When I try to summarize principle-based management, which is the name of our culture and philosophy, and that's what's in the book, The Principles, I try to articulate it for someone that has no idea about Koch or what our culture is all about: imagine if you had a culture where people knew what to do without being told. And so I think that really sums it up. Now, I'm not saying we have that; it's perfect. But we strive for that all the time by empowering people with these principles so that it's not about having the smartest person make the decision. Spontaneous order, and people that are closest to the problem are making the decisions.
This is the Business of Advice podcast, where we help good advisors become great business owners. Today on the Business of Advice podcast, I am honored to welcome Chase Koch, who is the Executive Vice President of Origination and Partnerships at Koch Inc., which is one of America's largest and most successful privately held companies, which is proudly headquartered here in the state of Kansas. Chase worked on this — this is how we got the idea for the podcast — this great book with his dad, Charles. It is called Becoming a Principle-Driven Leader: 41 Principles to Build an Enduring Business, which is what we're going to talk about quite a bit today. So, Chase, I know you've got a long history at Koch Inc. So for the advisors, entrepreneurs who listen to this that are trying to navigate succession, family dynamics, private company ownership, and I would say wanting to build something that lasts, I know your insights are going to be very timely. So welcome to the Business of Advice.
Thank you. It's so nice doing this with someone from Kansas, too. I have a great affinity for this state. Born and raised in Wichita, and you know, went to school at Texas, but ended up coming back just because of the amazing values and culture of the Midwest, but specifically Kansas. And I'm sure you agree, one of the reasons why you're probably in the state as well. So it's nice to have some alignment there.
Yeah, and our audience isn't quite as big as the All-In guys, you know. So I heard you and your dad on that one. That's where I got the idea. But I know just from reading the book — I told you I finished it a few weeks ago — like there's so many things that are going to apply to any entrepreneur, any business owner, but really any leader too, right? So people that are in a leadership role, so many principles here. So let me start with this one, just because some people may not know, but a couple of years ago, we brought our leadership team down to your headquarters at Koch to learn from kind of your top executives and figure out just, I think, how you guys have built something that is so outstanding. It was pretty inspiring being there. But for those...
I'm sad I wasn't part of that group. I guess you forgot to let me know.
Yeah, that's Phoebe's fault. We'll blame her.
I'm just kidding. I was on the road probably at that point in time. I was building Koch Disruptive Technologies and spending all my time on the road.
I think you were. But let's start there. So for people that listen, you know, in Kansas, I think everyone kind of knows of Koch. But for those who are listening who may not know about Koch Inc., can you just give a background on the business and then maybe hit on the different industries that you're involved in?
Yeah, no, happy to. So if you look at Koch today, we are still a private company, as you mentioned, one of the largest private companies in North America, and we touch the majority of the economy. We have like nine different business platforms, and that covers everything from Georgia-Pacific with wood products, Molex, it's technology — they're right at the center of the IoT world with connectors. We've got Koch Agronomic Energy Solutions, which is fertilizer and agriculture. I spent a decade of my career in that business. Flint Hills Resources, which is refining, and then Invista Fibers and Resins, Guardian Glass, and then Koch Engineered Solutions, which is an engineering company and makes products that go into a lot of different chemical industries.
And then Infor on the software side as well. So most people, I think there's a misperception about Koch that it's this kind of industrial business, legacy energy business. And while we have those in our portfolio, we're really a technology company. And we have evolved so much. We've invested in the last decade — we've invested 50 billion in technology, some of those large acquisitions like Infor and Molex, but a lot of that is just investments in our core businesses, like where my grandfather started the company in refining and pipelines, investing in technology to advance our energy company as well. So, touch the majority of the economy, as I said, nine different platforms, and the 10th one is really all of our investment businesses. That's really half of Koch's balance sheet. A lot of people don't know that either, is actually just investing, and that's everything from venture capital to funds to credit strategies. So Koch is really, really broad, and we operate in 60 different countries. And one thing that I found that always helps people, and this will get to one of our principles, one of the 41 principles that we wrote about in the book.
