Business Model Spotlight: Koch Industries Chairman and CEO Charles G. Koch

What is the biggest misconception that people have about Charles Koch?

Hardly skipping a beat, Koch, the 80-year-old chairman and CEO of Koch Industries and self-made billionaire along with his brother David; tied for the fifth wealthiest person in America, worth a reported $82 billion combined, responds with: “That we’re trying to destroy democracy in this country, out of greed.”

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Wichita, Kansas-based Koch Industries, with $115 billion in annual sales and a valuation of more than $100 billion, is America’s second largest privately-held company, employing more than 100,000 people worldwide, about 60,000 of those in the United States. Koch joined the company, then owned by his father, Fred Koch and valued at $21 million, in 1961, and at his father’s passing six years later, was named chairman and CEO of the company.

Today,  the company is behind innovations enjoyed by virtually every consumer, including stain-resistant carpet, stretch denim jeans and the connectors in your smartphone, though the Koch name is not found on any of these products. Over the past five decades, Koch Industries has exceeded the growth of the S&P 500 a mind-boggling 27-fold, and plans to double its value on average every six years.

Yet, despite this amazing track record of business performance, the Koch brothers are far better known for their influence and positions on political issues and economic policy than for their formula for business success. Charles Koch’s causes range from efforts to eliminate corporate tax breaks, subsidies and other benefits to “crony capitalists” and reduce regulations hampering neighborhood businesses, to supporting youth entrepreneurship education and criminal justice system reform. With a huge network of wealthy conservatives, Koch is positioned to leverage hundreds of millions of dollars to finance his agenda, including supporting political candidates.

Of course, none of this has made him popular  in liberal circles–especially among Obama supporters. For his part, Koch (who has stated that he is not a Republican, though he disagrees with the agenda of the Democrats), accepts accountability for misconceptions of his motives, pointing to his disinterest, until a couple of years ago, in responding to his critics and investing in corporate communications efforts.

It is in the spirit of Koch’s new thinking on proactively communicating his ideas and the values of his company, and with the release of his new book, Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies, that Koch Industries granted an exclusive interview to BlackEnterprise.com. The objective: to discuss the market-based management framework to which he credits the remarkable growth of his company, and which he offers as a success model for other entrepreneurs, and to share, in his own words, the values–including “principled entrepreneurship”–that drive his deeply held beliefs as both a citizen and a CEO. In his exclusive 90-minute interview with Editor-at-Large Alfred Edmond, Jr., he shares his success practices and philosophies.

Here are excerpts of that interview:

BlackEnterprise.com: Why did you write your latest book, Good Profit? What do you hope to accomplish?

Koch:  My goal is the same as the one for my first book, The Science of Success, but Good Profit is a much better book. I was fortunate enough to learn some principles and values that enabled me to accomplish things I never dreamed I could. So my goal now is to give as many other people as possible the opportunity to learn these same ideas and values, in the hopes that it will help transform their lives as these ideas did mine.

Probably the first thing in my life was that I had a father who was as tough as possible; that saved my life. The first thing was, he announced he didn’t want his sons to become country club bums. He started having me work during all my free time at age 6. I was digging dandelions in 100-degree heat, and bailing hay. Then I graduated to milking cows, and shoveling out stalls, digging ditches, hauling steel around; whatever dirty job was out there, he wanted me to do it.

What did I learn from that? See, I think people think, ‘Oh, to be educated, you’ve got to go to this college, or study this.’ No, people learn so much by having a job–any job, and particularly, dirty jobs. That is an education, and you find that people who don’t do that–let’s say they get to be 40 and they’ve never worked like that; they probably never will be able to productively work. So what do you learn? Well, you learn discipline and you learn, ‘this is hard dirty stuff; I want to be as efficient as I can.’ So you learn to improve, and think of better ways to get the work done. Then you learn to cooperate with others, the others working with you; so you learn mutual benefit. If I help you, you’ll help me, and we’ll get this hard, dirty work done more quickly and efficiently. So it builds tolerance and civility and teamwork.

Then, you learn: Okay, who is the customer? As a kid, you don’t think in those terms, but ‘who am I trying to please here?’ So you learn you’ve got to do that. I had to please my father, which I didn’t do a lot.

Read more on Koch’s business acumen and savvy on the next page …

But you knew that was the standard, at least.

Oh yeah, I knew it. Those are all things you learn

when you have a job to do; whereas, if you don’t have that, you don’t learn those key values and discipline. People say, ‘Oh, this is a dead-end job, don’t get that.’ Well, the real dead-end is being unemployed, because you never learn these lessons and develop these habits. The studies show, by the time you’re 30-something or 40, if you don’t have them, your odds of being successful are just about nil.

I have the letter that my father wrote to me and my older brother, that I found in the safety deposit box after he died. The main thing is he wanted us to experience the glorious feeling of accomplishment. That’s what I think people forget in a company, or anywhere; that people have to have meaning in life. The best meaning is helping others improve their lives. Doing so benefits you and them; it’s a system of mutual benefit.

So we’ve got to spread this idea of what we call principled entrepreneurship: to succeed by helping others improve their lives. The more good you do for others, the better you feel about yourself. That’s what I call a transformation. Once somebody

gets that idea, it’s transforming. Okay, so that was the first thing: learning to work. Next, you don’t preach anything to your kids that you’re not willing to live by, because your kids can spot hypocrisy about a million miles away.

