Good Profit Part I

if in 1961 you had invested $1,000 in this man's company today you would be sitting on 5 million on uncommon knowledge one of the signal figures in American business history Charles Koch uncommon knowledge now welcome to uncommon knowledge I'm Peter Robinson born and raised in Wichita Kansas Charles Koch studied at MIT worked for a few years back east then returned to Wichita to join his father's business than a medium-sized oil company in 1961 in 1966 he became president of the business which he renamed Koch Industries in honor of his father in the half a century since Koch Industries has grown so dramatically that it now represents the second largest privately held company in the United States its products run from oil to polymers to paper products to pipelines to fiber optics and it employs almost a hundred thousand people 60,000 of them here in this country worth 21 million dollars in 1961 Koch Industries of which mr. Koch remains chairman and CEO is now worth 100 billion dollars with his brother David Charles Koch is active in politics funding think tanks and campaigns mr. Koch is also the author of a number of books including most recently good profit Charles Koch welcome actually I ordinarily say welcome when we're in our studio but you are kind enough to invite us into your home so thank you for welcoming us here to your home in Indian Wells California well thanks for having me on your program I've watched it a number of times and I don't deserve to be on it given the quality the others but I take that as a high compliment and I thank you for it all right the opening gambit is modesty then we'll look from good profit good profit is creating this is the way you define your title good profit is creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity now Charles the common understanding of profit is money as money what has integrity got to do with it well it has to do with this if you want to make a quick buck you can do it a lot of different ways you can cheat somebody you can misrepresent something you can go manipulate the political system to get an advantage but if you want to if you want to be successful over a long period of time I believe you need to be to focus first of all on creating value for others and that scent oh that's I've had people well that's naive that's utopian no it isn't because why will the customers want to pay you anything over a long period unless you're creating value for them why would your your employees want to work for you if they did they didn't have any alternative why do they want to give their best efforts why do they want to get excited why would they wake up at night with ideas if you're in a community a plan in a community unless you're creating value for that community why would the community want you there if you're polluting and hurting people and not contributing anything to the community so long-term success starts with being dedicated to creating value for others it's it's not au truism it's my whole philosophy is is to have a system of mutual benefit where both parties gain a society based on win-win all right one of the aspects of good profits that's so interesting to me is that you provide something of an intellectual history that makes it sound pompous it's a very readable enjoyable book but that you're talking about your own intellectual journey young man in Wichita you go off to MIT you begin reading you try to figure life out and as you're reading at MIT and during your few years as you're working back east I'm going to quote you now the conclusions you've reached the more books I read the more passionately I embrace the truth that widespread human well-being demands property rights allows people to speak freely refrains from interference and private parties agreements and exchanges and allows human action that is markets allows human action to guide prices close quote so we've got the young man from Wichita embracing The Scotsman Adam Smith and the Austrian economist Friedrich Hayek and Ludwig Ludwig von Mises you find your way to classical liberalism how did that happen well it happened because I discovered at an early age I didn't think I was much good at anything and but my father did bit me a big favor he had me working in all my spare time from the time I was 6 because he he announced he didn't want his sons to be country club bombs he wanted us to feel grateful for everything and entitled to nothing and and for whatever reason when you say working he didn't give you some cushy office job in the company no no no not at particularly at age 6 I started out digging dandelions and when I say dig dandelions you don't pull him out you dig down and you have to get the entire root or they'll come right back and I remember there was a club and a swimming pool across the street from us and I'm out there in 105 degree heat digging these and I could hear my friends my little six year old friends they're swimming and jumping off the diving board and I could recognize each one squeal was different with joy and I'm thinking why does my father hate me and their fathers love them I found out that if you don't and then and then I course graduated to shoveling out stalls and milking cows and that doesn't sound like much work but oh it's it's hard work so I would milk cows before school and then again after school Martin milk milk our cows and digging postholes and all these things but I discovered that much later that if you don't learn to do dirty jobs if you don't learn