A lot of people ask, like, wow, when your grandfather started this company, you kind of started as this small crude oil gathering business in southern Oklahoma, and now you're in all these different countries and all these different industries. How does any of that make sense? And the way I would describe it, that's so different about Koch, is that we look at ourselves through the lens of being capability-bounded, not industry-bounded. And I think that's very different than most companies, especially public companies, where they're incentivized to really grow market share and focus in one area. I think one, being private has given us an advantage to give us this flexibility to work across a lot of different industries, and the fact that we think long-term versus short-term and we're not chasing quarterly earnings. I think that's a really big differentiator. But I think that one of the biggest kind of principles that sets our approach apart is this idea of capabilities.
And so what we learned early on in the first couple decades of being in business is that we were good at a couple things. We were good at running operations, we were good at logistics, and good at engineering. And when you combine those three capabilities, instead of just thinking about energy, we thought about how can we expand what we're good at into these other areas like wood products with Georgia-Pacific or fertilizers with Koch Agronomic Energy Solutions. So that's how that virtuous cycle, we call it, into all these different industries advanced over time. It's obviously much more complicated than that, but that's the simple idea on how we got into all those different industries.
Well, when we visited, that was one of my takeaways. It was interesting because I think in our space, we see people just investing constantly in the same financial services businesses or lines. And I think it was your CEO at the time said that, he's like, what we learned along the way is like there's certain things that we're good at that can apply to any business, and we're more focused on does this business need those capabilities and can we add value there around it, more so than we are the industry, which is a lot different. You know, I think that's when people do see all the different things you all do.
Yeah, well, and just one more principle to add to that. I think what's so important, because we've really screwed that up, and if you read the book you see a lot — we tell the stories through the lens of failure, where we got too big in areas we didn't really understand.
So the principle that I would really encourage your audience to think about, if they do want to expand more, think about things horizontally versus vertically from a capability lens and what they've demonstrated they're really good at. You've got to also apply experimental discovery because as you're getting into new areas, you don't want to go too big too fast. That's almost all of our biggest mistakes are from that. And also just having the wrong leaders in place is also another big one. But if you experiment and test and learn, and then you get that market feedback that something is working, then you've earned the right to expand and continue to reinvest without creating too much risk on your overall business.
That's good. So this book you wrote with your father, 41 principles. It's kind of the principles that have guided Koch for decades. Although I think he says in the book, you know, you're always discovering new ones. I think that's a pretty fascinating thing about Charles that I've noticed, is like in his 90s and just a student still to this day, which is pretty awesome to watch and read. But what made this the right time for you guys to partner together to write this book? And then what do you hope — because I think everyone should go buy it. We'll probably give it to a bunch of our advisors. But what do you hope they take away from it?
Yeah. Well, I mean, in terms of timing and why I was involved, which I was incredibly grateful and surprised, honestly, I was invited into the process because even though I'm coming up on 33 years at Koch — I can't believe that — because I started when I was 15 here.
When my father and also the co-author of my father's last book, Brian Hooks, who's the CEO of Stand Together, which is all of our philanthropic and social change efforts, which we can talk about later, they wrote a book together. And Brian, when this idea came about, well, we have all these stories internally — stories of failure in businesses, but also digging ourselves out of the ditch by applying these principles and transforming a business. We wanted to get that out to our employees so we could learn from our mistakes and learn the power of these principles. But that quickly expanded into, well, why don't we have all of our Stand Together employees and Stand Together organizations that are building nonprofits? We want them to learn from these stories as well. And then it's like, well, why don't we just open it up to everyone? That's how that got rolling into a, well, let's actually create a book out of this. But my first book, my father's fifth, right? So, but Brian said, like, look, you're going to add a kind of a second-generation approach to these principles, and the fact that I've been around these principles, frankly, since I was, I don't know, three or four years old, as you can imagine, I thought it made sense to combine that and give kind of a new flavor to the book and a two-generation approach, but also bringing new methods to the book as well. Technology — if you look in the book, there's QR codes that then give you access to videos of the last 20 years of some of the best leaders at Koch, that frankly a lot of them are retired, but they have those old stories of transformation that they tell. And then also, you know, we've got an app which we can talk about later that went with it. So anyway, I think like bringing technology, bringing kind of a new way of thinking, and that's one of our principles that my father applies very well, is about changing paradigms.
