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2014-06-12 08:35:06
A fascinating peek inside a successful and idiosyncratic private company
Jun 7th 2014
KOCH INDUSTRIES, an oil, gas and commodities conglomerate based in Wichita,
Kansas, is one of the great success stories of American business, with more
than 100,000 employees worldwide and annual turnover of around $115 billion. It
is also one of its most unusual, in everything from its management techniques
to its enthusiasm for political activism to the intensity of the family feuds
which have threatened, at times, to tear it apart. Far more is written about
the Kochs political activism often somewhat hysterically than about their
business. But a new book, Daniel Schulman s Sons of Wichita , offers a fuller
picture.
Koch, pronounced coke , is America s biggest private company after Cargill,
another commodities titan. Charles Koch, the second son of the late founder,
Fred Koch, is the undoubted boss of the firm. (Insiders joke that Koch stands
for Keep old Charlie happy .) A younger brother, David, acts as a loyal
lieutenant. Two other brothers, Fred junior (the oldest) and Bill (David s
twin), have a more complex relationship with the company that has helped to
make them two of America s richest men.
Charles believes that staying private brings many advantages. Spared the
requirements for disclosure and corporate governance imposed on listed firms,
Koch can avoid tipping its hand to rivals, and think long-term while acting
quickly when it sees a bargain. Above all, it frees the group to focus
relentlessly on growth. Mr Schulman quotes an executive saying that growth is:
Our religion to make things grow to push, push, push. Charles says that it
will go public literally over my dead body.
Charles runs Koch according to the principles of something he calls
market-based management. Employees are expected to read his 2007 manifesto,
The Science of Success , and attend a two-day seminar on the theory at an
in-house academy. Its aim is to bring the efficiency of markets into the
company s internal workings. Competition between different business units and
employees is encouraged, and all workers are given broad permission to make
decisions without referring upwards.
The system is highly democratic. Koch has an unusually flat organisational
structure for a company its size. Workers can earn more than their bosses.
High-school-educated farm boys from Kansas can rise faster than Ivy League MBAs
and end up running multibillion-dollar divisions. It is also ruthlessly
Darwinian. For those who succeed, bonuses running into six or seven figures are
the reward; for those who fail, there is no hiding-place.
The Kochs are also at the heart of one of America s most powerful political
machines. Most businesspeople take a strategic approach to politics: they lobby
for special privileges and contribute to both sides of the political aisle. The
Koch brothers have ideology in their DNA. Fred senior was a leading light in
the anti-communist John Birch Society. David ran as the Libertarian Party s
vice-presidential candidate in 1980, and Charles and David helped to raise an
estimated $400m for efforts to defeat Barack Obama s re-election bid in 2012.
Critics fret about the Kochtopus the Kochs and the network of institutions
that they finance, ranging from the Cato Institute, an august think-tank in
Washington, DC, to Tea Party organisations like Americans for Prosperity.
For all the successes of Koch and its founding family, their idiosyncrasies
have brought costs. The firm has been racked by family feuds that, in the words
of one of the protagonists, made Dallas and Dynasty look like playpens.
Bill has brought a series of lawsuits against Prince Charles , accusing him,
among other things, of wasting money on political causes, paying too little in
dividends and keeping the family wealth locked up in illiquid form. In the
1990s it suffered a barrage of cases from the federal government accusing it of
violating safety and pollution laws: the book suggests that Charles s
market-based, growth-focused management may have tempted it to overlook such
issues. Charles s enthusiasm for political activism has led the public to view
the company through an ideological rather than a business lens. For those on
the left, Koch Industries stands for everything that is wrong with capitalism,
from billionaires trying to buy elections to oil barons despoiling the
environment.
Nevertheless, the company s business record has been extraordinary: it does not
publish its profits but it is a safe bet that the family can well afford the
odd billion in political donations and legal fees. Although Fred senior and his
first business partner started out trying to perfect the refining of crude oil,
Koch Industries has grasped that its core competence nowadays is not so much
the research side of the business as its understanding of how to process and
transport commodities efficiently. This encouraged it to move further beyond
its original oil-and-gas business to make, in 2005, an audacious $21 billion
bid for Georgia-Pacific, a larger public company that sells Brawny paper
towels, Dixie cups and Angel Soft toilet paper. This almost trebled the firm s
workforce and provided fuel for further growth.
The power of regeneration
Koch Industries has also demonstrated a striking ability to reform itself.
Prodded by the spate of legal suits in the late 1990s, the firm introduced a
big safety programme. Charles s corporate mantra was 10,000% compliance with
all laws and regulations , by which he meant 100% compliance from 100% of
employees. The company sold the bulk of its pipeline operations and refocused
on the far less regulated area of trading commodities and energy. It also hired
a small army of former federal-government prosecutors and regulators to help
guard the hen house. After wasting millions of dollars trying to defeat Mr
Obama in 2012, Charles and David are now applying their re-engineering skills
to their gigantic political operation. What does not kill the Kochtopus only
makes it stronger.