unpleasant work you by the time you're in your 30s you never learn to work productively and so he was doing me a huge favor so it was beyond the work ethic it taught you how to work productively and how to work with others in mutual benefit for example if a group of you during a dirty job you don't try to stick it to them make them do more then they'll try to do it to you and the work goes on and on you want to work together to get it done as efficiently as possible you want to understand who your customer is how do what if my customer want what I want to see value I better do this the right way or all I have to do it again so you learn tremendous number of lessons in doing these these dirty jobs so that's that was the starting point and then I learned I didn't think it was much good at anything and I didn't and the other thing you learn is you don't want to do that the rest of your life so you better find some aptitude or something so you can do something that's more satisfying and fulfilling to yourself it is not as unpleasant so I didn't find much any good and then third grade I found that the teacher was putting math problems on the board and I asked why is she doing that the answer is obvious and I am the I did wasn't obvious to the other kids oh my god I have an aptitude so from then on everything I did was the easy way out in that I'm going to take more math and more science and logic and things that I'm good at and try to minimize having to do the things I'm so I went to MIT where the language is primarily math not English because I was so much better at math than a in English and even though I took got all these engineering degrees at MIT anyway it's worth noting you got your undergraduate degree in engineering at MIT you got a masters correct me if I'm wrong but as I recall you got a master's in mechanical engineer clear engineer nuclear engineering and then you got a second master's in chemical and chemical engineering so one two three am i tree MIT degrees in engineering it's amazing you retain the facility to speak English well yes that's true well I had I had to relearn that but but even though I took all these engineering degrees really what I maximized my time on was courses in math and science because I was much better than at that then the application of the principles so and that may be one reason I got one in nuclear engineering because it was mainly science and and then I and I also thought it was a new field this is the way energy is going to go so there'll be entrepreneurial opportunities when I got in and I realized because of all the safety concerns it's going to be controlled by the government and it's not going to be so I I went back in and got a degree in chemical engineering but you're saying your bent of mind was almost more theoretical than applause was yeah it was it was curious and Howard Gardner's multiple intelligences what what he calls logical mathematical intelligence and he had I didn't know Howard Gardner then or of him but that I later learned that that that's the particular aptitude I had so so in the process I learned that it's an ordered universe that the physical world is ordered and governed by certain principles so I said to myself well if I if I'm going to be six in the physical world that is making technical innovations and and learning how things work I've got to understand the philosophy of science and the scientific method so after I got out of MIT I that's that was my fascination I was read everything I could on starting an Aristotle decart popper kun Palani Einstein Newton I mean that that was my my reading and all this time you're working back east for our thirty little high three little who can accounting and consulting know what's in a capital city little is was back then was one of the leading full-range consulting companies and I started in product development and then I then I got to move over to process development an interesting project we had one client we had was the chemical core and they had they had this idea that they would make Aris auto bombs out of marijuana derivatives and so I helped design the plant to make this this marijuana derivative that has five times 500 times the potency of regular marijuana and the idea was to put it make it put it in a bomb and then rather with a hostile population rather than go have to kill a bunch of people you drop these marijuana aerosol bombs on them and you that all be giggling and happy you could come lock them up and everybody would would be safe and peaceful that's I apologize I misfit some of the taxpayers hard-earned money in that one but anyway and then I just what I'm curious about is you in that you leave MIT and you get a practical job but you're reading is all really quite in other words if I didn't know you were working at Arthur D little if I just hear you talk about your intellectual interests the reading you're doing I say oh this is somebody who's working to become a professional academic this is a professor in the making I would I would not have predicted that you go back to Wichita and take over the company I'd have predicted that you to put yourself up in for a philosophy department philosophy of science and right now you'd be teaching it you'd be teaching at MIT well that's a matter of fact that was my plan I was first of all I was I was thinking I'd get a PhD in math and then I found out that as smart as I thought I was at math that when it got to really abstract math it was beyond me like Norbert Wiener who was a