Very hard to do, right? But as leader of Koch, he applies that to himself better than almost anyone I've seen. And so it's like, well, I've written four books and I have a paradigm on the way it should be done, but if we bring Chase into this, he'll shake it up a little bit.
And so hopefully I've brought some value and some new stories and new approaches to it. But to your other question — so that's like why I was involved, but to your other question of why now, I think we got lucky on the timing of this. I think we're all facing unprecedented uncertainty, not only in business but just our lives, frankly, whether it's economic uncertainty or political divisiveness, or just a lot of — or AI disruption obviously is a big one too, and things moving so fast, that if you don't have something that helps you navigate all of that uncertainty, you kind of blow with the wind, right, based on whatever is popular or trending. And so these principles, they're called the principles of human progress for a reason. I mean, my father has studied over, you know, centuries, and you know this from knowing a good amount about Koch and being involved in this, but studied everything from philosophy to economics to what drove the most progress in different countries and what held countries back, and studying all of that and then bringing those principles that drove the most human progress into the business. Right? And then we tried to package it in a way that people could understand. But anyway, in terms of meeting the moment, we feel like it's a navigation tool and it just helps people. And I mean, look, I apply these to my kids.
You know, we talk about these at the dinner table. We apply them to sports. Like the principles apply to everyone and everything. That's what's so powerful about these principles.
I think you talked about your kids. One of the things I was laughing about when I was reading the book is you're like, 'Yeah, when I grew up, my dad would lock us in the room and make us listen to like Milton Friedman and Maslow.' But you know, at a really young age. But I will say, like, as you went through this process of writing that book, did some of those things start to click, or did it make you understand those principles better that you grew up learning?
Yes, is the short answer. But I will tell you that I was very thickheaded as a kid, and my sister — I have one older sister — and she was just absorbing these at, you know, age 12, 14, and I was always kind of the punk kid that was half asleep, you know, listening to these books on tape. But I give my dad a lot of hell because it's like, are you serious, books on tape by Milton Friedman and Walter Williams? And like as a 10-year-old, it just doesn't sink in. So I think that was a blessing in disguise because the way I learned is like you have to make this stuff fun, and you got to make learning fun. You got to motivate kids with them. So you have to gamify it in a lot of different ways. So that's how I do it with my kids. But what really unlocked it for me was in my late 20s, early 30s, all the stuff my father had been trying to teach me most of my life is when I lived it myself. And I was running our international fertilizer business and I spent a lot of time in Brazil trying to build a new fertilizer import facility, and what I thought was going to take one year to build and be in operations took five. And the reason was all the bureaucracy, the red tape, the corruption, and like trying to get in and add new technology and something that added value to farmers, all of these barriers and blockades to do it. So I'm like, this is what he's been talking about in terms of principles of human progress: it's empowerment, it's removing barriers, it's not adding and making it more difficult. You know, and so that was a big unlock, but it's because I felt it myself.
Right. It was impacting me. I wish I would have learned much earlier in life. But then the book itself, over the writing over the last two years, what I always tell people is, you know, especially at Koch, is you don't really understand the principles until you have to teach them in a way where you can confidently articulate them in a way that connects with someone, that then they can go apply it themselves and create value with it. Because when we started down this market-based management path, there was so much arm-waving and just using the words and sounding good, but a lot of people weren't actually applying it. And that's actually even worse than trying to apply it.
Because it looks good, principles on the wall, but...
It's kind of a BS culture, right? You're not really living up to the principles and the values. And so we've learned a lot, again through failure on that, of you've really got to dig in and apply them and try and experiment with them, and when you do, you can really transform.
