Readings — From the August 2019 issue

Charles in Charge

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From Kochland: The Secret History of Koch Industries and Corporate Power in America, published this month by Simon and Schuster.

Every quarter, the business leaders from Koch Industries’ various divisions came to the headquarters in Wichita to report to Charles Koch. When it was time for such meetings, Charles would rise from his desk and walk across the small lobby into the boardroom, where the senior leadership team was seated around the large circular table. The boardroom was still spartan in its decoration. The puffy leather office chairs were unremarkable. The only extravagance was the leather coasters placed at each seat at the table, emblazoned with the company logo. Extra chairs lined the outside wall of the windowless room, providing seats for any support staffers.

Charles Koch sat and listened as his business leaders explained their most recent quarter. He interrogated them and looked for soft spots in their presentations. It was always understood that chaotic market forces were slamming against their front door and that everyone would be accountable for their reactions. If a division lost money, the division’s president needed to provide a detailed vision for regaining profits over the long term.

In 2018, as Koch listened to the division heads make their presentations, he oversaw a corporation that seemed to vindicate his every belief. Entire, massive, profitable units of the company had not even existed in 2000, when Koch had launched a turnaround effort after various company disasters in the 1990s. The building-materials company Georgia-­Pacific, for example, was generating over $1 billion in annual profits, on average. The Koch Fertilizer division, the result of one risky bet in 2003, was delivering billions in revenue each year. Koch could make the case that his company wasn’t just perpetually growing but perpetually transforming as well, entering new industries, abandoning the old, always searching for the next opportunity, and bolstering these experimental efforts were the reliable cash cows. The Pine Bend refinery, still refining cheap crude and selling expensive gasoline, throwing off cash around the clock. And now Corpus Christi, repeating the same trick thanks to the fracking revolution. And the trading division, still selling derivatives, still trading in markets where it had an unparalleled view into real-time shipments and inventories.

Charles Koch’s beliefs would have been validated in another way during these meetings. Senior leaders at Koch Industries phrased everything they said in the vocabulary of Market-Based Management (M.B.M.). One of Charles Koch’s indisputable accomplishments over the preceding thirty years was creating an organization where every employee publicly subscribed to the intricately encoded philosophy he created. Division heads who came to Wichita spoke in terms of mental models and discovery processes and the “five dimensions.” They talked about integrity. Decision rights. Challenge processes. Experimental discovery. Virtues and talents. These weren’t dog whistles. They were the internal vocabulary of Kochland. Learning them was the first condition to winning a seat at the table. Downstairs, on the first floor of the Tower, the hallways were lined with classrooms where new recruits sat around circular tables during daylong learning sessions, memorizing this vocabulary and learning the rules of M.B.M. As Charles Koch himself put it, the new recruit either subscribed to this philosophy entirely, or they left Koch Industries. There was no halfway.

The real-world verdict about M.B.M.’s efficacy was less clear than Charles Koch’s faith in it. In 2018, as Koch listened to a parade of business leaders describe their operations, there were signs of trouble within Koch Industries. If M.B.M. really was the code for achieving prosperity, then prosperity was necessarily an uneven and volatile thing.

For example, Invista, a fiber and resin company, was deeply troubled. Depending on one’s point of view, the Invista acquisition in 2004 was either a disappointment or a disaster. In the spring of 2018, the Invista wing of the Koch Industries headquarters was like a ghost town of empty cubicles. In 2017 alone, Invista cut fifty-two jobs in Athens, Georgia, sold a plant in Tennessee, and sold another one in Derry, Ireland. It seemed that M.B.M. couldn’t fix whatever ailed Invista and the global market in synthetic fabrics. Similarly, M.B.M. seemed inadequate to reduce workplace injuries inside Georgia-­Pacific. The injury rate fell slightly during the first few months of 2018 but remained at the elevated levels that began in 2012. Jim Hannan and his team were still trying to solve the problem, but it stubbornly persisted.

There were also signs that Koch Industries, in spite of strict adherence to M.B.M., was repeating some of the mistakes of the 1990s. The company’s acquisition spree had once again saddled it with wildly diversified units that seemed like unnatural fits with one another—glass, steel, computer sensors, greeting cards, and advanced fertilizers, all under one roof. Molex, the microchip and sensor company acquired by Koch in 2013, was already delivering mixed results. In 2017, a Molex plant in Minnesota laid off 136 employees.

The economy itself was shaky in the spring of 2018. The stock market swung wildly, rising and falling with volatility that hadn’t been seen in years. There was speculation that the economy had overheated, thanks in part to the kind of government intervention Charles Koch despised. The Federal Reserve had kept interest rates at zero for several years after the crash of 2008, pumping global markets with easy money. This was compounded by quantitative easing, which essentially pumped more than $3.5 trillion of new U.S. dollars into the economy. If this radical monetary policy had caused asset bubbles to appear in different pockets of the U.S. economy, those bubbles might soon pop. When that happened, Koch’s corporate structure would be tested in ways it hadn’t been tested in a decade. The weaker divisions might suffer massive losses.

