Charles Koch - Libertarian Billionaire

[AlanM]

Anyone ever heard of Charles Koch? He is the CEO and owner of Koch Industries, a $60 billion, 80,000 employee empire. His net worth is estimated at $14 Billion. His is the largest and most profitable privately held company in America. Koch Ind. recently took Georgia-Pacific private. They make, amonsgt other things, Dixie Cups, Stainmaster, and Brawny Paper Towels.
He is a libertarian. Among his favorite political authors are: F. A. Hayek, Ludwig von Mises, and Charles Murray.
There is a good article on him in the opinion section of the Wall Street Journal today.

[KBCraig]

While the WSJ is a subscriber only site, they publish their editorials on the free opinionjournal.com site.

So, here 'tis:

http://www.opinionjournal.com/editorial/feature.html?id=110008343

Private Enterprise
Charles Koch applied the "science of liberty" to become one of the world's richest men.

BY STEPHEN MOORE
Sunday, May 7, 2006 12:01 a.m. EDT

WICHITA, Kan.--Meet Charles Koch. Philosopher, engineer, self-trained economist, libertarian activist, philanthropist--and the CEO of Koch Industries, a $60 billion, 80,000-employee empire, which just recently became the largest and most profitable privately held company in America.

But you've probably never heard of it.

Neither Charles Koch nor his firm are household names. Mr. Koch (pronounced "coke") has managed to live in relative obscurity despite being one of the richest men on the planet, with a net worth estimated at $14 billion. He is a man of modesty who craves none of the fame or public adulation that seems to preoccupy other members of the billionaires' club.

Yet celebrity seems to intrude. On the day I visit the company's Kansas headquarters, his office is atwitter over a recent issue of Forbes magazine featuring the world's billionaires. The issue includes a glossy photo of Charles Koch smiling contentedly, and right below him on the page is a picture of a slightly better known titan: Oprah. Running in company like that is bound to bump up Mr. Koch's public profile--whether he likes it or not.

My mission, then, is to unwrap at least a few of the secrets of his success.

Back in 1967, when Mr. Koch was in his early 30s, he became the reluctant president of the family business, then a $177 million, medium-sized oil firm. He recalls: "My father threatened that he was going to sell the company if I wouldn't come back home to Kansas from the East Coast and run it."

Nearly four decades later, that family company is a global conglomerate with net annual sales that exceed the GDP of many small nations, and it includes a diverse range of businesses supplying everything from jet fuel to plastic, asphalt to beef, toilet paper to lumber. It owns many familiar brand names such as Dixie cups, Stainmaster carpet and Brawny paper towels. The firm's financial performance numbers have been positively gaudy, with a rate of return on investment that has outpaced the Standard & Poor's 500 at least tenfold under Mr. Koch's stewardship.

"We couldn't have achieved the profitability we have," Mr. Koch insists, "if we had been a public company. No investor would have been patient enough to allow us to build a firm oriented toward long-term growth and profits." This is one of Mr. Koch's bugaboos regarding the deficiencies of modern corporate management. He notes, "The short-term infatuation with quarterly earnings on Wall Street restricts the earnings potential of Fortune 500 publicly traded firms. Public firms are also feeding grounds for lawyers and lawsuits."

He then confidently predicts: "Regulatory laws like Sarbanes-Oxley will only increase the earnings advantages of private firms. I would suspect that there will be more of these private company takeovers of publicly traded companies." He's referring to his blockbuster $21 billion purchase of Georgia Pacific last November, a Fortune 500 forest and paper company.

If Mr. Koch is right about the re-emergence of private corporate structures, it is a very big deal for the near-term future of financial markets. The hyperactive trend of the past decade to take companies public may be shifting into reverse gear. The Georgia Pacific deal, which was the largest acquisition of a publicly traded company by a private firm in U.S. history, would seem to confirm Mr. Koch's thesis. "Since the Georgia Pacific purchase," he tells me, "other publicly traded companies have come calling, asking whether we would be interested in taking them private, too."