That's actually a question I wanted to ask you because, you know, I think one of the things I underlined, principles I took away or ideas I took away, is that the principles have to be applied, right? You can understand them in theory, but if you're not acting on them, it really doesn't do any good. How — maybe dial it down because there's 41, right? So someone's like, 'We want to start acting on some of these principles.' What would be the two or three that you think are like the high-leverage, like, man, if you're going to start somewhere, these two or three principles are where you start at?
Yeah, no, that's a great question. And back to your point on a lot of people that read them or have been part of market-based management, it's like, well, this is just like common-sense stuff. But my — you know, one of my dad's quotes, and it's just, common sense isn't always — even though it seems easy, common sense isn't so common.
You know, and it's like it's really what — yeah, you can read it and say I understand it, but application to create value is a whole another level. So back to your question, I would say I'll just start with one, keep it like really simple.
The most powerful one for me that has transformed my life the most and the way I do my work is comparative advantage. And so the simple way to understand comparative advantage is really understanding what your human gift is, what you were born with, and like what gift you came to this world with. And that's different for everyone, right? We're all great at different things and we all kind of suck at different things too. But it's also this kind of double idea of understanding what you're giving up when you focus on something. And I always like to go to sports because everyone can connect to sports and it's easy to understand. Like we're both Kansas guys. I'm a Chiefs fan. I don't know if you are, but I support them. Take two different positions on the team, quarterback and wide receiver. But Patrick Mahomes and Rashee Rice — they're the best wide receiver. Maybe Rashee can throw the best deep ball. Maybe he can throw a better deep ball than Patrick Mahomes, but do you want him as quarterback because he has an absolute advantage on throwing a deep ball? Most people are like, 'Well, of course not.' And even if Patrick Mahomes is good at running routes, and he probably is, you don't want him at wide receiver because the give-up of both of them being a wide receiver and a quarterback is too great. So when you think about comparative advantage and understanding trade-offs but also gifts, you look at what can I do relative to everyone else on my team, and take their gifts into account as well to make the biggest contribution and grow the biggest pot. Right? So easy to understand in football, but when you take that into a business setting, it's much more difficult because it's almost like we have these broken paradigms of, well, I got to have the big title. I want to be CEO. I want to be VP, regardless of gift, and it just becomes this ladder-climbing exercise in business, which we call out all the time and say that is so destructive because it completely violates the principle of comparative advantage, but also Maslow's principle of self-actualization. You have a certain gift. To unlock that gift and for you to self-actualize and create the most value that you can, which also creates the most happiness, you've got to design your role around that gift.
And so imagine if in your business — how, you know, I think you said there's six or 700 in your network that you work with. Imagine if everyone was applying and dialing their role around their comparative advantage, and how powerful that could be. Or even on a small team, if you took a step back and you reset and said, 'All right, if we take into account what each of us are really great at, but also look at what the give-up is and the opportunity cost of each one of those to create the best team.' There would be a lot more business value creation, you know, across the country if we applied that, and the country would be better off, you know, at a bigger picture as well.
But we get caught up in titles and egos and how many people report to us and all that, when it's like — that's one of the reasons why I stepped away as president of Koch Fertilizer, which was the third largest business of Koch at the time, in 2014. I had a conversation with my boss around, like, look, I'm not happy in my role. I know I can contribute more on the innovation side, and I've got this other guy, Scott, that is a great operator. Let me be a builder, let him be the operator and the president of the business. And then that's making the most of the whole team, right? And the results got better in fertilizer. I went and started Koch Disruptive Technologies, a whole new platform, and everyone's better off. So I know that was a long way to unpack that, but I think that's — if you just started there and said, 'Look, we have 10 people on a team. Let's re-optimize who does what based on that principle.' Yeah, you can create some — you get some low-hanging fruit in about an hour.
