How Creating Value for Others
Built One of the World’s Most Successful Companies
Charles G. Koch
If you have wondered, as I have, about the left’s unceasing attacks on the Koch brothers, wonder no more. Read Good Profit.
Senator Harry Reid calls the Kochs “un-American.” Nancy Pelosi accused them of “a plot to take over the government” using “nefarious schemes.” President Obama took the unprecedented step of using his bully pulpit to demean private citizens for political activism. But the financier of progressivism and Democrat Party godfather billionaire George Soros got a pass.
Perhaps what drives the left and its Democrat spokespersons to vituperation is not just that the Kochs advocate political freedom and free enterprise capitalism. It is that they actively dispute the left’s assumption that capitalism is inherently evil because it is based on self-interest and detrimental to the common good.
In Good Profit Charles Koch argues that self-interest is a phony issue. He cites noted law professor and prolific author Richard Epstein to explain that the essential question ”is how to channel self interest for the general good.”
‘No individual could survive in a world of scarce resources without a strong measure of self -interest, one that includes at the very least his own family and close associates. Self-interest can manifest itself in one of two ways when dealing with strangers; through either aggression or cooperation.’
In this reviewer’s view, Socialist and Democratic presidential candidate Bernie Sanders is a poster boy for aggression. Sanders’ asserts that for distribution to be equitable, the government must do the distributing. He promotes confiscatory taxation of “the rich” and a complex combination of dictates and regulations designed to transfer wealth to those the government deems deserving.
The opposite approach is cooperation. It is achieved through mutual benefit. It operates by rules to hinder people from using aggression (force or deceit) to advance their self-interest. According to Nobel Prize-winning political economist Vernon Smith:
‘…(T)hese ‘beneficial rules of exchange are the right of possession, its transference by consent, and the performance of promises. This system encourages profiting by economic means, not political means.
In a society with rules of just conduct, in order to benefit ourselves we must benefit others. Adam Smith summed up this process when he wrote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own self-interest…
As an engineering student, Charles Koch studied mathematics, physics and chemistry. He learned that “we live in an ordered universe and that the natural world is governed by certain principles.”
He wondered whether there were also principles that determined societal well-being. Books that “covered the entire philosophical spectrum from ‘left’ to ‘right’ and everything in between” helped Koch understand those principals.
…(I)t dawned on me that these principals are fundamental not only to the well being of societies … but also of organizations, which are essentially small societies…
From antiquity to today, the best societies, as well as the best companies, had been the ones with the framework of freedom in which individuals can improve their lives by improving the lives of others,
Koch incorporated those principals into a business framework he calls
Market-Based Management. Consistent with the principle of mutual benefit, the goal of MBM is “good profit.”
The author contends that companies that create value for their customers in ways that improve their lives create long-term value for everyone–customers, employees, shareholders, and society”- make a contribution to society. “Good profit “comes from making such a contribution.
To save space this review offers a much-abbreviated version of the five dimensions of MBM.
Vision: providing products and services that customers value more than alternatives, while more efficiently using resources.
Minimizing waste intersects with environmental measures. For example, since 1997 Koch refineries have reduced air emissions at their refineries by 76%. Information not widely reported by left-leaning media.
Koch condemns government subsidies and mandates because they distort markets and reduce consumer choices. He believes that government should not pick winners and losers. Viable products are the ones that benefit customers and compete without government intervention. He uses the example of ethanol and biodiesel production, part of Koch Industries. Koch actively lobbies against ethanol mandates and subsidies, asserting ethanol can compete without them.
Virtue and Talents: Although skill and intelligence are important, Koch hires on the basis of values first, then talent. Or as he writes, skills can always be taught, but the employee who lacks the foundational values of MBM would be a poor fit for the company.
Knowledge processes: Employees are expected to respectfully inform supervisors if they have a better idea than current practices. Supervisors are obligated to create a culture that invites challenges and results in better use of resources and increasing value.
Decision Rights: Employees “own” well defined areas at work, which results in greater pride and increased responsibility for outcomes.
Incentives: At Koch, an employee can earn more than his boss.
If an innovation adds value for the customer, it may eliminate products (creative destruction) or add to them. Predicting customer needs is an important impetus for new technologies and new products. Employees are rewarded on the basis of a careful tracking system that determines value created.
All five are simple concepts, but as Koch warns, they are not easily integrated into a coordinated and comprehensive whole. Getting employees to “internalize those principles and practices” is an on-going challenge at Koch Industries. The author incorporates practical examples from vivid stories of successful and not so successful efforts.
If the foregoing sounds like a guide to successful business practices that is exactly what Good Profits is intended to be. As Koch explains in the Introduction:
I am writing this book for all business readers who are eager to more beyond anecdotes, buzzwords, and laundry lists. And learn how to apply MBM to generate good profit for themselves, their companies, and society at large…
Good Profits includes a Koch family history, and a fascinating account of father Fred Koch’s determination to overcome adversity. He founded the company that the author became steward of in 1967. Following his father’s example and developing and following the precepts of MBM, Charles Koch grew a $21 million business into a global corporation with revenues in the billions and 100,000 employees worldwide. He does not omit the rough patches along the way.
Entrepreneurs, present and future, will certainly benefit by reading this book. But as this reader attempted to communicate, Good Profits merits a wider audience. It is an erudite, persuasive and at times humorous rebuttal of the left’s fallacious claims to moral superiority.
There is nothing moral about the outcomes of the failed systems of the past. History and current events demonstrate that the only equality achieved is equal impoverishment and servitude. Nor is there morality in evoking the chimera of equality to persuade the gullible that expecting different results from doing the same thing over and over isn’t lunacy.