Koch Industries = imbedded in (and influences) almost every aspect of American life: trades in oil, packaging, consumer goods, all sorts of chemicals, fertiliser; but simultaneously incredibly secretive and insular.
Decision of Charles Koch to keep the company private -> not subject to revealing returns (or profits, sales) or shareholder demands, can be more nimble and think long-term, so able to be very profitable
Have a habit of getting into established and essential businesses (oil, fertiliser) which allows them to exploit legal loopholes to outcompete new competitors
Credo = Market-based management (MBM), what all employees are trained in from the beginning; pushed for continual improvement
Part 1
1987-1989: Senate investigation into corruption in administration of Indian land in OK; oil companies under reporting how much they were taking— FBI investigation discovered it wasn’t oil companies like Exxon and Mobil, but unknown Koch Oil that was actually doing this
1967-1972: Fred Koch (and his stability) suddenly dies -> family enters first period of volatility. Fred had been a “domineering patriarch,” wanted Charles to take over the family business, but Charles wanted to do his own thing… but by the 60s, Charles joined the company and gained more independence, then inherited it at at 32.
Charles Koch & how he ran the company = highly influenced by Hayek — classical liberalism, supremacy of markets to respond to a rapidly changing world and balance needs of all citizens (esp over any kind of government regulation), importance of entrepreneurs in this system. Constant push for the company to grow: all managers should look for opportunities to expand
“The Koch Method” for gauging oil -> guaranteed they were always over/long — taking and selling more oil than they paid for (by straight up lying?)
Charles = extremely hard worker, very engineer, private, low key personality— surrounded himself with more “people” people to deal with that side of business
1971-1973: fight vs labor unions at Pine Bend oil refinery— union (OCAW) -> extremely strong presence in the community, allegiance to it over the company. OCAW part of a very unionised state, which gave them lots of power (all networked); could end a business. Strike happened, got very intense & violent… eventually Koch won out and got the changes they wanted (which actually seemed pretty reasonable)
1973-1975: Volatility in oil supply and scarcity challenged business; Koch responded by making the company extremely flexible, dynamic, all centralised to him. Prioritised information systems: ex. built databases of how each unit of the refinery functioned under different conditions, optimised assays on crude oil, prices of products in different markets, etc. Thus could build massive models (early adopters of computers!) to guide management. Very secretive about all this. Completely replaced budgets with metrics just related to profit goals (ROI), all in terms of years rather than quarters; avoided debt as much as possible -> can take advantage of downturns in economy bc have the cash to buy competitors.
Growing govt regulations -> Koch saw the complete linkage of political economy, could not be disentangled.. Republican market regulations (Nixon) les him to support Libertarianism. Outlined campaign for business community to change things via education, media outreach, litigation, & political influence, basically all to support free markets over regulation. Initially cited limiting lobbying, as this “corrupts,” but this eventually fell away. Able to test these ideas fast in his “free market utopia,” Koch Industries: treated all employees as entrepreneurs/small business owners, gave them “ownership” over their work.
1980-1983: “War for Koch Industries” (Charles vs Bill) Bill lead chemical trading parts of company; lots of childhood and personality tension between the brothers, esp because Bill both worked for Charles and was his equal as a shareholder. David (much more public, ran for VP) was more on Charles’ side. Bill wanted more liquidity ($$ on hand) and openness from Charles, who said centralized decision making was critical for the company’s dynamism. Bill, with older brother Fred and other minor shareholders, tried to pull off a coup; didn’t work; Charles & David ended up buying them out for $1 billion
1983-1988: “Koch University” -> development & indoctrination of precursor to market-based management, based on Demmings: Opportunism, the whole entrepreneurial thing; Humility, being aware what you knew & expanding into areas with experience; Continuous improvement, using data, modelling, info systems to always expand and grow (being “over”—looks like stealing, but also just takin advantage of imprecision of oil measurements)
1985-1992: Senate investigation into oil theft; simultaneous with Bill suing bc he thought Charles lied to him (took advantage of the govt investigation). Charles responded to criminal charges w active attack through his political network to derail the legal efforts (vs previous, quieter efforts to shift American culture). Got the Indian tribes to say Koch wasn’t stealing from them— later chiefs realized they were wrong. Worked with Bob Dole to fight through Senate. Launched a plan to reshape judiciary; organization that “graded” judges on free market-ness, held seminars to enlighten them. “Accidentally destroyed” the company documents needed for Senate investigation…then lead FBI agent quit, basically ended it. Bill’s attack continued, revealed evidence that Koch employees stole oil; tons of testimony; Koch found guilty. Overall, established powerful political influence network for Koch: front groups like the judge graders, campaign finance systems, lobbyists. Meanwhile, US politics through Reagan, Clinton -> neoliberalism: dismantling government regulations while continuing with Medicare, Medicaid, SS, large defense spending… opened the door for companies to manipulate & exploit the complexity, which Koch was good at. Rise of “third party” campaign finance machines, that didn’t directly donate to politicians, but ran attack ads that carefully avoided oversight by FEC. 1990s -> Charles codified and rolled-out his formal market-based management (MBM) philosophy.