If the economic future was uncertain, Charles Koch seemed supremely calm during the winter and spring months of 2018. There might be layoffs. The company might have to sell some divisions at fire-sale prices. But the Koch Industries entity, the core business that executives referred to as KII, seemed impervious to failure. There was simply too much cash in the company, and too little debt, to envision it going under. Koch’s bread-and-butter assets—the oil refineries, the fertilizer plants, the paper mills, the commodities-trading desks—were part of the machinery that provided life’s necessities. People would buy gasoline and fertilizer during any recession, and it was unlikely that big companies could swoop in and build multibillion-dollar facilities to steal Koch’s share of the business. Koch’s business was also protected by a masterfully constructed corporate shell, a massive, multichambered legal nautilus that walled off various parts of the company from one another. Divisions could fail and be sued, but the damage would never penetrate to the heart of KII.

Charles Koch had other reasons to be supremely calm during 2018. If Koch Industries was resistant to bankruptcy, then Charles Koch was outright immune to it. If ever there was evidence for his faith in his own abilities, and the power of M.B.M., then it was in the size of his private fortune.

In 1991, Fortune magazine estimated that Charles and David Koch were worth a combined $4.7 billion, putting them among the wealthiest people in the world. This sum was the estimated value of Charles and David’s roughly 80 percent ownership stake in Koch Industries, which the brothers split evenly. The policies of the Clinton presidency did not diminish this fortune. During the 1990s, the Koch family’s net worth almost doubled. In 2002, Forbes magazine estimated that Charles and David Koch were worth a combined $8 billion. That fortune exploded during the Bush years, against a backdrop of growing government, uneven economic growth, and overseas military campaigns. By 2007, Charles Koch alone was worth an estimated $17 billion. He and David were worth a combined $34 billion, behind Warren Buffett and Bill Gates. During the Obama years—the years when Americans for Prosperity, the brothers’ advocacy group, warned repeatedly about the threat of creeping socialism—Charles and David Koch’s fortune more than doubled once again. At the end of the Obama administration, Charles and David were worth a combined $84 billion, a fortune larger than that of Gates, who was then worth $81 billion. By 2018, Charles Koch’s net worth alone amounted to $53.5 billion.

Charles Koch was so rich in part because he fought so hard, for so many years, to keep his company private. The vast majority of Koch Industries’ ownership wasn’t spread among thousands of shareholders, but only two. The employees at Koch Industries—including its senior executives—could not earn a real equity stake in the firm, no matter how hard they worked. They earned, instead, the right to shadow stock, essentially a derivatives contract based on the company’s performance. They also earned one-time merit bonuses.

This ownership structure, while rare in corporate America, reflected the U.S. economy in 2018. Charles Koch’s household was part of an exclusive club—about 160,000 households in the wealthiest 0.1 percent of the population. This group prospered just like Charles Koch. In 1963, the top 0.1 percent of households possessed 10 percent of all American wealth. By 2012, they possessed 22 percent. This gain came as the vast majority of Americans lost ground. The bottom 90 percent of Americans possessed about 35 percent of the nation’s wealth in the mid-1980s. By about 2015, their share had fallen to 23 percent.

The American labor market resembled the labor market inside Kochland. For more and more Americans, employment and income were now contingent, temporary, and reflective of the swing of market conditions. Labor unions, which had shielded workers from financial volatility for decades, were a negligible sideshow on the American economic scene. At the Pine Bend refinery, militant unions like the O.C.A.W. (Oil, Chemical, and Atomic Workers’ Union) were artifacts found only in history books. Even the modern, relatively powerless unions like the Inland Boatmen’s Union at Georgia-Pacific in Oregon were vanishingly rare. Full-time jobs were increasingly replaced by contract jobs and part-time work. Pensions were replaced by 401(k) plans, whose value rose and fell with the markets. Pay was not steady and was increasingly tied to bonuses rather than annual raises. Across the United States, the ownership of wealth reflected the ownership structure of Koch Industries. The vast majority of Americans owned shadow stock in the American enterprise.

This disparity in American wealth also reflected the disparity in political power. The rich and well connected shaped policy in America. It helped, in 2018, to have several hundred million dollars and a large lobbying office at your disposal, coupled with think tanks and a grassroots army, to have your policy preferences recognized. In 2014, a group of political scientists at Princeton studied the policy outcomes on 1,779 issues between 1980 and 2002. They found that no group in the United States had a surefire hold on policy making. But the rich—a group they called the “economic elite”—had, by far, the best chance of turning their policy choices into reality.The second most powerful entities were special-interest groups such as lobbying organizations, which had a lower success rate than the economic elite but still held significant sway. The impact on policy outcomes of median-­income Americans—whose preferences the study found reflect those of the majority—was “near zero.” The study concluded, succinctly: “When a majority of citizens disagrees with economic elites or with organized interests, they generally lose.”