Then I’d say the next thing–and I have no idea how to teach this, but I think in my case it was critical: I always wanted to be different. I asked my father, I said, ‘Pop, why were you so much tougher on me than my younger brothers?’ And he said, ‘Son, you plum wore me out.’ Because I was ornery, always trying to do something different. I didn’t want to be like the other kids. I didn’t want to go run with them. I have no idea why, but I think that’s critical to be a successful entrepreneur. You want to go figure out something that others aren’t providing, or provide it in a different way.

As you say in your book, everybody has their codes and values. It’s one thing to have a business model and a code of conduct; it’s another thing to figure out how to integrate that into your organization top down. What does an entrepreneur need to focus on in order to implement market-based management of his or her business?

Okay, the first thing I believe, is to not start out with: ‘Okay, how do I make the most money?’ If you start with that–’Boy, I want to maximize profits’ –that may work on one deal.  But if you want to be successful over a long period of time, you need to start with: ‘How do I create the most value for others? How do I help other people improve their lives?’

We have ten guiding principles made up of three parts. The first part [is comprised of] the first two principles: integrity and compliance. I would put keeping people safe and protecting the environment in there.

In the book, you explain how you go beyond teaching the importance of safety and compliance in particular, not just by drilling employees on rules and procedures, but allowing them to experience the emotional and psychological consequences that result when compliance failures lead to a devastating accident and loss of lives.

Absolutely. We’ve learned that we can’t just say, ‘Gosh, we had three deaths this past year; that’s terrible.’ No, we now make videos of the people who worked with [those involved in the accident], with tears in their eyes, saying, ‘Oh, it’s the worst thing that ever happened,’ and then send that around. These are real people talking.

 Not just numbers.

Not just statistics. You have to learn how you can reach people’s hearts and values with this. The first two principles: integrity and compliance, we view as the necessary–but not sufficient–conditions for long-term success. The sufficient condition is number three, value creation. People would ask, when I explain this: why do you need 10 principles, when you say the first three are the necessary and sufficient ones? Because the other seven [principled entrepreneurship, customer focus, knowledge, change, humility, respect, fulfillment] are the values that people have to have to make those first three a reality. Otherwise, it’s just on paper, and form over substance. These principles are who we are as a company and they guide everything we do; who we hire, who we retain, who we promote, how we compensate people. It instructs everything, and if someone isn’t living by these–I mean we’ll try to help them if it’s because they misunderstand. But if they just don’t think these principles are important, they can’t last here.

The 10 guiding principles and your market-based management philosophy, and the value of principled entrepreneurship in particular, are not only integral to the operational culture of Koch Industries; they also drive the causes you champion outside the company, in the broader political and economic arena, such as prison reform and your youth entrepreneurs non-profit. Why are these issues so important to you?

We have a society that’s destroying opportunities for the disadvantaged and creating welfare for the wealthier. That’s driven, in my view, by some misguided policies; one result of which is creating a permanent underclass, and then it’s also crippling the economy and corrupting the business community.

How do we select issues? We work on those things for which we can get broad-based support. Otherwise, it’s tilting at windmills. Where we want to put most of our efforts is where people are starting to see this is an issue and we can get broad-based support, like we have on criminal justice reform. Koch Institute is going to be [a] leader in that, but so is Koch Industries. The next issue is poverty-causing regulations, and at the top of that list is occupational licensure.

More  from Koch on reform and community issues on the next page …

Such as barber shops.

Yeah. Barber shops, interior decorators, yoga instructors, hair braiders. In one community—I forget where it was— you had to study hair dressing for two years and it costs thousands of dollars. It’s ridiculous. It’s all cronyism because the people doing the business want to keep out all these eager young people, so they can charge a higher price. Besides destroying opportunity for the disadvantaged, it raises the prices of all these services. So it hurts everybody, particularly the least well off.

Another is to reform (which is really tough) and supplement the education system. That’s what we’re trying to do with Youth Entrepreneurs and our support for the United Negro College Fund. We’re working with various people who have been organizing and know how to get people active.

How would you advise an entrepreneur who might read Good Profit or read this article and decide they’re going to drink the market-based management Kool-Aid. What are the biggest obstacles in their companies that they’re going to need to be prepared for when they try to implement the system?

The first thing is: Physician, heal thy self. The tendency with any of this, as with any management system, is to make a cookbook out of it, to have a process: ‘I’m going to have a checklist.’ That’s the way we started here. What you find is that then people become good at talking about it, but not really implementing it. You’ve got to go beyond just the words and the procedures. You’ve got to internalize the fundamental principles. What are these fundamental principles and mental models to internalize them? And then think, ‘Okay. How do I apply these, not as [an intellectual exercise], but as a way to help me create more value?’

From your seat as the chairman and CEO of the company, how do you manage the balance between your “North Star”–your guiding principles as a person and a business leader–and how you’re perceived, whether it’s here in Wichita or around the country?

It isn’t a problem, because I’ve been committed to these values for over 50 years. As I say, they transformed my life, so they are my life. No one’s going to push me away from that. One of my favorite quotes is from Frederick Douglass: Stand by those principles, be true to them on all occasions, in all places, against all foes, and at whatever cost. Just like Douglass said, I’d rather die for something than live for nothing.