A version of this interview appears in the Oct. 19, 2015 issue of Forbes.
Charles Koch was just weeks away from turning 80 when he met with FORBES to talk about next year’s presidential elections, the course of American politics and his new book, “Good Profit,” which attempts to explain the home-grown business philosophy he calls Market-Based-Management and which helped propel
We met in Koch’s large but unpretentious office on the third floor of the Koch Industries headquarters in Wichita, a black glass-and-granite structure that looks out over mostly undeveloped prairies to the north. Koch wheeled around to a conference table with his lower leg wrapped in a cast; he recently had foot surgery at the Hospital for Special Surgery in New York, which received a $25 million donation from his younger brother David, New York’s richest resident. Koch gave up tennis and skiing years ago, but the competitive golfer – he has an 11.1 handicap -- hopes he can return to the links after his foot heals.
Charles Koch in his Wichita office. (Jamel Toppin for Forbes)
This is not the typical office of an oil-industry executive: No Remington bronzes, no autographed Super Bowl footballs. A Picasso-esque painting of a figure in red hangs on one wall, the precocious work of his daughter Elizabeth, now a publisher in L.A., when she was 16. A portrait of Koch's father, Fred, hangs on a wall to the right of his desk. On another wall hangs a framed letter Koch found in his father's safe deposit box after Fred's death in 1967. Written in 1936, the letter expresses concern about the life insurance policies Fred had purchased to pay for his children's education in case he died. “If you choose to let this money destroy your initiative and independence,” Fred wrote, “then it will be a curse to you and my action in giving it to you will have been a mistake.”
Following are excerpts from a wide-ranging conversation with Koch.
POLITICS
At the Freedom Partners semi-annual conference for rich conservatives in January, Koch officials privately exhorted some 400 rich attendees to spend $900 million over the next presidential election cycle to try and influence U.S. policy on everything from regulation to criminal justice. Koch says only a third of the money will go directly into politics, and he sounded distinctly unenthusiastic about any of the candidates. In fact, he has said “I am not a Republican.”
Q. What are your goals in this election?
A: My view of the political realm, not just now but for many decades, is that the Democrats are taking us down the road to serfdom over the cliff at 100 miles an hour and the Republicans are going around 70 miles an hour. What I want is to reverse the trajectory of this country.
Q. What are the key issues?
A. There are a lot of topics we could talk about but two really big ones. One is we have out of control, irresponsible spending by both parties that are taking us toward bankruptcy as a country and as a government. Related to that is we’re headed toward a two-tiered society. We’re destroying opportunities for the disadvantaged and creating welfare for the rich. This is coming about by misguided policies creating a permanent underclass, it’s crippling the economy and corrupting the business community.
Q. How do you fix poverty?
A. Our priorities are criminal justice reform and eliminating the barriers to low-income people starting a business or even getting a job. The biggest is occupational licensure. There are hundreds of these. You name it, depending on the locale or the state you have to get a license. They’re knocked out of it and of course, this is all cronyism corporate welfare. Those who are in the business don’t want all these newcomers coming in undercutting ‘em and destroying their profit margins.
Q. Who do you like in the GOP field?
A. I’ll let somebody else decide that. I’m not going to talk about personalities or the individuals.
Q. If Donald Trump is the Republican candidate for president, will you support him?
A. We’re not going to talk about that.
Q. Is it true you’re spending close to a billion dollars on the 2016 campaigns?
A. No. The billion dollars is for all these things we do.
Q. How much of that will be from you and your brother?
A. Well, a small fraction.Most of what I give is to my foundation, and the Charles Koch Institute. Almost all of what I give personally (to political action committees like Koch PAC and Freedom Partners PAC) is public and I’m fine with that.
Q. We now know that organizations affiliated with you including Freedom Partners spent more than $200 million in the 2012 cycle. Will we have to wait two years to find out what you’re spending on this one?
