I interviewed Charles G. Koch about his fascinating new book Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies this Thanksgiving Eve:
HH: Special Thanksgiving eve hour and a half ahead. Charles Koch is one of the owners of the Koch Industries, and he has a brand new book out, Good Profit: How Creating Value For Others Built One Of The World’s Most Successful Companies. He joins me, I believe, from Wichita today. Charles Koch, welcome to the Hugh Hewitt Show.
CK: Hey, thanks, Hugh, thanks for having me.
HH: It is terrific to have you. I’ve got to tell my audience how this interview came about, because it is consistent. As I read Good Profit, I was struck by a lot of things, we have a lot of time to talk about it, but I was struck on Page 213. You wrote, “Motivating external parties to support the company also requires that our employees deal with them in a way that is in the best interest of the company as a whole.” And I thought of Kevin Gentry, who was sitting next to me on an airplane, Charles, and so I was reading Peggy Noonan’s book, and leaned over and said you’re Hugh Hewitt, aren’t you? Yeah. I think you’d like Charles Koch’s book, and he handed me Good Profit, his own copy. And then from that came this interview. Isn’t that the perfect example of how your corporation works with people?
CK: Well, that’s sure the way we try. Good for Kevin. He’s internalized these messages well.
HH: That’s exactly, you talk about internalizing MBM, market-based management, and I want to talk about that. But that’s the overall message. This is not easy, this is not a slogan book. This is a way of thinking.
CK: No, and it requires, really, turning these principles and concepts into habits so you do them, so you don’t need to think about them. That’s just the way you approach problems and opportunities, and approach dealing with other people.
HH: Well, Kevin gave me that book, and I started reading it, and here’s what got me. An investment of $1,000 Koch Industries in 1960 would have a book value of $5 million dollars today. The company was worth $21 million in 1961 when your father passed, and it’s now valued at $100 billion dollars based upon the Forbes estimate of your brother, David’s, and your net worth. It has 100,000 employees. I mean, in your wildest dreams, Charles Koch, did you ever imagine in 1961 it’d be this big?
CK: No, as a matter of fact, when I’m, I’m very mathematically-oriented. When I came to the company, I said okay, I’ve got all these ideas, and if I’m successful in applying them, here’s how much we can grow. And two years ago, we surpassed 70 times my lifetime ambition. So once again, it’s better to be lucky than smart, but it just shows the power of these basic principles and values. And they transformed my life and enabled me to accomplish more than I ever dreamed I could, and that I have the talent to accomplish. And that’s one of the reasons I wrote this book, to help give other people that same opportunity to learn those same principles.
HH: And I stress for the audience, Koch is operating in 60 countries. It has got 9 different companies within it, and six core capabilities. We’ll talk about all those in the next hour and a half. But I wanted to start on what you just touched. Why bother, Charles Koch? You’ve got $100 billion dollar company that you and David Koch run. You’ve got 100,000 employees. There’s an opportunity cost, as you well know, that goes into writing a book like Good Profit. Why do it?
CK: Well, that was one reason, to share the ideas that transformed my life. And another one is that I wanted to convince businesspeople that the way to succeed long term is to create, is the focus on creating value for others. Now you want to be compensated for that, but that’s the starting point. And when I say others, I start with creating value for customers, but then you need to create values for employees, or they won’t want to work for you. You need to create value for suppliers, or they won’t want to supply you. And you need to create value for your communities, or they won’t want you in your community. And when you do that, then you have the best chance of succeeding long term. So it isn’t altruistic, it isn’t self-sacrifice. It’s what I call a system of mutual benefit.
HH: It’s very well laid out, but I’ve got to tell you, there are some things as a journalist and a lawyer, and I don’t think you’re too high on either journalists or lawyers. There are some things that stick out in the course of this book that I wanted to start with, rather than wait for them in the turn that they come up with. One is the fact that in 1974, you built a house in Wichita, and you’re still living in that house. I find that to be one of the most striking things.