developer of cybernetics at it was teaching man and only the very brightest math students would go to his class Nolan had any idea what he was talking about so he would give everybody an A because he couldn't distinguish because they were all flunking his class and they were all the best students so I knew I couldn't go there so then I thought well I'll get a I'll get a doctor in chemical engineering and and I went to one of my favorite professors and I said well what about this he said what depends on what you want to do if you want to teach or be researcher yeah but just keep in mind we will make your life miserable we'll have you do all our dirty jobs make us look better dance our careers and you'll be kind of our our slave so if that's what you want to do you need to go through that if you want to go in business get the hell out of here as quickly as you can so I went off and thought about it and I said well I think probably logic and math will be helpful in business as well and that sounds like a lot more fun so I got this job at arth indeed little and then as I said I started in product development than I did process development and then I got over in management services and great learning experiences because we got to do consulting for Standard Oil New Jersey now Exxon DuPont copper's Stanley work all these sizeable companies and here I was like 24 25 and I'd go get to make presentations to senior management so talk about learning English I had to learning some English they had to do this so it was a great learning experience and then after I'd been there about two years my father calls me and and and wanted me to come back to work with him and I turned him down because I was learning a lot and I had no idea of going back I mean remember he had been a tough taskmaster and and he had he had worked me to the to the bone I thought and one of his favorite sayings being Duchess you can tell the Dutch but you can't tell them much so I thought my god I don't want to go back and get more of what I grew up under so I said thank you very much but I got different career paths so a couple of months later he called me back and he said son either you come back to run the company or I'm going to have to sell it because I don't have long to live and I have no successor and he says and I'll tell you what our main company is a company called Rock Island oil refining we don't have a refinery we have crude oil gathering system and and we bought an interest in another refining company and but we have a separate business that you boys are and I put it in your name this very small company but it makes refining equipment coke it's called coke engineering and it's not doing well I haven't paid any attention to it and I'll let you run that any way you want the only thing you need my approval on is you want to sell it now I said hey get to run it so rather than consulting drug people and how to run companies I can go run one and how old at this time was 25 God and so I came back and and it was wonderful he was absolutely true to his word he let me run it and and it was such a mess that I didn't know what I was doing but even with little experience I had I could make great improvements in it and and it blossomed and so then he turned over a lot of the other company and he actually made me president in 1966 as his health was really deteriorating and then he then he died in 1967 so I got to work with him for six years you were with your dad for six years from sixty-seven on you remain you mentioned your siblings at some point you and your brother David bought out your siblings interests you remain CEO of the company for what nearly half a century now that's right correct now I want to return once again to good profit I just read the way you had come to the conclusion that the best society was a free society private property freedom of speech and so forth here's another quotation from good profit that continues that thinking I'm quoting you as I digested this it dawned on me that these principles principles of liberty freedom and so forth are fundamental to the well-being not only of societies but also of organizations companies which are essentially small societies close quote so I want to make sure I have this right Koch Industries this gigantic enormous Lee successful company as we see it today back in your mind in the mind of young Charles Koch in the late 60s your father's gone now you're in charge Koch Industries is an experiment yes right you get to test your beliefs about human nature on this company that's right that's correct oh yeah no I had when I was doing even even when my father was still alive I was trying these but the way I came about this is as I said I was very interested in the philosophy of science and and and I came across this essay of Pliny's called the republic of science and in which he outlines how scientists work together to create the most innovation and advance scientific understanding and a key part of that well one part is to get all kinds of dispersed and desperate knowledge together that's how you get innovations when you have these conflicting ideas together and out of it come something new and another part is which I also learned from Karl Popper that that the scientific method is to is to articulate a theory that's refutable right and then to spend as much time trying to disprove it as prove it and and and he goes through what societies have done that in which one than those who apply this method that his free societies are those