A. We’re estimating around $300 million out of the $900 would go to that. But it depends on what the donors give.
Q. The whole $200 million last time wasn’t you and David writing checks?
A. No, absolutely not. No.
Q. Have you had any impact on the Republican Party?
A. It’s tough. Not nearly what we’d hope. (An aide suggests he seems to have succeeded in killing the Export-Import Bank.) But that’s a small issue in the whole scheme of things. I take a much longer view. My brother David is much more interested in the political side. I’ve been doing this for more than 50 years, as you know. I’m more interested in the understanding, the education, the cultural aspects. Because I think that’s what’s going to drive what kind of country we’re going to have and whether can really change the trajectory of the country. To have a white knight come in and going to save us, that may help a little, but you’ve gotta change the hearts and minds of the people to understand what really makes society fairer and what’s going to change their lives. And it’s not more of this government control, and those in power telling us all how to live our lives. Throughout history that has not worked. And the more you have of that, the more people suffer, particularly the poorest people suffer.
Q. So will this presidential election decide anything? It doesn’t sound like you’re enthusiastic about anybody.
A. My ideal candidates would be Calvin Coolidge or a William Gladstone. I mean, you look at what they did. Of course they were different time and place. (Gladstone served as British Prime Minister four times between 1868 and 1894 and helped eliminate tariffs, cut budget deficits and increased government transparency. Coolidge was the famously frugal president from 1923-29) Look what Calvin Coolidge did. He cut government expenditures in half. Cut tax rates by two- thirds, reduced the national debt by a third and cut unemployment from 12% to 2.4%. Now the only thing I hold against him is he didn’t run again so we got Herbert Hoover, who turned a recession into a great depression with his policies.
Q. You mentioned a white knight. What about Trump?
A. Yeah, I mean, he’s… I’m not the only one person who’s frustrated with what’s going on in both parties. But I would hope there would be somebody who would capture that frustration, and what’s behind that frustration, and do what Calvin Coolidge or William Gladstone did and change the trajectory of the country. Now it’s not likely, because I’ve got to go back to Calvin Coolidge to find somebody who did that. I’ve got to go back to Gladstone in 1846.
Q. What about Reagan?
A. In his first term the growth of government was slightly less, but in the second one it was right on target right with what the Democrats had done.
Q. George W. Bush?
A. In fact we got this seminar group (now the semi-annual Freedom Partners summit) started in opposition to Bush 43’s policies. We started in `03. Bush was running on free enterprise, more freedom, more opportunity and then he grew the government more than Clinton. And increased regulation more than Clinton and got us in more wars than Clinton. So I mean my God, what are we doing? He is a fine person. I’ve met him, and know something about him individually trying to do the right thing, but I don’t know, he must have had bad advisors or something.
Q. How about our current president?
A. Well, he’s helping us on criminal justice reform, so we’re grateful on that. And there’s a sign they may be beginning to realize the inequity and the harm that this occupational licensing does.
Q. So you won’t name a favorite?
A. I want someone who’s going to change the trajectory of the country in the ways I said, away from the two-tiered society and away from bankrupting us. And that’s out. And you can’t tell from their rhetoric or their popular appeal. So I need some better evidence on who’s going to do that. And who’s glib and who has the most popular appeal has not been good evidence for bringing that about.
Q. Your conferences in California have been criticized for secrecy, so you invited the press this year. Was that a mistake?
A. We did the last two. As far as I’m concerned we could be completely open on everything. We have participants, donors to this that aren’t as comfortable with being public. And who can blame them? They don’t want to get the kind of abuse I get, the death threats I get. I had 153 death threats last year. Now al Qaeda has me on their hit list. So others don’t want that. They don’t want their names exposed,. So that’s why we’re not more open than we are. But as far as I’m concerned I’m not doing anything I’m ashamed of, I’m happy to tell why I do things, what I stand for, what I;m trying to accomplish. So all my presentations at the conference are open to the press. But I leave that up to the person.
Q. Why do you generate so much hostility?
A. These ideas, the idea that we believe that people are going to be better off when they control their own lives rather than have somebody in power have what Hayek called the "Fatal Conceit," and Easterly called the "Tyranny of Experts," think they can tell people, force people to run their lives the way those in power think they should. So this threatens people in power, or people who believe the opposite have a different vision on how society can best function. So I understand it perfectly.
MARKET BASED MANAGEMENT
Koch’s management philosophy is an amalgam of personal experience, an engineer’s obsession with measurement and analysis (Koch has master’s degrees in chemical and nuclear engineering from M.I.T.) along with a large dose of the libertarian economic thinking of economists like Friedrich von Hayek, Joseph Schumpeter and William Easterly. It’s based on “five dimensions:” Vision, Virtue and Talents, Knowledge Processes, Decision Rights, and Incentives.
