Koch Brother Shares Good Ole Fashioned Business Sense
By Leslee Kulba- Henry Ford had ideas about good profit. He paid his employees extremely well, but not so well as to have to price his cars so expensively that nobody would buy them. He knew by paying well, he was enabling employees to buy his cars. He didn’t go into business to maximize profit, but to make the world a better place. That was in an era when ethics and high moral standards were cherished. Ford had lots of common sense, and he spoke bluntly. But like all of us, Ford wasn’t perfect. On matters of religion, he harbored some primitive and unenlightened biases. And, sadly, rather than weighing each precept on its own merits and rejecting the bigotry, which some sources say he recanted, today’s logic teaches to throw the baby out with the bath water and dismiss Ford’s business sense. The same unreasonable tack is applied by those who teach we must eschew limited government and separation of powers because Thomas Jefferson owned slaves.
The good news is, Charles Koch has just published a book that reads like rapid-succession flashbacks to Ford’s writings on business being an ethical means to raise everybody’s standard of living through service and respect. Koch is one of the Koch brothers, the name alone supposedly fearsome enough to ward readers off. Hot off the press, Good Profit was dismissed because it was claimed that Koch was a huge crony capitalist. This Koch denies. He says he plays the game inasmuch as it is law, but he tries to avoid it otherwise. Either way, this review is not intended to put anybody on trial, but rather to weigh the merits of what is written. After all, the Bible teaches that we’re all sinners, while also instructing us sinners to preach the Word.
Reasons to believe Koch’s claims about accepting corporate welfare as a necessary evil, while figuratively holding his nose, include his views on two ways to turn a profit. In the opening pages, he defines good profit as, “creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity. Good profit comes from making a contribution in society – not from corporate welfare or other ways of taking advantage of people.” He adds, “Bad profit comes from disrespecting customers by making them subsidize our business with their tax dollars and higher prices, siphoning away the good profit other companies could have earned.”
Good profits are achieved through economic means. Economic profits are achieved by converting existing materials into items people want. They require hard work and innovation. Koch describes the ongoing process as aggressively producing better goods and services at lower costs. Bad profits are achieved through political means. Political profits include, “special tax breaks, import tariffs, restrictions on exports, mandates, anticompetitive regulations, and bailouts – including those that would seem on the surface to be beneficial to us.” Koch explains, “Corporate welfare relieves recipients of the constructive pressure to innovate and create value for society, hinders the unsubsidized competition by coercion, and limits the choices available to consumers.
Like F. A. Hayek before him, Koch views free trade as an amazing tool that, using prices as instantaneous signals, organizes economies with spontaneous order having higher standards of living than top-down, planned economies can achieve. Welfare programs deprive individual recipients of the satisfaction of contributing, and absolve corporate recipients of the responsibility to contribute meaningfully. The bills can be paid in spite of abysmal sales. When one corporation accepts welfare, the economy becomes less robust because its employees lose incentives to innovate, and money is withdrawn from more innovative sectors to subsidize the stagnation.
Koch’s parents instilled in him a serious value system stressing, but not limited to, “integrity, humility, responsibility, work ethic, entrepreneurship, thirst for knowledge, desire to make a contribution, and concern for others.” His dad, Fred, who started the family business, left a note for Charles in his safe deposit box with the insurance policy to be applied to his education. It read, “You can use it as a valuable tool for accomplishment, or you can squander it foolishly. If you choose to let this money destroy your initiative and independence, then it will be a curse to you, and my action in giving it to you will have been a mistake. I should regret very much to have you miss the glorious feeling of accomplishment, and I know you are not going to let me down. Remember that often adversity is a blessing in disguise and is certainly the greatest character builder.”
Koch Industries grew from a $21 million company in 1961 to a $100 billion enterprise in 2014. Employing over 100,000, it is now the second largest private company in the United States, and it has a presence in over sixty countries. A brief sampling of Koch Industries’ offerings includes high-quality fuels and biofuels, healthier crops, more comfortable jeans, touchless hand towel and soap dispensers, more-absorbent and better-fitting baby diapers, more durable carpeting, and smaller and lighter cell phones. Through the years, the company has navigated vicissitudes in geopolitical changes, volatility in oil prices, revolutions in technology, and accelerating volumes of regulation and litigation. During the recession, when many companies went scrambling for porkulus, Koch more than doubled shareholder equity and increased its workforce more than 40 percent. It did so by upholding its principles. “We don’t lobby the government to mandate or subsidize what we’re selling. That creates bad profit,” wrote Koch.
But Koch is quick to share all has not been successful. He refers the reader to Appendix B for a list of failures, which weren’t really failures, but, he says, activities that could be better run by somebody else. As Koch took the reins of the family business, his father advised, “I hope your first deal is a loser; otherwise you will think you’re a lot smarter than you are.” Koch stresses the importance of experimentation as a way of containing failures. Taking calculated risks through scientifically-designed experiments, can be a process for learning incrementally not only about what systems will function, but what products consumers will buy. Koch describes the ideal business as a collaboration of experimenters. It is imperative that everybody in the business, and not just managers, use their brains to reason and innovate.