This creative forward-thinking should come as no surprise, because Mr. Koch is immersed in the ideas of liberty and free markets. Whereas the bookshelves of most of America's leading CEOs are stocked with pop corporate management and "how to succeed" books, Mr. Koch's office is a wall-to-wall shrine to writings in classical economics, or, as he calls it, "the science of liberty." The authors who have had the most profound influence on his own political philosophy include F.A. Hayek, Ludwig von Mises, Joseph Schumpeter, Julian Simon, Paul Johnson and Charles Murray. Mr. Koch says that he experienced an intellectual epiphany in the early 1960s, when he attended a conference on free-market capitalism hosted by the late, great Leonard Reed.

Mr. Koch is by training a scientist, with master's degrees from MIT in nuclear and chemical engineering. Despite his business success, he has no MBA or formal management training. Mr. Koch sees that as an advantage. "Being an engineer, I realized there's an objective reality that helps one understand the rules and conditions that improve the human condition," he says. "Laws and principles that facilitate the advancement of peace, prosperity and social progress are as immutable as the laws that work in science. . . . Politicians often come up with misguided policy solutions," he continues, "because they suffer from Hayek's 'fatal conceit' and believe they can violate basic laws of economics. They are just as misguided as the man who jumps out the 14th floor of a building convinced that he can repeal the law of gravity."

As we continue, Mr. Koch becomes increasingly animated. He discusses another seminal work in his collection, F.A. Harper's 1957 "Why Wages Rise." The book demonstrates "that wages rise not because of unions or government action, but because of marginal productivity gains--people get more money when they produce more value for other people." Then he confides, "I was so thrilled by this revelation that I had what Maslow called a 'peak experience.'"

Ideas seem to exhilarate him. This no doubt explains in part why this professorial CEO delivers "dozens and dozens" of lectures around the country to his employees on these very topics. But what does any of this have to do with explaining his company's prodigious profitability? Well, everything--he believes. Mr. Koch contends that the key insight of his business career was melding these philosophical insights about the way the wealth-creation process works into a business operating system called "Market Based Management." This system, which he has trademarked, enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit. It is intended to reward employees who think like entrepreneurs.

"Long term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs. "In this sense, maintaining a business is, in reality, liquidating a business." Mr. Koch likens the cycle to Schumpeter's "creative destruction"--where the old and inefficient are ruthlessly swept away by the new.

What we have here are the theories of supply-side economics operating on the micro-level of the firm. Incentives matter; competition fosters innovation; property rights must be firmly established. Koch Industries gives big financial bonuses for entrepreneurial behavior by employees, whether it's a project head or a janitor. The idea is to reward all activities that add to the bottom-line profitability of the firm. "We want our employees to act like owners," Mr. Koch explains. Similarly, employees earn "decision rights" for past successes. "Just as central planning is a failure in running government, so it is at the level of the firm," he says, repeating one of his favorite operating tenets.

Some of the ideas that undergird Market Based Management seem fairly commonsensical to me, and I'm not entirely sold on the notion that this program somehow represents a seismic breakaway from what is taught at Harvard Business School. Some former employees also complain that top management's absolutist devotion to MBM has created a cult-like atmosphere that can be overbearing. To succeed at the company, they say, one has to become a "Koch addict"--which means, in part, buying into MBM. Mr. Koch himself willingly concedes that the ideas don't bear fruit with everyone, and that many times employees simply "memorize and regurgitate the ideas," rather than apply them on the job. But even the deepest skeptic can't argue with the bottom-line results. Quite simply, Mr. Koch's firm has tripled in size and profitability in the last decade, among its many other achievements.

Charles Koch--no surprise--disdains government and the political class. He has invested tens of millions of dollars into free-market think-tanks and political activist groups (including several founded by this author). He's disgusted with the runaway federal budget under the Republicans, and he proposes that "every new law should be subject to the question: Will it strengthen the culture of prosperity?" Won't about 90% of the laws fail that test? "Yes, that's exactly what I mean," he replies. "But the problem isn't the people in government, it's the system--the incentives are perverse."