Q. Explain Market Based Management in 20 words or less.
A. It’s a way for organizations to succeed by helping others improve their lives. Now that sounds like left-coast pyschobabble and it normally would be, but not if you base everything on it. And that’s who you are, and you don’t just have posters on the wall and put all this stuff up for show and don’t implement. (MBM drives) who we hire, the training, having leaders who live up to our values, and then testing everything for results.
Q. In your book you say you’d rather have an employee risk a project with a 50% chance of success and a $10 million payoff than a 90% chance of success and $1 million payoff. That flies in the face of normal human psychology.
A. That is too broad an indictment. Many human beings are that way. It’s like John Adams said about the system they were trying to create in this country: “This is a system for moral people. It will work for no other.” So this is a system that works for certain people.
Q. You also eliminated most of your outside insurance in favor of “investing” in safety programs. Isn’t that taking a huge risk with your own fortune?
A. You can’t buy enough insurance to really cover it if you had a catastrophe. (Investing in safety programs is) much better than paying insurance because it prevents the disaster in the first place. With insurance, at best you’re going to get half the face value of the policy anyway.
Q. Koch Industries has been a compound growth machine: A $10,000 investment in 1960 would be worth $50 million today. How do you identify the winners from the losers?
A. Well, you get a lot of losers. What all this comes down to is you need an experimental discovery culture and model. You can study these things ‘till the end of time and not know because the future is unknown and unknowable. We try to do experiments at a level that we can afford to lose.
Q. Conservatives like you say the government shouldn’t be in the business of picking winning technologies, but Koch employees have to. What’s the difference?
A. We don’t do it from a politically correct or bureaucratic standpoint. We run experiments all the time. And those that prove out, we do. You limit the amount, and then if it doesn’t work, you kill it. Whereas in the government and they get something that politically correct and it doesn’t work then they say “Well, we need to spend more money on it.” So you never kill it.
Q. How would Market Based Management work in the White House?
A. Oh my god. You can just go through the five dimensions. You start with the vision. What capabilities do we have to create superior value and help make other peoples’ lives better? What can we do better than our competitors? Well, that’s the first thing the White House needs to do. What is the nature of government? Government is a social agency of coercion. It has a monopoly of force in a given geographic area. So what kind of activities does force work better than voluntary cooperation and competition? And that’s what government ought to be limited to. You need to test every one. I mean certain things basically involve coercion. Like protecting peoples’ life and property. Like national defense. Like enforcing dispute settlements. To do those things, you need to use force. So those are roles for the government.
Q. Is the Obama administration doing a good job in education, with its emphasis on testing and incentives for improvement?
A. No, I think that the education system should be run locally and there ought to be competition and the students have choice. The main thing is the education system needs to be run for the benefit for their customers. The schools need to be run today for the benefit of the students, with innovation and experimentation, rather than being run for the benefit of the teachers and the administrators.
Q. How do you evaluate an employee who backed a concept that utterly failed?
A. We look at, how was the decision made? If you have a failure and you’ve applied good experimental methodology, then that’s fine. OK, you lost something. But what we do in we’re evaluating somebody’s compensation and their performance is look at the sum of everything they do. So you have more losers than winners but if the winners have done better than the losers because we followed through on them and made a business out of them, then these are just small deductions from your overall. Whereas if you plunge in and do a bunch of stupid things then yeah, we don’t want to give you the property rights, the authority, the decision rights to do more of that.
Q. How do you succeed at Koch Industries?
A. If you want to be a leader here, you have to build a challenge culture. If people don’t challenge you then you’re not a good leader. You can’t be, because you’re not using the knowledge of your people. And if you’re an employee, and you’re not challenging, what good are you? We’re better off getting another computer.
ENERGY POLICY
Koch Industries is deeply involved in the carbon economy, with refineries, chemical plants and energy-gobbling manufacturers like Georgia-Pacific. Yet Charles Koch lobbied to end ethanol subsidies, favors exports of crude oil that would theoretically raise his price of raw materials, and supports the XL pipeline even though it would force his Minnesota refinery to bid more for heavy Canadian oil. I started by asking him his views on global warming, and he rattled off from memory statistics going back to 1880 comparing atmospheric CO2 levels to temperature.
Q. Is this evidence of CO2-induced global warming?
It’s highly probably that CO2 has contributed to that.
