Meet Charles Koch. Philosopher, engineer, self-trained economist, libertarian activist, philanthropist--and the CEO of Koch Industries, a $60 billion, 80,000-employee empire, which just recently became the largest and most profitable privately held company in America.
"We couldn't have achieved the profitability we have," Mr. Koch insists, "if we had been a public company. No investor would have been patient enough to allow us to build a firm oriented toward long-term growth and profits." This is one of Mr. Koch's bugaboos regarding the deficiencies of modern corporate management. He notes, "The short-term infatuation with quarterly earnings on Wall Street restricts the earnings potential of Fortune 500 publicly traded firms. Public firms are also feeding grounds for lawyers and lawsuits."
He then confidently predicts: "Regulatory laws like Sarbanes-Oxley will only increase the earnings advantages of private firms. I would suspect that there will be more of these private company takeovers of publicly traded companies."
This creative forward-thinking should come as no surprise, because Mr. Koch is immersed in the ideas of liberty and free markets. Whereas the bookshelves of most of America's leading CEOs are stocked with pop corporate management and "how to succeed" books, Mr. Koch's office is a wall-to-wall shrine to writings in classical economics, or, as he calls it, "the science of liberty." The authors who have had the most profound influence on his own political philosophy include F.A. Hayek, Ludwig von Mises, Joseph Schumpeter, Julian Simon, Paul Johnson and Charles Murray. Mr. Koch says that he experienced an intellectual epiphany in the early 1960s, when he attended a conference on free-market capitalism hosted by the late, great Leonard Reed.
Mr. Koch is by training a scientist, with master's degrees from MIT in nuclear and chemical engineering. Despite his business success, he has no MBA or formal management training. Mr. Koch sees that as an advantage. "Being an engineer, I realized there's an objective reality that helps one understand the rules and conditions that improve the human condition," he says. "Laws and principles that facilitate the advancement of peace, prosperity and social progress are as immutable as the laws that work in science. . . . Politicians often come up with misguided policy solutions," he continues, "because they suffer from Hayek's 'fatal conceit' and believe they can violate basic laws of economics. They are just as misguided as the man who jumps out the 14th floor of a building convinced that he can repeal the law of gravity."
As we continue, Mr. Koch becomes increasingly animated. He discusses another seminal work in his collection, F.A. Harper's 1957 "Why Wages Rise." The book demonstrates "that wages rise not because of unions or government action, but because of marginal productivity gains--people get more money when they produce more value for other people." Then he confides, "I was so thrilled by this revelation that I had what Maslow called a 'peak experience.'"
"Long term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs. "In this sense, maintaining a business is, in reality, liquidating a business." Mr. Koch likens the cycle to Schumpeter's "creative destruction"--where the old and inefficient are ruthlessly swept away by the new.
What we have here are the theories of supply-side economics operating on the micro-level of the firm. Incentives matter; competition fosters innovation; property rights must be firmly established. Koch Industries gives big financial bonuses for entrepreneurial behavior by employees, whether it's a project head or a janitor. The idea is to reward all activities that add to the bottom-line profitability of the firm. "We want our employees to act like owners," Mr. Koch explains. Similarly, employees earn "decision rights" for past successes. "Just as central planning is a failure in running government, so it is at the level of the firm," he says, repeating one of his favorite operating tenets.
Good ideas can be so powerful! If they can be demonstrated in the form of an entertaining story, even better, as Bret reminds us. If you did not catch the above reference to Leonard Reed, let me point you to a terrific story - I, Pencil, which I believe is one of Bret's favorites. Everyone should read this at some point and I do mean everyone. Be sure to see Milton Friedman's introduction:
Leonard Read's delightful story, "I, Pencil," has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith's invisible hand—the possibility of cooperation without coercion—and Friedrich Hayek's emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that "will make the individuals do the desirable things without anyone having to tell them what to do."