1995-1998: Pine Bend = crown jewel of Koch, massive rapid expansions, and also case study of how MBM can go wrong. “Managers” = “process owners” of their “profit unit,” all had greater authority than the non-profit related engineers (ex. wastewater tx)… MBM advised profit units to limit use of non-profit advisors lest they become too costly. Pine Bend started dumping wastewater (high ammonia) it couldn’t treat directly into wetlands rather than through regulated pipes into river by “clearing fire hydrants,” despite wastewater engineer saying it was illegal. Overall in 90s, Koch = one of biggest violators of envt laws in the US.
1995-2000: Started hiring more Harvard sorts of MBAs, even stronger focus on growth— “Value Creation Strategies”; rapid prototyping to test out new industries. Got into entire chain of agriculture industry, from fertiliser to beef. But moving too fast: ex. buying Purina’s feed mills -> exposed themselves to huge liabilities (hog industry); led to extreme tightening of the /corporate veil/ — independence from subsidiaries. Also the big lawsuit from Bill this whole time -> bad publicity.
Part 2: The Black Box Economy
2000: Charles Koch -> bad personal and business reputation… reinvention of Koch Industries: new leadership, new strategy, sold off many subsidiaries & streamlined the rest. Basically became an investment firm, relied on corporate veil. Accelerated growth further; saw itself as an /info gathering company/ — main advantage over competitors; started explicitly complying with the law, lawyers everywhere; kept all this very secret. Meanwhile, US politics (Clinton -> Bush) = /neoliberal paradox/ of expanding, hyper-regulatory state except for key exceptions for rich industries that could lobby
Major success in trading and financial markets— first crude oil, then futures, then derivatives (after hiring McKinsey); again due to their information advantage— and having “insider” knowledge and control over huge amounts of the physical resource; even hired meteorologists to predict energy usages
2000-2004: Options trading in newly deregulated natural gas industry— bet on volatility; Koch traders making huge percent of company profits. Despite Charles’ emphasis on humility, teamwork among employees, changes to bonus structure (traders get larger portion of their profits) -> better results, less loss of talent to Wall Street and such.
2000-2002: Traders branching out to new (complex) markets— ex. /electricity/, trade in MWh, huge market being set up -> Koch capitalised on its lobbying power & political influence to sway govt… chaos ensued in California with semi-deregulation of electricity trading, surges in energy use due to heat waves, and very illegal financial games -> power outages, extreme prices (“parking”). Happened bc Koch and Enron traders had market power — could force prices higher than supply & demand would dictate, bc electricity had to be used in real time. Tons of controversy and political and real drama, but Koch only profiting from information, not actual illegal trading -> stayed out of public eye. Info trove from traders -> insight into entire American economy whole corporation; Charles put this to use IRL (not just derivatives) -> wave of acquisitions.
2002-2005: The Aforementioned Wave of Acquisitions General rules: 1) Company had to be in distress, ideally bc bad management. 2) Had to be long term play. 3) Had to fit with code capabilities. Ex. Nitrogen fertiliser thing
2003-2006: Acquired Georgia Pacific paper mills, then eventually whole company; DuPont synthetic fibers — building on strength of processing raw materials. Principle of “experimental discovery,” starting small, low-risk in new industry. Focus on corporate veil -> put debt from purchases onto holding, then use cash flow to pay back; emphasised 10,000% compliance with regulations
2006-2009: Use of labor management system (LMS) in warehouses -> “barcode” employees and algorithmize work to max efficiency, ranked all employees & operations, cutting the worst; all this amidst changing economic conditions: instead of cyclic lay-offs, companies permanently cutting jobs for more efficiency, esp non-college -> recession-like conditions
2008-2010: David Koch -> lots of charitable givings (MIT and JH for cancer, the arts and ballet, etc)… really represented 0% of his wealth. But signs that cresting market “wave” was going to crash: unregulated derivatives market, housing mortgages, see The Big Short. Koch’s conservative trading strategy protected them— had placed limits. Charles responded calmly, rationally, long-term POV— still lots of job cuts & closures, but had “trader’s mindset” and diversity to exploit downturns and market volatility. Ex. “Contango storage play,” where oil today is cheaper than oil tomorrow, so stored oil in tankers to deliver later.