Q. Is it good science to conclude humans are the cause?
A. It’s not settled, it’s not certain. Anybody who says something this complex is settled is not using good science.
Q. Is current energy policy too focused on fighting carbon emissions?
A. The present policies of subsidizing and mandating inefficient alternatives is counterproductive. The enormous cost and unreliability of wind and solar are making people’s lives worse. They’re increasing the cost of energy, they’re corrupting the business community, increasing corporate welfare, and they’re counterproductive. On the other hand, if people believe this is a problem, or could be a problem, then it’s worth investing a certain amount in, not by government mandating, but by letting companies like ours and others innovate to find economic solutions that will make peoples’ lives better today and in the future. Because there are economic alternatives to fossil fuels and because they reduce whatever risk there is that CO2 emissions can cause real harm in the future.
Q. You have engineers working on energy-saving and low-carbon technologies at Koch. How about ethanol?
A. Here’s the thing about ethanol. Remember, we helped get rid of all the subsidies except the mandate. They have this mandate they need to get rid of. And we’re the sixth-largest ethanol producer. Get rid of the mandate and let ethanol to stand on its own feet. Is it really economical? Is it really adding value?
Q. In your book you say you support the XL pipeline even though it would cost you money. Explain.
A. If that pipeline is built it will reduce the cost of transporting Canadian crude to the Gulf Coast by $3 a barrel. So presumably the price of Canadian heavy oil will increase by $3 a barrel compared to foreign competition, which is what the Gulf Coast refiners are running now. So that will increase the cost of our crude oil at our Minnesota refinery by $3 a barrel. We run 250,000 barrels a day of it, so that will cost us $750,000 a day, which is a little less than $300 million a year. But we’re still in favor of it because it makes good sense.
Q. Ah, but you have millions of acres of heavy oil reserves in Canada yourself.
A. First of all we don’t develop oil in Canada. If we find something with reserves or have acreage that goes up in price we sell it. So we approach it more as a trading vehicle. And our total production of heavy oil in Canada is less than 100 barrels a day. Take 50 barrels a day of production and we import 250,000 barrels a day, what are the odds that that acreage is going to be producing 250,000 barrels a day? It’s ludicrous.
SUCCESSION AND PERSONAL LIFE
Koch turns 80 in November, and while still very much in charge at Koch Industries, he has to think about succession. His son Chase, 38, a graduate of Texas A&M, runs Koch’s agronomics division, which develops crops that use fewer resources like water and fertilizer. His daughter Elizabeth, who graduated from Princeton, runs a boutique publishing company called Catapult.
Q. You’re 79, what can you tell us about your son Chase and succession?
A. I’m proud of him.
Q. Typically you move somebody being groomed for top leadership around more in the company.
A. He’s worked in a number of different areas. We try to run a meritocracy. Whatever position Chase has he has to earn, he has to be the best one to hold that position and get whatever compensation he’s getting. We have succession, we have a lot of great talent in the company, the best we’ve ever had, with great values, so we’re in good shape there were I to vanish tomorrow.
Q. And if you were to vanish tomorrow, who’d own the company?
A. It will be clear on who owns it. I own 40%, so mine will be clear. And I think David got his set up, and Elaine Marshall (whose family owns 16%) has hers set up.
Q. So it won’t be a foundation?
A. No.
Q. Have you taken the Warren Buffett pledge to give it all away?
A. I’ve already done my estate planning, so all the rest of mine will go to my foundations. So I don’t need to do any pledge, I’ve already done it.
Q. Your daughter Elizabeth is building a publishing company -- does she have your management chops?
A. I don’t know, she’s a much better writer than I am. She’s terrific. I’m really proud of both my kids. They have great values, they treat other people with dignity and respect and great work ethic.
Q. Looking back, what was your first really big deal, the one that had it failed, there would be no Koch Industries today?
A. (In 1969 he made a deal with J. Howard Marshall II to gain control of Great Northern Oil Co. and paid $25 million to buy out Union Oil’s 40% interest.) That was a whole lot of money for us then. (Marshall agreed to accept Koch Industries stock instead of cash, even though the precise exchange rate couldn’t be established because that would make it a taxable event.) We said, “We’ll be fair later.” How many people would agree to that? When he had the swing vote which he could have sold for a big premium then? But bless his heart, he trusted me.