Mr. Koch's latest crusade to spread the ideas of liberty has been his sponsorship of a twice-yearly conference that gathers together many of the most successful American entrepreneurs, from T. Boone Pickens to former Circuit City CEO Rick Sharp. The objective is to encourage these captains of industry to help fund free-market groups devoted to protecting the fragile infrastructure of liberty. That task seems especially critical given that so many of the global superrich, like George Soros and Warren Buffett, finance institutions that undermine the very system of capitalism that made their success possible. Isn't this just the usual rich liberal guilt, I ask. "No," he says, "I think they simply haven't been sufficiently exposed to the ideas of liberty."

Sounds as though Messrs. Soros and Buffett would benefit more from sitting down with Charles Koch than I would. For my part, after listening to this natural-born teacher exalt the superiority of free markets and the boundless wealth that they can create, I feel as though I'm about to experience one of Maslow's "peak experiences" myself. But our time is up, and if Mr. Koch has learned nothing else from his spiritual mentors, it's the concept of opportunity cost. Time is money, and it's time to get back to his greatest passion of all: building the profitability of his world-class company.

[tracysaboe]

I wonder if someone like that would be interested in investing money to try and start-up helping to start up Free Market patrol and restitution services in NH?

http://forum.soulawakenings.com/index.php?topic=3275.0

Perhaps an angel like this could be talked into investing in NH businesses and supporting true freedom and the abolishion of all regulations. 

Perhaps he could even be talked into financing secession?

Or financiing libertarian candidatings in NH?

Especially if we could try to figure out a way to make such things profitable.

Humm. Anybody know anything about business and writing proposals?

TRacy

[FTL_Ian]

Wow, that guy is awesome!

I'm looking forward to learning more about their "Market-Based Management Institute". 

[Pat McCotter]

Market-Based Management

At the March 1996 Center for Constructive Alternatives seminar, "The Future of American Business," Charles Koch outlined his strategy for success called Market-Based Management. What follows are excerpts from his remarks.

The shelves of most bookstores are crowded with best-selling business books. But business owners should not limit their reading to these. They ought to be studying the classic works of Austrian School economist Ludwig von Mises. Mises championed the principles of free enterprise, and he was one of the principal sources of the ideas that changed the course of my life and that led to the development of Market-Based Management, the framework that I credit with the enormous success of Koch Industries.

Market-Based Management is based on four main assumptions. The first assumption is that today's world is characterized by an unprecedented rate of change - change driven by an accelerating accumulation of knowledge. The second assumption is that prospering in this environment requires a well-founded and internally consistent framework that enables us to interpret and apply new knowledge. The third assumption is that from both theory and history we know that the best framework for dealing with rapid change, especially knowledge-driven change, is one based on economic freedom. The fourth assumption is that this framework should also have five key dimensions: (1) vision, (2) values, (3) incentives, (4) decision rights, and (5) knowledge systems. Here I would like to focus on those five key dimensions:

Vision
Our vision controls the way we think and, therefore, the way we act. If we try to apply Market-Based Management without changing our vision and without acquiring sound economic principles, we end up doing the same old things in a different way with a different language. We change the form but not the substance. And when that happens, we don't get results.

But when we actually change our vision, we typically get remarkable results. Major improvement or growth in any of Koch Industries' businesses has always been preceded by a change in vision. The same is true for the vision our employees have of their jobs. An example - one repeated many times over-involves an employee whose job was operating one of the process units at a refinery in the past, his job primarily consisted of following detailed instructions, such as: "Turn the valve when the pressure reaches a certain level." Once the vision of his job was changed from following instructions to optimizing his unit, and he was given the information and the freedom to do it, the employee improved the performance of his unit by over 20 percent. Clearly, the vision we have of our jobs determines what we do and the opportunities we see or don't see.

Values
Change destroys jobs. But it also creates new ones. Candle-makers have been replaced by electricians and natural gas manufacturers. Blacksmiths have given way to automobile and airplane mechanics. And here is a more recent instance of how change can bring unexpected benefits: Employees at one Koch industries plant thought of so many new and better ways to improve performance that we were able to cut our maintenance force by 20 percent, or about 50 employees. But we didn't lay them off. Instead, we offered them the chance to create their own new jobs. The employees in question got together and decided to form an internal construction service group that would compete against all outside contractors. The group has been a terrific success, providing better, faster, and cheaper service. Imagine if AT&T and other American businesses that have recently resorted to massive layoffs tried this innovative, market-based approach, Who knows what new companies, products, and services they might create!