the Progress and others like come in as societies who have what's politically correct and don't allow other ideas to compete with it don't progress because they go down the wrong track so I said okay we need this kind of challenge culture the skepticism in our company and so we're going to build a culture of challenge that is you're a supervisor at any level and your people don't challenge you you've got to change your ways or you can't be a supervisor because you're not using the ideas of your people you're not building a republic of science and if you're an employee and you don't challenge your supervisor then you're not doing your job we why don't we get another computer or a robot or something to do it because you're not using your brain let me interrupt there because this gets us to what is the heart of much of good profit you've spent as I say almost half a century now working on working on this experiment of coke industries and you've distilled your management technique into what you call Matt market-based management which has five basic components let's take a couple of those you just touched on one knowledge I'm quoting you again knowledge processes not only is it permissible for employees at coke to challenge their bosses if they think they have a better answer but they have an obligation to do so absolutely close quote now in practice I just said in the introduction Koch Industries is now nine different freestanding units a hundred thousand employees around the world only a little more than half 60,000 in this country how do you defuse this I mean here's the herbal you could just say well this is very high so high sounding that mr. coke when he was a young man developed this idea of that we needed challenged culture in our company terrific but now we have a big company processes apply the usual bureaucrat how do you actually infuse genuine challenge culture across an entity as large as this well and I mean it starts with with values and that's that's our the five dimensions our vision virtue and talents knowledge process as you mentioned decision rights and Senate's and they're all based as you say from from my studies on on how people can best live and work together how societies can organize himself to maximize well-being for everybody not just for a select few and so so the starting point is is having these values what we call our ten guiding principles having them be who we are as a company many companies have lists of principles but in many can dance the end of our stick them in the drawer and that's the end of it the our principles are who we are as a company they guide everything we do they determine who we hire who we retain who we promote how you as employee will be rewarded everything and to keep part of those values is is our key part of those principles is challenge you've got to challenge and you've got to be skeptical and you've got to be committed to getting long-term results not just results this quarter but we evaluate and reward people on long term results and it's I'm not saying it's easy or we're perfect we're a long way from perfect in any of the but we fight it every day but one of the most difficult things we have when we acquire a company is building in this challenged culture because in so many companies if you challenge your boss in particular if you're pushy about it that can affect your career in a negative way sure and our we're the opposite if you never challenge that's going to affect your career and in that negative way if you challenge not to prove you're your smartypants or show up somebody but because you have an idea on how we can improve how we can do better how the hell your boss is decision is a mistake and if you do that whether you're right or wrong you're going to be celebrated and you're going to be rewarded for that particularly obviously if it gets improves results another of the five tenets of market based management virtue and talents and again I'm quoting from good profit we can hire all the brightest MBAs in the world and if they don't have the right values we will fail we hire based on values first then talent that's breathtaking it's breathtaking well first of all just as a practical matter how do you screen for values how do you screen for values legally you're not allowed to ask questions about people's religion huh how do you do that I don't think they're based on well we're not concerned about religion we're concerned about do you have integrity do you have the courage to live by the values when they're tough this is why Aristotle called courage the most important of all the virtues because if you don't have it you won't be able to exercise the other virtues when they're needed most so courage compliance value creation being dedicated to creating real value for our customers for society for the company knowledge Challenge treating others with dignity and respect and then trying to have a job that's fulfilling to you because we find and this isn't just altruism this is the philosophy of mutual benefit if an employee has a fulfilling job they're going to be more creative and more productive and it makes their lives better Charles Koch author of a good profit thank you thank you Peter for uncommon knowledge and the Hoover Institution I'm Peter Robinson

Channel: Hoover Institution

Views: 57,515

Rating: 4.6492891 out of 5

Keywords: Koch, good profit, classical liberalism, integrity, business, success

Id: nrfUUiD7W3I

Length: 27min 19sec (1639 seconds)

Published: Thu Apr 14 2016