Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (27 page)

Market-Based Management hinged on measuring performance, especially employee performance, and the company placed a major
emphasis on quantifying in granular detail each worker’s contributions to the company. Koch based its incentive system—what employees called “I-Comp”—on these evaluations. Assessing how much money an employee had earned for the company was a relatively straightforward task when it came to, say, a commodities trader in Koch’s financial division or a refinery manager, but there were many other workers whose economic value was harder to compute. What about the employees who maintained the company’s pipelines? Technically, the more diligently they did their jobs, the more they sliced into the company’s profits.

The former manager of a Koch research group recalled his boss once asking him to evaluate the members of his staff “based on their contribution to the bottom line”—the literal dollars and cents they had earned for the company. He balked. “I said, ‘I can’t do that. I can’t tell you how much value in terms of sales and profit a particular technician does. It’s an outrageous question. He’s too far from the action. He has too little control. I can’t tell you that this particular employee earns this much for the company and thus should get this amount of money.’ ”

A few months later, the manager attended a Market-Based Management seminar in Wichita led by Charles. After the CEO’s spiel, he asked for questions. The manager raised his hand.

“Charles,” he said, “I’m having difficulty relating what my technicians do to the company’s bottom line. My problem is, they don’t have any real control. There are all kinds of decision makers in between them—their supervisors, me, the product managers, salespeople, pricing.”

Charles seemed perplexed by the question. “Why,” he asked, “are you trying to do that?”

The impression that had filtered down from upper management was that Charles had wanted all employees to be evaluated based on their individual return to the company—but, in actuality, the CEO’s definition of “value” was more expansive. “We’d all been
doing something that had been misunderstood from something Charles had said,” the manager recalled. “There’s a lot of stuff that goes on in Koch because of Market-Based Management [that] doesn’t always reflect what Charles wants.”

Whether or not employees misinterpreted Charles’s management edicts, his relentless emphasis on profits and value creation may have had dangerous, even deadly, consequences. In the Danielle Smalley case, as well as other lawsuits involving Koch’s dilapidated pipelines and environmental negligence, lawyers repeatedly cited Charles’s management philosophy as a key factor.

“Koch has a pattern of delaying needed repairs and maintenance, often neglecting them entirely,” Linda Eads, the former Texas deputy attorney general, noted in a 2001 affidavit. “One reason for this failure to operate safe pipelines comes from Koch’s so-called Market-Based Management approach. For example, under this management philosophy, each section of the Koch pipeline must show a profit, and this profit must increase every quarter. Environmental and safety compliance does not pay off quarter by fiscal quarter, and thus employees are not rewarded or encouraged to strive for safety or compliance. Indeed, safety improvements are regularly delayed or ignored even when recommended by employees. Employees at Koch are told that every decision has to be judged by its economic effect and how the decision will affect the company’s profitability.”

Market-Based Management caused controversy in other areas, too, as Charles and his ideological lieutenants attempted to apply the technique to the constellation of nonprofits he funded. “If I get a concept in my head that I think is the way the world works,” Charles admitted, “I apply it to everything.” There even came a point when Charles tried to impose his management philosophy on the private school his children attended.

Located nearly across the street from the Koch compound, the
Wichita Collegiate School was cofounded by Bob Love, Fred Koch’s John Birch Society sidekick and later Charles’s libertarian compatriot. A generous benefactor of the school, Charles chaired its executive council in the early 1990s. In 1993, the billionaire ignited an acrimonious uprising at the school, after its well-liked headmaster abruptly resigned due to efforts by Charles and other trustees to foist Market-Based Management on Wichita Collegiate and meddle with hiring decisions. Incensed parents threatened to pull their children from the school; faculty members quit; students wore black in protest. Charles stepped down from the board of trustees citing, among other reasons, the school’s refusal to integrate his management style. But in a sign of just how much influence he exerted over the school, Richard Fink, one of Charles’s key advisors and an architect of Market-Based Management, was installed as Collegiate’s interim head. The outrage ran so deep that, as Fink tried to tamp down the uproar, he was hung in effigy around campus.