It is also possible to minimize resistance to change and greatly reduce hardship by establishing a culture based on certain core values, which is the second key dimension of Market-Based Management. Values, like vision, help determine behavior:

Humility
We must acknowledge our weaknesses, identify what we don't know, and learn from others. Humility is essential to social progress since learning begins with the recognition that none of us has all the answers. Arrogance, the opposite of humility, has been one of man's greatest stumbling blocks. As historian Daniel Boorstin notes, "The greatest obstacle to discovery is not ignorance, it is the illusion of knowledge." Columbus's voyages were delayed for years because those in power "knew" the earth was flat. More recently, many people "knew" that airplanes would never fly.

In business, arrogance is equally destructive, In the 1960s and 1970s, American car manufacturers 'knew'' what American car buyers wanted and how to make the best cars. But the Japanese had different ideas. Likewise, many oil companies in the 1970s "knew" that the price of oil was going to $100 per barrel and made huge investments relying on that certainty. As the old saying goes, it isn't so much what we don't know that hurts us as it is what we know that isn't so.

Integrity
Dealing honestly and honoring commitments are also prerequisites of social progress and economic prosperity. The trust that integrity creates lowers the transaction costs of human interaction and is necessary to the exchange of knowledge. We must face reality rather than delude ourselves. There are several factors that make this more difficult than it sounds. The first, as I have pointed out, is the role of vision in learning. Until we open up our vision of what is possible and how the world works, it is impossible for us to see reality and learn from it. Albert Einstein wrote: "Whether you can observe a thing depends on the theory [vision] you use"-not the other way around. Another factor is self-interest. We all tend to rationalize away unpleasant or threatening ideas and facts.

Intellectual honesty and truth are at a minimum in command systems. The rulers develop a vision that the truth is whatever they say it is; the ruled initially are afraid to speak their minds but soon accept the vision of infallibility of the rulers. The creation of knowledge grinds to a halt, and progress ceases. This is as true for command-based business organizations as for political regimes.

Truth should be what stands the test of evidence and criticism, not what authorities say is true. A discovery culture based on honesty, openness, and constructive challenge improves and expands our knowledge, thinking, and vision.

Tolerance
Tolerance means treating others with dignity and respect. We cannot have a civil society unless we are willing to cooperate and learn from those with different kinds of knowledge and different perspectives. For example, it is easy to dismiss folk medicine as silly superstition. But medical researchers have discovered some truth in what we tend to dismiss as "old wives' tales." People in Peru used to chew the bark of the cinchona tree to reduce the effects of malaria. Today, we know that this bark contains quinine, which, until fairly recently, was the standard medical treatment for malaria.

In business, tolerance allows us to learn from others and improve-to share and integrate knowledge. To be successful, a company cannot forego ideas and talent just because they are different.

Responsibility
Taking responsibility for our own actions - rather than blaming others or being victims - is also vital to social progress. Only if we have the self-discipline to accept responsibility for our mistakes will we learn from them.

When, in response to deteriorating business, a company blames outside forces or covers up its problems by changing its accounting methods or by using other tricks, it ensures failure. When an employee covers up or blames others for problems, both trust and knowledge are lost, and the employee fails to develop and improve.

Desire to Contribute
Making a real contribution requires passion, initiative, and dedication, It also requires the discipline to profit only by economic rather than political means-that is, by the creation rather than the transfer of wealth. Economic profits are a measure of the value created in society a sort of receipt for public service. In contrast, political profits - profits from government subsidies, restrictions on competition, or barriers to entry-are an indication of the destruction of value and of public disservice.

The same principles apply to employees as to firms. Employees must believe they have potential, that they can and want to contribute, and that they should be rewarded accordingly They must look at their jobs not as routine tasks to endure but as opportunities to contribute, develop, and grow.

