Exclusive: Charles Koch on Making a ‘Good Profit’

“Industrialist” is more likely to be applied to businessman Charles Koch than “management guru” probably because the massive private company he and his brother David run, Koch Industries, was built on core industries like chemicals and refining crude oil. But as their conglomerate expanded to include an array of technologies and services, so too has the strategy for managing these businesses had to evolve. In an exclusive interview with TSD, the billionaire Koch talks about the management philosophy he outlines in his new book, Good Profit, and how building the right culture – with more grads from Wichita State than Harvard – is so vital to business success.

11_-_073107_Koch_lws15_520_320_c1_center_topTSD: How does an organization as vast and seemingly decentralized as Koch embed a common ‘good profit’ culture across disparate and global business units?

CK: No person, no matter how brilliant, can direct 100,000 employees in 60 countries. What I’ve done is provide a framework in my Market-Based Management (MBM) philosophy that has helped our employees become more productive, creative, and fulfilled, regardless of their role, company, or location.

Successfully applying MBM is neither simple nor easy, and to do so requires internalizing its principles at all levels of the organization, especially in leadership. But MBM theory and practice starts on day one for any Koch employee, and the journey continues each day thereafter. Our guiding principles are not as in many companies something to be stuck in a drawer and forgotten. They represent who we are as a company. They guide everything we do, including who we hire, retain, and reward.

TSD: There are extreme pressures on public companies to meet financial expectations on a quarterly basis.  Do you think your firm has been able to focus more effectively on long-term stakeholder value because you are privately held?

CK: MBM encourages innovations that create value, not only for the company, but for our customers and society. Creating value is the only reason any business should exist, whether it’s public or private. MBM can work in a public company, but to fully work, there has to be a focus on maximizing long-term value.

There’s a lot of emphasis in a public company on short-term value and quarterly earnings, but being captive to quarterly earnings isn’t consistent with long-term value creation. If public companies are willing to change the way they think and accept that short-term value should not be the sole measure of success and sell that idea to investors, then MBM can work and be transformative.

TSD: Talent has got to be at the heart of any great organization.  How do values play into your recruiting and retention of the very best people? And how does a big industrial corporation attract bright young people who increasingly want to head to places like Silicon Valley and Wall Street?

CK: Having skills and intelligence is important, but we can hire all the brightest MBAs in the world, and if they don’t have the right values, we will fail. Therefore, we hire based on values first – then talent. Our experience confirms that when a person has the appropriate values, beliefs, and intelligence, the needed skills and knowledge can usually be developed.

In Good Profit, I tell the story of an Ivy League-educated journalist from a famous New York business publication who once interviewed me about Koch and our employees. She asked me, “Doesn’t your location in Wichita make it hard to attract top talent?” What she didn’t realize is that Koch’s location in the heartland is an asset, not a drawback. For example, young people who’ve grown up on a farm learn early on the importance of accountability. They understand that if you decide to sleep instead of getting up to milk the cow one morning, you can’t pass the buck or cover up your mistake.

There is nothing wrong with recruiting students from Ivy League schools – that works well for many companies – but Koch has enjoyed much better results hiring from Wichita State or Kansas State than from Harvard. In fact, the four employees who have succeeded me as president of Koch Industries hailed from the Murray State University School of Agriculture, Texas A&M, the University of Tulsa, and Emporia State University.

The bottom line is that talented people with bad values can do far more damage to a company than virtuous people with inferior talents.

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