Charles G. Koch - Good Profit: How Creating Value for Others Built One of the Worlds Most Successful Companies

The possibility of men living together in peace and to their mutual advantage, without having to agree on common concrete aims, and bound only by abstract rules of conduct, was perhaps the greatest discovery mankind ever made.

F. A. H AYEK

P eace and mutual advantage: These are essential requirements for civil society and, on an individual level, for successyours and mine. Together with those abstract rules of conduct so admired by Nobel Prizewinning economist Friedrich Hayek, they mirror the goal of my business management framework: that everyone knows the right thing to do and is motivated to do itwithout explicit directions or overly detailed rules.

As CEO of Koch Industries, Inc., I am proud to work with principled people who help themselves by helping others improve their lives. I am dedicated to pursuing only a certain kind of profitwhat we call good profit.

By good profit, I dont mean high margins or high return on capital, or lots of profit by just any means. What I consider to be good profit comes from Principled Entrepreneurshipcreating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity. Good profit comes from making a contribution in societynot from corporate welfare or other ways of taking advantage of people.

The most value for customers is created by the scenario described by Hayek on the previous page. One that maximizes the freedom of the employees bound only by abstract rules of conduct. This is how we strive to manage Koch Industries.

In the early 1990s when Koch Industries introduced its management framework, Market-Based Management, to our metal fabrication plant near Bergamo, Italy, its union leaders responded with concern: This might work in the United States, but its not going to work in Italy. Here, managers think. Workers work. Youre asking us to do the managers job. Yet that mentality undermines success, general well-being, and the development and fulfillment of the individual.

We prefer to look at business through a win-win mind-set, which was the guiding philosophy behind the MBM framework we began to develop in the mid-1960s. This framework has enabled Koch to grow tremendously; indeed, it was essential to turning a company valued at $21 million in 1961 into one valued at $100 billion in 2014. (This $100 billion figure is derived from Forbess estimate of my brother Davids net worth and my net worth.)

As shown on the next page, an investment of $1,000 in our company in 1960 would have a book value of $5 million today (assuming reinvestment of distributions)a return 27 times higher than what a similar investment in the S&P 500 would have achieved.

It is worth noting that our rapid growth in value has continued even as we have grown into a large organization with more than 100,000 employees. Such results are uncommon among large companies. In 1917, for example, Forbes produced its first list of the hundred largest companies in the United States. Ninety-six years later, only thirteen of those companies were still in existence and independent, and only seven remained among the hundred largest in the country. Despite all their assets and capabilities, the vast majority of the nations largest companies could not keep pace.

What is Kochs secret? I believe it is Market-Based Management, our unique business management framework, which has allowed us to more than keep pace through half a century of dramatic change.

In the decades since we began to develop this framework, energy prices have risen and fallen in repeated cycles, global competition has intensified, the geopolitical map of the world has been redrawn, the volume of regulation and litigation has soared, new technologies have transformed industries and businesses, and the pace of innovation has accelerated, but MBM has enabled us to deal with it allall the while earning good profits: good because they are driven by a voluntary, mutually beneficial relationship with customers. We dont lobby the government to mandate or subsidize what were selling. That creates bad profit. Instead, we earn profit by creating valuefor customers, society, our partners, and every employee who contributes. That is good profit.

Going forward, Kochs vision is to double profits on average every six years by applying Market-Based Management, which is outlined and detailed in this books chapters.

Like most, I am interested in the well-being of not only my family and myself, but others as well. Clearly my family and I have benefited from the success of Koch Industries. But so have the more than 100,000 people Koch employs around the world in over sixty countries, including China, Mexico, India, Japan, Canada, the UK, Germany, Singapore, Brazil, and Malaysiaas well as all the people who have affordable access to countless valuable products and services because of Kochs efforts and discoveries.