Long-Term Perspective
Being willing to make sacrifices or investments to build a better future is also important. In the history of this country, immigrant families have risen from poverty largely to the extent they sacrificed by working and saving to educate their children. Learning and self-development likewise involve sacrifice and require putting a higher value on the future than on the present.

The same is true for business. To last, a company must strive to add long-term value rather than going for the quick buck. This means that its behavior must be guided by the desire for continued relations with its principal constituencies - employees, customers, suppliers, stockholders, and communities. For example, at Koch Industries, we have made it a practice to reinvest 90 percent of our profits back into our companies.

Core values build trust, stimulate experimentation, and encourage the development of knowledge. They make people want to contribute. They are reinforced by hiring, training, mentoring, promotion, and compensation. Most of all, they are reinforced by strong examples. The leaders of the companies with core values tend to practice what they preach. It is hardly surprising, therefore, that a recent study found that the companies with core values grew sevenfold over an eight-year period, while those that didn't had zero growth.

Incentives and Decision Rights
The third dimension of Market-Based Management is an incentive system that rewards accomplishment-a system that, just as for entrepreneurs in society, enables employees to participate in the value they create. To be effective, incentives must be based on more than employees' contributions to current profits. They must also consider contributions to long-term success, including contributions to our culture and our communities.

As employees contribute to long-term success, they acquire "decision rights." Decision rights, the fourth dimension of Market-Based Management,' refers to the level of responsibility and authority employees have to allocate their firms' resources. In the marketplace, when entrepreneurs contribute they earn profits that give them additional property rights - that is, the ability to direct more scarce resources. Market-Based Management attempts to duplicate this powerful market process of moving control of resources to those who successfully satisfy customer needs.

This framework provides insights that are particularly significant in a world characterized by rapid change. For instance, it has become quite common in management literature to critique top-down decision-making as inefficient. And, indeed, centrally-driven command and control corporations do experience the same type of problems as centrally planned economies, However, universal decentralization has its own set of problems. There is no question that a firm wants to capture the ideas and creativity of all its employees. But decisions should be made by those with the best knowledge, which will vary with the type of decision. For example, in the oil business, decisions on how to operate a pipeline to get the most "throughput" should be made locally, but decisions about how to integrate that pipeline with supply, sales, and trading need to be made by others with broader knowledge.

Knowledge Systems
The fifth and final dimension of Market Based Management - knowledge systems - is based on a woefully under-appreciated mechanism for creating knowledge: market transactions. In a free economy, a primary function of prices and of profits and losses is to reveal what consumers value and the availability and utility of resources. Likewise, companies must have profit signals, or "discovery measures," so that employees can see what creates value and what doesn't. just as for entrepreneurs in society, these will expand employees' vision, change their thinking, and enable them to make new discoveries. And they must include contributions to the whole, not just to one part. For example, measures that track the cost of failures in reliability including lost profit from "down time," loss of credibility with customers, and environmental and safety problems, provide employees with a vision that is vastly superior to the typical one of controlling maintenance costs.

But, as important as knowledge systems are in bringing to bear the best knowledge, they won't work unless decision-makers possess core values. Modern technology transmits information with incredible speed, but that doesn't do much good in a culture that stifles learning. Anticipating or even keeping up with rapid change requires the effective integration of knowledge, and that can only be done in an open, sharing, and adapting culture. From our efforts to apply this integrated framework at Koch, we have anew vision of employees. In this vision, employees don't have jobs; rather, they have a set of rights, responsibilities, and rewards that enable them to best contribute.

Helping People
What Market-Based Management' is all about is helping people fulfill their potential. It is about helping everyone develop the vision, values, and desire to better their lives by making a contribution. It is about enabling people to do good by doing well.

As you might suspect, understanding and implementing Market-Based Management is not easy, and we at Koch industries are far from where we want to be. In fact, I would say that we are about a "4" on a scale of 1 to 10. But even that modest progress has enabled us to grow over one hundred-fold in the last 30 years and to be growing and hiring today while many of our competitors are shrinking and laying people off.