In many ways, however, politics were a sideshow for Charles Koch. There was another, more important, campaign under way for leadership within Koch Industries. After Charles’s son, Chase Koch, took himself out of the fast-track lane to become CEO, something like a three-way race emerged to select Charles Koch’s immediate successor. There were three executives who seemed primed to take the job, and Charles Koch could evaluate each one as the business grew.

The contours of this race were defined in 2017, when Koch Industries was overhauled in its most significant restructuring since 2000. This time, the company was redrawn into two divisions: Koch Enterprises and Koch Resources. The Enterprise division included Georgia-Pacific, Molex, and Invista—basically any part of Koch Industries that produced a consumer product or piece of a consumer product. The resources division contained Koch’s legacy operations in fossil fuels and other extractive businesses, including Flint Hills, Koch Minerals, Koch Ag & Energy Solutions (which included the fertilizer division), and the commodities trading arm, Koch Supply & Trading.

Jim Hannan was promoted from CEO of Georgia-Pacific to CEO of Koch Enterprises. Brad Razook was promoted from CEO of Flint Hills to CEO of Koch Resources. In these roles, the two executives were engaged in an unspoken competition. Each division reported its results to Charles Koch. He could measure their progress and determine who might be best suited to take over the firm. Then there was David Robertson, the president of Koch Industries, which acted as a holding company over both Koch Enterprises and Koch Resources. Robertson had quietly made his way to the most senior spot beneath Charles Koch over many decades of work. Robertson was soft-spoken, direct, and a consummate M.B.M. man. He knew how to achieve great things and appear not to take any credit for them. If Charles Koch made a bet that his corporate culture could replace him as the charismatic CEO, then David Robertson was a fitting vehicle to carry that bet forward.

If any of these men became CEO, however, they might be taking the job in a caretaker’s role, because Chase was still the heir apparent. After working for a while in the specialty fertilizer division, Chase Koch invented a new role for himself. He was spending a lot of time with venture capitalists who wanted Koch to fund their projects, and he became intrigued with many of their ideas. He talked it over with his father when the two had dinner at Chase’s childhood home. Chase told his dad that Koch Industries was missing out on the future by not getting more involved with venture-­capital firms making risky bets on new technologies. They mulled over this idea and came up with a new division of Koch called Koch Disruptive Technologies (K.D.T.). Chase was named head of the new division. He would help Koch identify the next wave of big businesses to invest in. One of the group’s first investments was in an Israeli medical-devices company. Chase’s division moved to a newly constructed wing of the Koch headquarters campus. In early 2018, the K.D.T. offices were still a blank slate, a set of cubicles and small offices under construction. In a small meeting room near the space, Chase sat at the head of the table, leading his group through a meeting. His bearing was somewhat stiff, but authoritative. After many years, he seemed comfortable in his own skin. When asked if he would be CEO someday, Chase said it was certainly a possibility. He said he would only fill the right job at the right time.

One day, Charles Koch sent his son a small folder of old papers, with a handwritten note attached. The note was written on a small piece of yellow paper with a simple letterhead: charles koch. Charles Koch’s neat cursive script said:

Chase,

I’m going through my old files for the book project. I found these notes on your Aristotle paper.

Pop

The papers attached were notes that Charles and Chase had written while working on Chase’s elementary school assignment about Aristotle. Aristotle believed that people strived to accomplish things, and that is what gives their life meaning. From that meaning flows happiness. This was the message Charles passed on to his son.

If Charles Koch found meaning during his working days in 2018, that meaning seemed to derive largely from the book project he mentioned in his short note to Chase. People close to Charles Koch said he was drawing away from the business, at least somewhat, to work on this book, which was his private passion. Charles Koch’s close friend Leslie Rudd said Charles was finally exhibiting something that was very rare in his life: a sense of contentment. “I think Charles, now, is doing just exactly what he wants to do, which is trying to do good,” Rudd said.

Charles Koch had already published two books about Market-Based Management, which he argued was the ultimate solution for running a prosperous business. But even within those books, he had hinted that Market-Based Management was more than a business philosophy. In this new book, Charles Koch planned to show the final dimension of Market-Based Management. He would show that it was a guidebook not just for running companies but for running entire societies. The proper shape of American society was the shape of Kochland.

Charles Koch had no illusions that America would instantly adopt his creed when his new book was eventually published. The path would be long and contentious. He had been cutting the path for fifty years already. But he had always worked on a very long time line, measuring his success on a scale of years, even decades.

His plan, so long in the making, was still just in its early stages.

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