company, it's hard to build this culture because in most companies challenging your boss can hurt your career. At Koch, it's the opposite – if you never challenge, that hurts your career. If you challenge because you have an idea to improve, even if you're wrong, you're celebrated and rewarded.

We're not concerned about religion. We look for integrity, courage to live by values when they're tough (Aristotle said courage is the most important virtue because without it you can't exercise others), compliance, value creation, knowledge, challenge, treating others with dignity and respect, and finding a fulfilling job. If an employee has a fulfilling job, it benefits both them and the company – it's mutual benefit.

The MBM approach is an integrated philosophy. Each of the five dimensions needs to reinforce each other. We do not take risks with safety or the environment. Safety is job one. For example, at Georgia-Pacific, employees tried to fix paper machines while they were operating, causing accidents. We changed that – if a machine isn't working properly, shut it down. It took years and firing violators, but we improved safety and environmental practices. Financial risk we evaluate: probability of success, downside vs. upside, and whether it builds new capability for growth. In crude oil gathering, we understood the customer – independent producers. We built relationships and invested in pipelines without firm commitments, based on trust. That seemed risky financially, but by focusing on creating value for customers, we built long-term relationships.

Yes, if you're dedicated to creating value for your customers, you build relationships that last for 40 years. We have suppliers and customers where we help each other in problems rather than take advantage.

I have a terrible disability: I have an MBA. So whenever you tell a story like brain damage, exactly, I'm avoided. I'm trying to figure out how to do this creating value, where does that fit in any matrix? Okay, no, but we found from experience that 90% of those risks paid out, and they paid out big time.

It starts with a vision of creating value for others. You ask yourself what your capabilities are and what opportunities exist to create superior value. As you prove yourself, you add other capabilities, opening new opportunities. After my father died, we negotiated the estate tax, freeing us from that liability. We had three sets of capabilities: crude oil gathering and trading, coke engineering, and a 35% interest in Great Northern Oil Company. I bought the rest of that company and built the refinery from 40,000 to over 300,000 barrels per day. We then bought chemical businesses and DuPont's Lycra and nylon. That led us to other chemical process industries. When we heard Georgia Pacific wanted to become more consumer-focused, we offered to buy their pulp business, applied our management philosophy, and later bought the whole company after dealing with asbestos liabilities. Our acquisition approach is to believe our management philosophy will improve the business, and they have capabilities we don't, so it's win-win.

I don't think we would have been able to do it if we were public. First of all, who's this kid with all these crazy theories going to use our company as a laboratory? I'd have been fired long ago because we had lots of missed starts. You had one choice: own it or lose your job. So staying private allowed us to reinvest 90% of our profits in the business, giving us capital to continue. We paid out enough so our stockholders had what they needed and had confidence that we could get a higher return than if we paid dividends.

We don't look at it that way. Every business we've entered was based on our having the capability to improve it and their having capabilities to open new opportunities. One hand washes the other. All these businesses are interrelated. We try not to have a big central bureaucracy but a few specialists per field. For example, we have innovation seminars twice a year where everyone shares ideas on driving creative destruction. We build a community, the republic of science. Same for operations excellence. So there is a core competency: the republic of Koch, the set of ideas, management techniques, and values. Values come first, then technologies. For incentives, we evaluate each employee's contribution to increasing long-term value, not just this year's earnings. It's largely subjective, and we spend a lot of time on it. We're not perfect, but we do it well enough that people know we reward them for the value they create, even if it helps another division.

We don't look at it that way. I'm quite idiosyncratic in my approach. On politics, we don't look at policies based on whether they make us money but whether they help people improve their lives. I see the biggest problem as an increasingly two-tiered society that destroys opportunities for the disadvantaged and creates welfare for the wealthy. We work on criminal justice reform, improving education, and creating an open economy so people who have nothing can get jobs and create well-being. We oppose all corporate welfare, which costs the economy at least $5 trillion a year. The tax code alone has $1.5 trillion in special benefits. This country was founded on the idea of equal rights, but it was not fully applied. It wasn't applied to blacks, Native Americans, women, and immigrants. Corporate welfare has always existed. If the country had been true to the Declaration of Independence, we could create a greater society than anyone ever dreamed of.

Look at the money we raise that goes into politics. This year we have a budget of about $500 million for all activities. The great majority goes to education and to our new organization Stand Together, which works with groups trying to improve lives of disadvantaged people, particularly minorities. A fraction goes to electoral politics. I've said over two years we raised $750 million total, probably $250 million will go into politics, but because of disappointment in the primaries, it will be less. Our total will be about the same because there's more interest in these new things from our donors.

Oh yeah, the great majority of what we invest or help invest is coming from others.

First of all, I feel a moral obligation to do this. I feel I have a calling. Unfortunately, the other parts have been effective. When I started, I started an education because these ideas were transforming my life, and I wanted to give others the opportunity to transform theirs. Then I saw that many policies were holding people back from fully applying these ideas. So we started working to move America towards policies that enable everyone to practice these ideas, away from a system of control, dependency, cronyism, and poverty. We got into electoral politics because I was very disappointed in the Bush 43 administration. They grew government much more than Clinton, and regulations more than doubled. So we started opposing what they were doing. It was hard because most business people are Republicans and didn't want to oppose a Republican. But the people who got us politically active were Republicans, not Democrats. And the whole American population evidently feels that way, which is why they're going against Republican politicians.

I don't like to comment about individuals because we're not into ad hominem attacks, but I can say this: I disagree with a lot of his policies. I don't believe in protectionism, corporate welfare, or attacking people personally. I believe in free speech. I praise Bernie Sanders even though he attacks us; we made a video praising him. To be clear, I agree with Sanders' diagnosis of what's wrong with the country, but I think he's completely wrong about expanding government to solve it. That will just make things worse.

We can only do that at certain times. I'm pushing our people to have an even slope, but we've been flat for a while then jump up, then flat again. So it doesn't mean every six years, but on average over 50 years. There's still room for growth. We've got to find new platforms. We bought Molex and have investments in information technology. Our goal is to turn all our products and processes into smart ones. For example, in our plants, we're developing monitors that automatically detect leaks and shut down units. Georgia Pacific is working on the public bathroom of the future. We're broadening Molex's product lines. We're also doing the same in biotechnology.

I take what Shakespeare said: 'What's once done, joy's soul is in the doing.' It goes with Maslow and what psychologists have found: what gives you fulfillment and long-term happiness is accomplishing something. If you accomplish something and that's it, you just brag about it, you become unhappy and bored. You've got to keep growing and learning and finding new ways to contribute. That's the way you feel good about yourself.

We've got to change the narrative and learn to do a better job of communicating what makes people's lives better and gives them happy, fulfilling lives. It's not socialism, and that's what they're getting from almost all the media and universities. But fortunately, there's technology and alternative media, and more and more groups are realizing socialism is a dead end. What we're trying to do in our network is to innovate and drive creative destruction in this area, find new ways to show people that this is a dead end and the way to live a better life and have a more moral society is to go away from this system of control and dependency and perpetual poverty. Charles Koch, author of Good Profit, thank you.