What was interesting when I read the book, and Dave, my partner, and myself have always kind of acted as co-CEOs, and I would say we had a third partner, and about eight or nine years ago bought him out, and Dave and I sat down for the first time ever — you know, first 10, 12 years we're just building the company — and really took some time to talk about like where your gifts are at and where my gifts are at. And our business has skyrocketed since then because one of the things you said is like I've had to realize like I'm a great builder and I'm a terrible operator. You know, I just don't enjoy it. I lose interest quickly. So even here now, you know, I think one of the things we do — and Dave's a great operator, not that he's not a builder too, right? But like he's a great operator. But even in ROS, like my chief of staff, great operator, right? So it's like I need someone around me that I know complements that. And then I think the one — even in the book you kind of talk about people take promotions for status thinking, you know, other people are paying attention to that. Most aren't, but I think everyone who listens to this has, you know, that situation where they promoted someone who was great in the job, who was just a terrible leader, because you think that's what you're supposed to do, when the reality is like keep them in the role where they're crushing it, you know, and don't move them into that.
Well, yeah. And I think the paradigm that we need to break as a society is just because you're moving up the ladder, you have a bigger title or more people reporting to you, doesn't mean you create more value, or you're not going to get paid more either. Right? Because the way we look at it, like we've had this problem in our trading groups before where you make a great trader the leader of the trading group, and it's like they were a fantastic individual contributor and could create so much more value than that. And then as a trader, they miss getting in the trade, and then they don't develop people and make people around them better, which is the number one thing you have to do as a leader or supervisor. And every time we've done that, we've failed. So I think that's one of the biggest lessons for me over the course of my life, and that's why I only have one person reporting to me now.
Well, one of the things that you talk about in the book, but we spent a fair amount of time on it when we came down to visit there, is like — and going back to that example — how do you approach compensation? Because I think that's a unique thing about Koch, is like you're more focused on how are you adding value to the organization, not so much what's your title or how many people you lead. But how'd you figure out how to get to that solution? Because like you said, I think everyone in America has this, you know, hierarchical — like as you move up, you get paid more.
Yeah. There's a thing called the Hay system that we think is very broken, and it's based on titles and where you are in an organization, and then that indicates how much you get paid. We think that's like the worst approach that you could have, and you'll destroy your business and for sure your culture over time. So the way we do it is based on a principle of marginal contribution, and that looks at every individual and says how are they contributing to the overall whole. Now, it's much more difficult to apply that as opposed to, let's say, in a sales role: I made X, I brought in X million dollars of business, so I therefore get Y, you know, incentive at the end of the year. We look at a lot of different factors. So what do we want people motivated to do? We want people motivated to be accretive to the culture, apply the principles, and help others, right? This whole idea of anyone can be a leader even if they don't have people reporting to them. And the definition of a leader goes back to — we have this in the book — but Jack Clark, who's won more national championships than any sports coach in the history of the world, Cal rugby coach, I think 33 national championships. His definition of a leader is the same one we have: making those around you better, and that is your main focus. So how does an individual make those around them better, right? Those on their team, those that are their supervisors, those that are on the front lines. But then it's also what contribution are they making, not only in the short term — so what contribution did they make — but long-term, and this is one of the hardest things to measure. And so we cut it with an axe. We don't try to put formulas around this. And that is: are they building capabilities that will help us build competitive advantage and serve our customers better three, four, five years from now? Right? In the short term, if you just measured that, the P&L is worse, right? Because you're making bigger investments now for the future. But in the long term, if those play out, you're going to be adding NPV to the overall business. So those factors that I went through, we look at that on every individual and we say what has their marginal contribution been this year, but also what they're doing for the long term and the culture. And then we look at base and salary, and we have a kind of a shadow P&L system for certain individuals at the company as well. And then we look at total compensation for total contribution.
And it's always wrong, right? It's never a right number. But that's how we try to do our best to reward people. And I think to your point, it's very different than most companies.
Yeah, very much so. That was a big takeaway that we've tried to model. And we still got a long ways to go to get there. But okay, let me ask...
I mean, it's taking — to your point earlier, it's taking steps towards that. It's like, okay, maybe we still have some formulas around sales, but how do we bring culture into the equation? That step, right, that's a big move forward just by, you know, asking that question.
