How the Kochs built their business — and their power

The Washington Post
By Suzanne Goldenberg

Until Donald Trump came along, there was arguably no bigger villain for the American left than Charles Koch. Over half a century, the notoriously secretive multibillionaire from Wichita transformed Koch Industries from a midsize Midwestern company into a conglomerate exercising enormous influence over the American economy and public life.

But that’s not why he antagonized the left. Most Americans have never heard of Koch — which is how he likes it. The rest know him as a largely unseen and entirely unaccountable force in politics, bankrolling Republican lawmakers, corporate lobbying efforts, conservative think tanks and tea party groups that together have conspired to block action on climate change and roll back government regulations.

In “Kochland,” Christopher Leonard has done an impressive job of breaking through that secrecy and getting insiders as well as outcasts to talk. As a result, “Kochland” is the most definitive account yet of how one of America’s richest and most powerful families amassed its fortune.

For the most part, Leonard steers clear of the Kochs’ influence on politics. He turns his efforts instead to exposing their sprawling business dealings and their strategy for building a corporate empire structured to avoid regulatory and public scrutiny. The Koch way, we learn, has had sweeping consequences for the American economy: crushing the power of unions and redefining the concept of regulatory compliance. As a chronicle of American capitalism in the 21st century, “Kochland” makes for compelling, and often scary, reading.

Behind the opaque black glass of the conglomerate’s headquarters in Wichita, Charles Koch turned Koch Industries into an incubator for his ideas about government’s role in the economy — and for his personal management philosophy, known as Market-Based Management. Koch was so enthralled by his theories about entrepreneurship that he trademarked the MBM name.

New hires spend several days immersed in MBM as part of their indoctrination process. The “Guiding Principles” of MBM are tacked onto cubicles and printed on paper drinking cups in the breakroom. A supervisor at a Koch-owned paper plant described his MBM trainer this way: “It was like watching a German war movie. He was very direct. He told us: you will have homework. You will complete it before the next morning.”

MBM seems unobjectionable. It prescribes a workplace culture based on core principles that include integrity, knowledge, principled entrepreneurship, respect and humility.

But in Leonard’s account, MBM has been used to justify cutthroat business practices that crushed union rights, sacrificed environmental and worker protections, and legitimized outright theft. “As Market-Based Management was rolled out through the company it would wreak its own kind of havoc,” Leonard writes. “There would be accidents and spectacular business failures. There would be public humiliation and, worst of all, a host of criminal charges brought against the company.”

Leonard describes a genus he calls “Koch man.” Typically a Midwesterner from a state university, the Koch man “was lean and athletic, with a square jaw and a manner of speech that was utterly earnest, sincere, and laced with unbendable self-confidence,” Leonard writes.

“The employees learn MBM’s vocabulary and speak a language among themselves that only they truly understand. They drop phrases like ‘mental models’ [and] ‘experimental discovery’ … that instantly convey deep meaning to insiders,” the author explains. “Employees didn’t have responsibilities, they had ‘decision rights.’ ”

Leonard makes no direct reference to any people of color at headquarters or other Koch enterprises. And there are only a few women on a list of more than 75 main characters.

Charles Koch was determined to export MBM from Wichita to Washington. Together with his brother David, he has bankrolled Republican lawmakers, think tanks and political action groups like Americans for Prosperity, and tried to bend or block government regulations that he considers a hindrance to his own businesses and the overall economy. “Charles Koch’s political vision represents one extreme pole in the ongoing debate about the role of government in markets,” Leonard writes, “a view that government should essentially protect private property and do little else.”

Koch is undoubtedly brilliant at building his company and making money. In 1968, a year after his father, Fred, collapsed and died on a hunting trip, the oil pipeline and equipment and ranchland business had about $250 million in annual sales, Koch told a news conference in New York. Today, the enterprise is worth about $1.7 billion . And Charles and David have amassed personal wealth estimated at more than $40 billion each, according to Forbes.

Charles and David split their shares of Koch Industries equally after buying out two other brothers in a rancorous and hugely litigious breakup. David relocated to New York, where he cultivated a reputation as a philanthropist and patron of the American Museum of Natural History and the New York State Theater, now named the David H. Koch Theater at Lincoln Center, home of the New York City Ballet.

Charles remained in Wichita, driving himself to work at 7:30 most mornings and climbing the back stairs to his third-floor office. In the 2000s, amid the Kochs’ growing notoriety as funders of conservative causes and climate denial, Koch acquired a security detail, and the company installed an earthen berm and checkpoints around the black-glass office block.