A couple years later, similar discontent roiled the Institute for Humane Studies, which had relocated from California to the Arlington, Virginia, campus of George Mason University, where in the 1980s, Charles and Fink had established a beachhead of free-market research and scholarship. The mission of IHS is to groom libertarian intellectuals by doling out scholarships, sponsoring seminars, and placing students in internships at like-minded organizations. The impact of the institute’s work was not easy to discern. Charles nevertheless grew intent on measuring the intellectual dividends of the institute’s programs, as if manufacturing libertarian ideologues and widgets were one and the same.

“Koch, evidently beginning to despair at the prospects of achieving political goals in his lifetime, became obsessed with a quick fix and decided that IHS needed to have ‘quantifiable results,’ ” noted Auburn University philosophy professor Roderick Long, who was affiliated with the Institute for Humane Studies. “Massive micromanagement ensued.”

Professor Long recalled that “the management began to do things like increasing the size of student seminars, packing them in, and then giving the students a political questionnaire at the beginning of the week and another one at the end, to measure how much their political beliefs had shifted over the course of the week. (Woe betide any student who needs more than a week to mull new ideas prior to conversion.) They also started running scholarship application essays through a computer to measure how many times the ‘right names’ (Mises, Hayek, Friedman, Rand, Bastiat, etc.) were mentioned—regardless of what was said about them!”

“These,” he noted, “were the days that my friends and I used to refer to as ‘the Shadow falling on Rivendell’ ”—an allusion to the evil pall Sauron casts over the elven stronghold of Rivendell in J. R. R. Tolkien’s
The Lord of the Rings
trilogy.

While efforts to impose Market-Based Management outside of Koch Industries faltered, it eventually flourished within the company. “You couldn’t avoid it,” a former Koch executive said. A copy of Charles’s 2007 management manifesto,
The Science of Success
, is standard reading for new employees, and the company’s ubiquitous ten “Guiding Principles” (“integrity,” “principled entrepreneurship,” and “value creation,” among others) are stamped on the time cards of factory workers and printed on coffee cups. Koch employees at every level attend a two-day Market-Based Management Academy. Managers, meanwhile, receive additional instruction on how to identify the characteristics of an ideal Koch hire—that is, someone who will be receptive to the Market-Based Management–driven culture.

“They have a very rigid selection and development process,” the former executive said, noting that more than a dozen Koch employees screened him before the company made him an offer. “They want to make sure they’re hiring the right people with the right ethics and the right business orientation.” He added, “I never
met a dumb person at Koch. Everyone was brilliant.” The company’s interview process relies heavily on SBO—situation, behavior, outcome—questions to identify candidates in the Koch mold. “Have you ever made a mistake at work?” is one typical interview question. Another: “Tell me about a time that you failed.”

The company went through a phase of recruiting talent from elite universities, including University of Chicago–trained MBAs, but it found that many of these hires—often headstrong and overconfident—didn’t survive long within Koch’s corporate ecosystem. Instead, Koch has largely built its business with men and women who share its Midwestern roots, drawn from the University of Kansas, Oklahoma State, and other nearby state schools.

“They’re always looking for what’s called an ‘upper right quadrant’ person,” noted Nancy Pfotenhauer, who once ran Koch Industries’ Washington lobbying operation and is a veteran of a handful of Koch-funded nonprofits. “If you have humility on one axis and ability on another, they’re looking for that combination.”

It also helps if you fall in the right quadrant politically and buy into the libertarian ideology that is so deeply embedded in Koch’s corporate DNA. Fully embracing the Koch mind-set means believing, as Charles does, in the self-regulating powers of the market and the socialistic evils of big government. It requires sharing the company’s Adam Smith–inspired philosophy that acting in one’s self (or corporate) interest benefits society as a whole in the long run.

Even the company’s quarterly newsletter,
Discovery
, is an overtly political organ that contains editorials promoting climate change skepticism (“much of this ‘information’ is discredited science”) and jeremiads about the tyranny of regulation, federal spending, and unwarranted government intrusions into the marketplace.