CK: Well, it’s a great house, and I said, we believe in division of labor by comparative advantage in our family as well as we do in business. That is each, everybody benefits when each person focuses on what they can do best and have a passion for, and then freely exchange and share in that. And that’s, my wife and I have that, and she’s much better at building houses and doing all that stuff. So I told her what I wanted, and then she built a much bigger house than I asked her for. And those were turbulent times. We had wage and price controls, we had the oil crisis, the shipping crisis, and I thought we were going to go broke. And so I remember sitting in 1974, when we’d just dug the basement, and with my feet hanging down in there, saying honey, I think we can afford to fill it up, but I’m not sure we can afford to finish it.
HH: Yeah, it’s an amazing story, and it says something about, and your defense of Wichita as a capital for your home base, and there’s lots we’ll cover. Let me tell you, though, what stuck out the most, Charles. You may find this interesting. I don’t know how many people actually read the books before they talk to you, but I do. And I always write down my favorite anecdotes. Here is the most telling anecdote from Good Profit. “It’s been almost 20 years since August, 1996, when Danielle Smalley and Jason Stone smelled something suspicious near a Koch pipeline. They got in their car, they turned it on, and the car blew up, because there was a leak. And you write about this. You’ve, in fact, you volunteer all the warts on the Koch Industries story, and it really seared into you, and it produced this 100 Times 100, 10,000% compliance attitude within Koch that I found, I found it fascinating, and I also found it admirable that you would remember Danielle and Jason in your book.
CK: Well, those are, I mean, people ask me what are my biggest disappointments and things I regret, it’s when people, because of us, were hurt, or worst of all, lost their lives. And so when we have something like that, I mean, that is number one for us is protecting people’s lives, and then protecting the environment. And we’re accused of having a lot of pollution and stuff, and we do, because we make more things in different ways than about anybody in any company in the country. But every plant we buy, every company we buy, the first thing we do is improve safety and environmental practices.
HH: It’s actually revelatory, and I think it will have an impact on may other industries that you’ve saved $800 million dollars in energy conservation in the last four years, $800 million dollars in turning off the light costs, I guess.
CK: Right, and we, and we’re using information technology and other techniques we’ve developed. We sell systems now to help other people do that. For example, at Georgia Pacific, we’re designing what we call the bathroom for the future, not for your homes, but commercial bathrooms, of which there are millions of them. And we design in their systems to control the temperature and the lighting, depending on when people are in or out, and the frequency of using them. And so we can save tremendous amount of energy on that, plus the other benefits we can bring by this technique.
HH: It’s really amazing, the whole story of how you evolved, the iterations of the company, which we’ll talk about. But I want to close this first segment on 10,000% compliance, 100% compliance required 100% of the time. And if someone doesn’t buy into that, you don’t hire them at Koch.
CK: Right. And if they don’t practice it here, I mean, we’ll work with them to get them fully committed to that. And if they’re not, they need, they can’t stay here. We cannot tolerate that.
HH: Given the target on Koch Industries’ back, I’m glad you developed that years ago. But that’s 25 years in the making, isn’t it? I mean, you’ve been practicing that for at least a quarter century.
CK: Yes, no, that’s exactly true. And we constantly work at getting better at it, because we’re not perfect, and never will be, particularly when you have 100,000 employees that are in 60 countries. But that’s job one here.
HH: And there are other jobs as well. Don’t go anywhere, America, this is a special Thanksgiving Eve presentation. I told you how I came upon the book, Good Profit, by Charles Koch. And Charles will be my guest this hour and half of next, so don’t go anywhere.
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HH: Charles, when you were a young man, you write, you were an idealistic man in your 20s. “I became passionate about the urgency of finding freedom-fueled solutions to human problems, even if the solutions were radical.” And you cite Adam Smith, Hayek, Harper, Ludwig von Mises, Michael Polanyi, I didn’t, I’d never heard of him before, and I’m going to come back to that, Thomas Sowell, of course, I know about. But you really committed early on right out of MIT to this worldview.
CK: Well, I started by, I learned at MIT that it’s an ordered universe, and that if you want to do well in the physical world, you need to understand the principles by which it operates. And so I became passionate about philosophy of science, the scientific method, and that’s where I found Polanyi among all the philosophers of science I read. And then when I moved to Wichita, I had a hunch that there were principles that determined how well people, how well societies could live to work together to make each other’s lives better. And so I started reading everything I could on the subject from all different perspectives, and all different disciplines. And out of that, I concluded that there were these basic principles that I’ve been applying and trying to better understand and develop ever since. Continue Reading