While processing crude provided a gusher of profits, Koch did not confine himself to oil. When it came to expansion, Koch Industries scoped out companies that played to its core capabilities. Koch got into transportation, farm products, fertilizer and data. His companies were early adopters of data analytics, including specialized weather forecasting, according to Leonard. They also moved into commodities trading.

Unlike executives at public companies, Koch and other senior leaders had no obligation to report to shareholders or generate large dividends. They could take the very, very long view of investments, prospecting for companies that others had written off, looking for gaps in the market. Their approach and resources built Koch Industries into a global enterprise employing 120,000 people and invested in oil refineries, pipelines, industrial glass, spandex and paper cups, according to the company website.

At times, the search for gaps in the market was literal: “Kochland” opens with an FBI investigator staking out an oil tank on an Indian reservation in Oklahoma. A number of investigations concluded that Koch technicians routinely shortchanged the tribe when recording how much oil they were taking, Leonard reports. In a civil trial, a jury found Koch Industries guilty of falsifying about 25,000 documents to cover up its theft of oil on Indian land in the early 1980s. “Tales of theft were told by Koch’s own employees from Kansas, Texas, Oklahoma, North Dakota, and New Mexico,” Leonard writes.

Under the principles of MBM, supervisors in charge of “profit centers” at Koch Industries’ Pine Bend refinery in Minnesota were discouraged from using support services — such as on-site environmental engineers who advised on the safe disposal of pollutants and hazardous waste — because those services added to costs. In 1999, Leonard writes, Koch Industries admitted that it had illegally dumped ammonia-laced wastewater into the Mississippi River and nearby wetlands, and paid an $8 million fine. In a separate case, the Environmental Protection Agency successfully sued Koch for negligence that resulted in more than 300 spills at oil pipelines and other facilities across six states between 1988 and 1996. “The company was eventually fined $30 million for the pipeline leaks, which was the largest fine of its kind in US history,” Leonard writes.

Some of the negligence was tragic. In the summer of 1996, a neglected Koch pipeline leaked butane vapors, resulting in an explosion that burned two teenagers to death. The family won a record $296 million judgment against the Kochs and later settled for an undisclosed amount. “These fines and charges, combined with those for the ammonia dumping at Pine Bend, marked Koch Industries as one of the largest, most flagrant violators of environmental laws in the United States during the 1990s,” Leonard writes.

Some of Charles Koch’s bets didn’t pay off in financial terms. His acquisition of Purina Mills, a St. Louis firm that made animal feed and pet food, was a disaster that nearly wrecked the company. Koch paid $670 million for a company valued at about $109 million, financing the deal almost entirely through debt, because he was convinced that he could make money trading commodities.

And some MBM practices were lethal. In 2014, six workers were killed in separate incidents at Koch-owned Georgia-Pacific paper plants. The spike in industrial accidents followed drastic job cuts: The company had halved the number of unionized workers over a 10-year period. “Federal regulators ruled that Koch Industries had violated dozens of federal worker-safety regulations,” Leonard writes. “But the fines for doing so were relatively paltry.”

In 2017, an internal Koch presentation acknowledged that the company had a worse safety record than its competitors did. The company’s response? “Workers must change their mind-set and ‘Go from Have To – To Want To’ in terms of staying safe,” Leonard writes.

But the biggest setback for Charles Koch’s hopes of imposing MBM on the rest of America could turn out to be President Trump. Despite the Kochs’ investments, Trump is moving the Republican Party away from conservative libertarian ideas. The administration has pursued the deregulation and tax cuts that Koch favors and has installed pro-business judges. But Trump’s tariffs and his deficit-busting tax cuts clash with Koch’s free-trade and small-government convictions. (The feeling is mutual. Trump dismisses the Kochs as “globalists.”)

“Kochland” is the third major book to explore the Kochs’ influence, after Daniel Schulman’s “Sons of Wichita: How the Koch Brothers Became America’s Most Powerful and Private Dynasty” and Jane Mayer’s “Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right,” but it’s the first to investigate fully the companies that are the source of that power. An investigative reporter, Leonard largely sidesteps the question of where he stands on the Kochs’ sway over American public life. But the mountain of evidence he provides, reported in granular detail, should lead readers to draw their own conclusions.

Christopher Leonard
Business
Kochland: The Secret History of Koch Industries and Corporate Power in America