Companies should be organic and responsive to change. Koch illustrates how silly it would be to hold on to old technologies, and also provides examples of government granting crony favors to prop up businesses on crumbling foundations long after the public has – or but for government would have – moved on to newer and better things. People got excited about fiber optics, voted with their purchasing power, and made copper cables obsolete. For whatever reasons, the same has not yet happened with solar cells.
Whereas Austrian economist Joseph Schumpeter’s creative destruction sets individuals back short-term, society as a whole enjoys an improving standard of living as better goods and services become available and affordable as swiftly as possible. By imposing top-down command-and-control, governments slow progress. Koch observed that Venezuela, though rich in natural resources, after fourteen years of socialism is now rationing food, electricity, water, and other necessities.
Koch’s father taught him to fear communism, as it stifles individual genius as it attempts to coerce a more perfect societal order. Fred had had spent time in the former Soviet Union, building industrial plants while Stalin was “purging almost all [Fred’s] Soviet counterparts along with tens of millions more of his own people.” Fred described the former Soviet Union as “a land of hunger, misery, and terror.” By imposing prices top-down rather than letting traders set their own values, the USSR became famous for surpluses and shortages, and products designed to fit prescribed prices and quotas, rather than functionality and customer preference. Among many from which to choose, Koch tells the story of big, bulky nails made to satisfy weight quotas.
Charles Koch encountered more economic distortions caused by government at a young age through corporate lawsuits, one of which involved a bribed judge. Following that, Fred advised, “Never sue. The lawyers get a third, the government gets a third, and you get your business destroyed.” The family was further hit by two federal excess profit taxes, and as his father aged, the company was hesitant to invest in growth for fear of inheritance taxes.
Then again, elected officials aren’t the only little tyrants that force businesses to make poor economic decisions. Petty tyrants, like scum, have a way of rising to the top. Koch says people who don’t catch the vision of everybody working intelligently to streamline the production of better items need to be let go. Managers who don’t believe this shortcoming rises to the level of triggering termination have to go, too.
But sometimes employees become slaves to management du jour. Some dysfunctions Koch mentions include having a decision-making framework that is too complex. It is not uncommon for divisions or other companies trying to adopt Koch’s recommendations for corporate governance to formalize a program, in detail, with repercussions for compliance infractions. In these cases, the structure is so complex and/or rigid it defeats the purpose of encouraging all people to participate creatively and meaningfully. Sometimes the forest gets lost for the trees, and rather than using the system as tool to empower people, people become tools to serve the system. The means become the end.
In trying to implement Koch’s commonsense strategies, some groups have even developed a specialized cult of buzzwords. Koch says slogans confirm what employees already suspect, that management doesn’t know what it’s doing. Another form of corporate fru-fru is charts and graphs. Koch recalls having a problem with his engineers being more absorbed in making charts than solving engineering problems. He was dismayed to discover they were spooking up what they disparagingly referred to as “charts for Charles” because they knew the boss man liked charts. More accurately, he liked charts, and all other things, provided they led to better products made smarter.
The private sector also has a way of evolving its own bureaucracies. When people aren’t challenged to be brilliant and wise, they can slip into automatic mode. “We all tend to become complacent, self-protective, and less innovative as we succeed,” wrote Koch. He contrasts quality guru Dr. W. Edward Deming’s continuous improvement commitments to Schumpeter’s creative destruction. People can waste their time continually improving superfluity on a piece of junk instead of scrapping it to altogether add functionality to high-demand items.
“Deep-seated habits are the result of neurological pathways in one’s brain that are extremely difficult to eliminate and replace. That’s why culture is so hard to change. And it’s a big reason why businesses stagnate and their employees adopt a herd mentality.” Koch’s system, “emphasizes principled entrepreneurship over corporate welfare, virtue over talent, challenge over hierarchy, comparative advantage over job title, and rewards for long-term value over managing to budgets.”
Lastly, Koch wants the reader to remember why people go into business. It’s for the customer. Sam Walton said, “There is only one boss – the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
Koch recalls an incident when Sterling Varner, a former president at Koch, “erupted.” Certain employees were gloating about the way they had taken advantage of customers, when Varner interrupted. “Stop it! You boys are way out of line! Our customers are our friends. They are the ones that keep us in business. And we don’t make fun of or laugh at friends. It’s not right. And if we continue doing it, we won’t have any friends and we won’t have any business. If we’re going to have friends and business, we have to build trust by treating them with respect.”
Adam Smith was more flowery in describing the purpose of business. “That to feel much for others, and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and prosperity.”