“A growing government is often the worst enemy of liberty,” Charles warned in one
Discovery
column during the 2008 presidential
race. “Judging from what we’ve heard from the presidential campaigns so far, we could be facing the greatest loss of liberty and prosperity since the 1930s.” On the eve of the 2008 election, another Koch executive stressed “the importance of keeping our principles in mind and being an informed voter in this election.… Imagine what our world could be like if every candidate for public office was measured by the standards of our MBM® Guiding Principles.”

People of all political persuasions work for Koch, but given the company’s strong institutional perspective, some employees with liberal beliefs tend not to advertise their politics.

“You either drink the Kool-Aid or you keep your mouth shut and walk the line,” said Randy Rathbun, a Wichita lawyer and former U.S. attorney in Kansas who has many friends who work for the company. When Rathbun ran for Congress in 1996 as a Democrat, his campaign received numerous contributions from supporters at Koch Industries, but the donations were uniformly small, he said. He appreciated the support, but the relatively diminutive size of the contributions puzzled him. Rathbun later learned that Koch employees had intentionally contributed low-dollar amounts in order to skate under state campaign contribution reporting limits. They feared the consequences if the company discovered them supporting a Democrat, especially one that Koch Industries’ political action committee along with top Koch executives had targeted for defeat. “I have never seen a place where people are afraid like this where they work,” Rathbun said, noting that some of his friends who work for Koch jokingly refer to it as the “evil empire.” He added, “There’s a culture of fear out there.”

Because of the company’s insistence that its employees conform to the Market-Based Management model, some have complained of a cultlike atmosphere. “Everyone is walking around like they are in the George Orwell book,
1984
,” commented one former employee.

In contrast to his brother David, who is respected by the company’s rank-and-file but not seen as the driving force behind the company’s success, Charles is viewed as a near-mythic figure, a man of preternatural intellect and economic prowess, whose mystique is only intensified by his quotidian persona. He is unquestionably powerful, but unfailingly humble; elusive, but uncomplicated; cosmopolitan, yet thoroughly Kansan. Although Charles could have his lunch flown in daily from Paris if he chose, employees often spot him in the cafeteria, tray in hand and waiting patiently in line at the “healthy choice” station.

Charles has been described as a businessman so shrewd that “in a fifty-fifty deal, he keeps the hyphen,” but he projects the image of a brainy professor, not a cutthroat mogul. “I am Charles Koch,” he once introduced himself to a classroom of junior executives who had gathered for training in Market-Based Management. “I’m in the philosophy department.”

He’s known by friends and colleagues alike as a voracious consumer of knowledge. Even on the short commute between his home and office, a drive of no more than fifteen minutes, he pops in heady audiobooks such as Thomas Sowell’s
Ethnic America
or Eric Foner’s
Reconstruction
. Every conversation is an opportunity to profit intellectually, and when Charles hits upon a subject that fascinates him, he drills for details. “If he’s even in the elevator with you,” said Pfotenhauer, the former Koch lobbyist, “he’s trying to learn from you. He doesn’t waste a minute.”

Charles is a true believer, whose free-market beliefs are unquestionably self-interested—but also undeniably sincere. His value system is apparent in all aspects of his company, including Koch’s lobbying operation. Until the early 1990s, the company didn’t have a Washington presence; this, one former Koch lobbyist said, reflected Charles’s inherent distrust of politicians and his antigovernment bent. Once it did open a Washington office, prompted by the wave of government investigations and the bad PR stirred up
by Bill Koch, the company’s lobbyists operated differently than the K Street–hired guns that stalk the halls of Congress for their corporate clients.

Koch’s lobbyists don’t shift their positions based on the political headwinds. According to one Senate Republican leadership aide, they won’t be found pressing for subsidies in one bill and opposing them in another. “They’re not rent seekers,” he said. The overriding factor guiding the company’s lobbying agenda is not whether a legislative proposal will be good or bad for Koch Industries, but whether it is consistent with Charles’s libertarian beliefs.