Part 3: Goliath
2010-2011: Charles Koch -> partnered with Wichita State to use /experimental economics/ to test principles of MBM, liberalist ideas (public schools suck, the holdout problem for pipelines). Put to use in conflict with union workers at Georgia Pacific warehouses (under LMS, economic stagnation— productivity increases way more than wages), union willing to hold out in contract renegotiation. Experiments found strategy relied on information asymmetry— just like commodity trading, acquisitions. Could beat holdouts by making them expendable, sparking competition between parties.
2008-2011: Fight vs Obama’s carbon control plan… which would screw over Koch’s entire oil business. Pelosi -> new House committee on global warming, introduced cap & trade bill. Charles & David -> rapidly ballooning political influence network: PAC, think tanks, philanthropy; “climate change is fake”. Big businesses like Koch -> insanely outspend other interest groups on lobbying; again, an information game. 2009, secret “Democrats for Koch” lobbying approach; bc climate was 3rd on Obama’s list of goals, more time to derail it. Even though potential for Koch to profit from cap & trade (esp fertiliser plants), felt like refineries were unfairly targeted. Cap & trade bill (Waxman-Markey) passed House with some R support -> Charles responded by buckling down, no compromise or acceptance of climate change, target moderate Rs who supported bill. Went along with long term goal to reshape Republican Party.
2009-2010:Americans for Prosperity -> organised protests across US on July 4th; simultaneous arising of Tea Party movement, eventually linked up, even though Tea Party not truly libertarian (liked Social Security, Medicaid). Koch utilised 1) echo chamber— a lot of secretly affiliated orgs, some political, some think tanks, all promoting same material (anti-climate change science) to make it seem popular; 2) holdout strategy, pressuring Rs from the right… cap & trade died in Senate.
2010-2014: fracking boom, volatility, Koch profited, oil prices dropped. Fear of “peak demand” rather than peak oil due to renewables; Koch started super-influencing state legislatures in Kansas to overturn bills supporting growth of wind energy, etc. All this political stuff came at the cost of Koch brothers’ anonymity, esp with Jane Mayer’s reporting. Also another acquisition boom at this time, more random commodities.
2003-2015: Charles = really old (80 by 2015?), would Koch survive without him as CEO? Two kids— Chase and Elizabeth; grooming Chase for the job but not into it, did his own thing until 2003, when he joined the company, went through lots of training by Charles in the Koch ways. Ex. taxes: viewed as morally wrong & thus to be avoided in any way, but also 10000% compliance -> use complexity of tax code to legally get around it— make LLCs around the world in tax havens.. 200+ in Caymans alone. Anyway, Chase didn’t want to be CEO, decided to spin off one of the agro-businesses instead.
2015-2017: Back to Georgia Pacific warehouses, things getting worse for workers: injuries and deaths increasing, general unhappiness. Not a lot of publicity or big fines about this -> Koch responded by saying employees needed to follow MBM better. Workers wanted wage increases, unhappy that union couldn’t get a better deal… wanted Bernie, didn’t follow union’s endorsement of Clinton -> Trump. Trump also forced out all of Koch’s candidates (Jeb, Rand Paul, etc) and threatened his overall vision for reduced govt.
2017-2018: Koch set out to derail Trump on health care replacement, tax bill (bc Border Adjustment Tax, which would tax companies on what it sold in America, not exported?) -> most explicit political statements to date— would support any rep who voted vs certain bills; allied with Freedom Caucus; effectively earned a place at bargaining table. Both aligned on climate change, though… dismantling of the EPA, Scott Pruitt being crazy…
2018: THE END. Koch facing another potential period of volatility, but basically indestructible. Charles and David = super rich. Charles writing a book about how MBM can be applied to society.