Charles Koch, one half of the now infamous Koch Brothers enterprise, has been criticized for many things over his five decade career in the oil industry. Whether it’s accusations of pay-to-play politics or the funding of global warming skepticism (among other things), criticism of Charles Koch has been front and center in contemporary media.
Amidst it all, though, one thing seems to have been lost in the din: He knows how to make money.
It’s no secret that the Koch brothers are wealthy. Both Charles and David Koch are worth well over $40 billion each, and they use this enormous wealth to influence the political landscape like few others can. What’s less talked about is how exactly that wealth was made.
In his new book, “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies,” due for release Tuesday, Charles Koch details the business practices and management framework he used to turn the name Koch into one that means so many things: wealth, business success, politics and untold influence.
Since taking the reins of Koch Industries from his father, Fred Koch, in 1967, Charles managed to turn a small oil refining company worth $21 million into a behemoth global corporation, with tentacles reaching into a variety of industries, worth an estimated $115 billion in 2015.
Here’s how he did it:
1. Don’t be afraid to diversify:
In 1940, Fred Koch created the Wood River Oil and Refining Company, and at that time, the company simply refined oil. In 1967, Charles took over the company, and started to diversify the company’s holdings. Now, known as Koch Industries, the company produces everything to paper towels and napkins to advanced polyester material and fertilizer.
When Koch Industries acquired Georgia-Pacific in 2005, the company was most interested in paper towels, but the advent of low-cost connectivity between objects and the people running them has created whole new value within the market.’
From the book:
It’s not too hard to envision a “washroom of the future,” with sensors monitoring peak usage times, hygiene patterns, and mold potential while automatically reordering bathroom tissue, towels and soap. This technology could improve sanitation, reduce costs and streamline communications between GP and commercial building owners.
But how did Koch Industries get from paper towels to an Internet of connected bathroom devices?
Molex, another Koch acquisition that makes electronic sensors, combined its technology with the paper towel dispensers, and in doing so improved bathroom hygiene habits and created a new 15 percent market share in hand-drying technology for Koch.
2. Stick to what you’re good at:
According to Koch, a company is best served when it focuses on what it is capable of doing, not necessarily what it could be doing. In this way, he says, it is completely unnecessary for an oil exploration company to be involved in refining and marketing, because there are other businesses that can handle that.
From the book:
Even though all these are facets of the same industry, the capabilities required for oil exploration are quite different from those required for other parts of the value chain. A company doesn’t need to own or control its feedstock when, like crude oil, it is widely available on liquid markets.
That is why, Koch says, despite oil refining being an important business for Koch Industries, his company does not deal in crude oil production or own any gas stations. It is better for his company to trade, distribute and transport.
3. Develop internal talent aggressively:
At Koch industries, all employees are expected to act like principled entrepreneurs and take ownership of their own careers. They’re also encouraged to share their career goals with supervisors in order that they be used in a way that most utilizes employees skills and interests.
From the book:
By developing their individual capabilities, employees make a greater contribution … and are more likely to reach their maximum potential. Instead of using centralized curricula or career paths, we strive to provide an internal marketplace for employees … while taking into account how they can make the greatest contribution to the company.
In this way, as employees career paths develop, they can take on more important roles at Koch Industries and the company grows as its employees progress, keeping everyone happy.
4. Learn to use adversity:
The 1990’s were a particularly rough time for Koch Industries, after management and regulatory failures led to the deaths of two teenagers and massive payouts to the tune of $300 million.
In 1996, two teenagers were burned alive in their car after a ruptured liquid butane line in Lively, Texas, exploded with two nearby. The pipeline between Oklahoma and Texas had become badly corroded, and a National Transportation Safety Board investigation concluded that Koch could have avoided the incident if it properly managed and inspected the pipeline.
Despite Koch readily accepting fault for the explosion, a Texas jury found that the company acted with malice and awarded the families of the two teenagers $3.5 million, the maximum amount they could receive in punitive damages. The company was ordered to pay $296 million on top of that for actual damages.
Following the incident, Koch instituted a 10,000 percent compliance model for handling regulations. This compliance model reminds employees that “100 percent compliance is required 100 percent of the time.” This 10,000 percent model, Koch says, led the company in a positive direction, and it hasn’t had any indictments or prosecutions in the last decade.
From the book:
I am proud to say that since these indictments, the EPA has recognized Koch’s companies’ environmental performance and stewardship many times, commenting on the productive and collaborative approach that Koch companies use in working with the agency.
Koch goes on to say that the emissions from the company’s refineries are 31 percent lower than other refineries of a similar size, and the EPA ranked Koch best in the country for implementing pollution prevention initiatives.
Adapted from “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies,” by Charles G. Koch. Published by Crown Business, and imprint of Penguin Random House LLC, on Oct. 13, 2015.
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