Yeah. Let me ask one last one, kind of around the book, the principles. So your father, Charles, has led Koch for almost 60 years. You've been there for 30 plus of those. I don't think people realize, I mean, during that time earnings increased 4,500-fold and the valuation increased 9,000-fold. That's just insane. As you've gotten a chance over the 30 years to kind of watch him, what is the one — like the one thing that you've really learned or taken away from him? Like, man, this is the thing that I see that he does so well.
I think it's courage and consistency. And everything comes back to principles. That's why he's written five books on it, and that's why he's dedicated his life to helping others, not only in the business, but, you know, also all of our social change things. It's the same principles that we apply. He wants to help people with principles like bottom-up empowerment. And so if he's living that example and empowering others within the company, everyone, all the other leaders see that and say, well, like, this works. And so when you obviously, you know, it starts with the leader of the organization. And if he tried to run Koch Industries with top-down, which is the way a lot of companies are run, right, the smartest guy in the room is making all the decisions, there's no way Koch would have scaled to what it is.
He thinks about himself as the chief philosophy officer, not necessarily CEO.
So that's another — so he's thinking about what's my comparative advantage. It's understanding and applying these principles, but then helping others understand them so that they can go run with them and then get out of the way. So his consistency in doing that, I'll just give you one example. Like in a quarterly business review, or we're making an investment decision and we're in the room, someone's making a recommendation to invest in a venture capital firm, for example. He is going around the room asking questions not only of the leader that's on point and accountable for the bet, but he'll go to the analyst at the end of the table and say, you know what, I think you're probably the one that's closest to the knowledge here. What do you think? Should we do this bet and how big should we make it? And so that's like — he's not the smartest guy in the room, right? He wants to leverage the full power of knowledge of everyone that's at the table. And when you lead by example, that starts to permeate through the culture. And I think that's why we've been able to do that. And that if us, you know, when my father's gone, our success will be determined on if we can still do that and have that bottom-up empowerment model, and we keep these principles alive and going and growing.
Well, you said he's not the smartest person in the room. He probably is most of the times, but I think the bigger point there is like he puts that aside because he wants to get, you know, all that input from different people. I've just — I've listened to him talk quite a bit, and he's probably the most intelligent person I've ever listened to talk.
He is. But he would tell you and look you in the eye authentically and say, 'No, I'm not the smartest person in the room on that subject.'
Like it's this group of people and I'm going to empower them. I'm going to challenge them and ask questions, but if I feel good about that bet, I'm going to let them run their business and go. And it's like — so I'll give you another example. The fastest-growing business at Koch is a company called Molex that's right in the middle of this connectors and cabling. Like we have a really good and growing business there. And that's in our healthcare, you know, devices and products that need to be connected. We're in data centers. So obviously that is growing significantly right now. So we're in the quarterly business review with those leaders, and it's not about looking at the PowerPoint and the strategy and just asking a thousand questions. He walks in and says, 'Guys, all we want to do is remove barriers for you to be successful.' So instead of going through a 40-page PowerPoint, what are the top three barriers and how can I help you succeed? How can I help you remove those? That is a much different mindset than, you know, back to the point of being the smartest guy in the room and telling people what to do.
And just to make one final point on this, like when I try to summarize principle-based management, which is the name of our culture and philosophy, and that's what's in the book, The Principles, I try to articulate it for someone that has no idea about Koch or what our culture is all about: imagine if you had a culture where people knew what to do without being told. And so I think that really sums it up. Now, I'm not saying we have that; it's perfect. But we strive for that all the time by empowering people with these principles so that it's not about having the smartest person make the decision. Spontaneous order, and people that are closest to the problem are making the decisions.
So I think that's a kind of a summarizing statement of what we're trying to accomplish with this.
It was interesting. My next question was going to be about culture. I think that was one of the things that jumped out from our visits there. I've been down there once before, too, but this time we brought our team down. It's like I always say that, and people would say...
It about here. You walk in and you can feel the culture, right? You could feel it at Koch. And I also say you can judge a lot about people by their relationships, and you know, so many people I've gotten to know, Steve pretty well, worked for Koch forever, you know, still does a ton, and just so many people have been there for so long.