And Market-Based Management is not just for large companies or even for adults. As we have learned in our work with at-risk high school students, everyone has the potential to develop and contribute. One of the students in our Young Entrepreneurs program, April Sheldon, says:

"When I was younger, I had some people tell me there were certain things I couldn't do because I already had three strikes against me. I was black, I was female, and I didn't have any money. I don't believe that anymore .... Now I know that I can become financially independent if I apply the entrepreneurial concepts I have learned and if I work hard."

April's path is open to everyone, given the right environment. We have the opportunity to help create that environment and to clear that path. I have taken this as a personal challenge and welcome those who would like to join me.

Charles Koch
Chairman and CEO, Koch Industries



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As chairman and chief executive officer, Charles Koch had presided over the dramatic growth of Koch Industries. Under his leadership, this energy-based firm has grown from $177 million in sales in 1966 to over $20 billion today, and it ranks as the second largest privately held company in America. At the time of the original publication, Mr. Koch was dedicated to developing Market-Based Management, an approach that draws insight from the productivity of the free marketplace. He has helped establish centers to study Market-Based Management at the University of Kansas and George Mason University. His commitment also carries over to his philanthropic interest, which include funding programs that apply market solutions to social problems. He was an instrumental in founding the Cato Institute and Citizens for a sound Economy. He served as chairman of the board of the Institute for Humane Studies and the Center for Market Processes.
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Reprinted by permission from IMPRIMIS, the monthly journal of Hillsdale College. August 1996, Vol. 25, No. 8.

[KBCraig]

Way back when I managed a full service restaurant, I tried to implement a similar plan. It wasn't my original idea; I'd read about it elsewhere, but it made complete sense to me.

The idea was to give each server ownership of her tables, freeing her to do what she needed to do to make customers happy. So long as it made money, that is -- "free food!" would make them happy, but it would defeat the purpose. I wanted them to be able to "hire" busboys to keep their areas cleaner and ready for more customers, or not -- they should bus their own tables and keep their money when business is slow. The mindset I wanted to discourage was "it's someone else's job" to do this or that. Instead, I wanted them to attack the job knowing that everything in their section was their responsibility, and if they wanted to make money, they'd make things work.

I couldn't get it past my bosses, though. Everyone was too focused on the traditional workflow, where cooks cook, servers serve, busboys bus, and managers wander through and check on people, and adjust tickets if someone's unhappy.

The best servers did it anyway, though.

[Pat McCotter]

My brother did this on his own at a restaurant. He shared his tips with the busboys and the cooks. The tables were cleaned quickly after guests left and food was ready quicker for his tables. He asked for the section furthest from the kitchen. He would then help folks in other sections in his travels. They tended to ask for his section when they returned.

[Lex]

You should try to get this guy on your show Ian.

[Atlas]

He could fulfill the AMP program's monthly goals by himself. Ant the FSP budget for the year. Could ya lend a hand.

[FTL_Ian]

Oh, the fun we could have...

[Dreepa]

He could fulfill the AMP program's monthly goals by himself. Ant the FSP budget for the year. Could ya lend a hand.

I wouldn't want him to fund the FSP nor do I think he would.  I am sure he wants results. Maybe he would pay $x if the FSP could recruit N people in a month...

Now that is an idea.

[AlanM]

He could fulfill the AMP program's monthly goals by himself. Ant the FSP budget for the year. Could ya lend a hand.

I wouldn't want him to fund the FSP nor do I think he would.  I am sure he wants results. Maybe he would pay $x if the FSP could recruit N people in a month...

Now that is an idea.

Why is it that some people expexct others to pay for things they want?
I posted the original article to let people know there are successful Libertarians out there. I was hoping folks might take the effort to learn more about his company and to maybe try to buy his companies products, rather than products from statist supporting companies.

[Tunga]

people helping people.

If only tunga could type.

the werld would be saved.

Just kidding.

Know what U mean KB.

Did you know that coffee  Kupps are best kleened with salt?

[tracysaboe]

Or perhaps maybe we could learn from example and become billionaires ourselves.

Tracy