Kochland: Koch Industries and corporate power in America

Kochland: The Secret History of Koch Industries and Corporate Power in the United States With annual revenues of more than $110 billion and a consistent track record of success, privately owned Koch Industries is well poised to take advantage of new opportunities in the energy industry today. In order to learn more about how this company succeeded where many others have failed, the purpose of this paper is to provide a review of the basic ideas presented in the book, Kochland: The Secret History of Koch Industries and Corporate Power in the United States, followed by an assessment concerning why this book is useful for business students. In addition, a summary of the research and important findings concerning the basic ideas and issues presented in this book are provided in the conclusion.

Review of Kochland The book is organized into three parts, with ten, seven and eight chapters each, respectively, titled “The Koch Method,” “The Black Box Economy” and “Goliath.” The first part, “The Koch Method,” begins with the ominous-sounding chapter, “Under surveillance and ends with “The Failure,” and both of these chapter names are highly accurate. For instance, the first chapters describe the legal hot water Charles Koch found himself in after it was discovered that Koch field employees (known as “gaugers”) were routinely pressured to provide inaccurate reports in the company’s favor, resulting in millions of dollars of extra profits each year. These practices attracted the attention of other stakeholders and the U.S. government (hence the chapter title, “Under surveillance”), but the implications of the outcome of the lawsuit that followed (discussed further below), were the focus of the next several chapters.
The actual history of the company, and the role played by Charles Koch in its success, actually began much earlier when Fred Koch, Sr. founded the company in Wichita, Kansas in 1940 but these events are only mentioned in passing. The real story described by Leonard begins in 1967 in the preface where Fred Koch, Sr. passed away unexpectedly on a family hunting trip, leaving the company’s reins to his 32-year-old son, Charles.
Ambitious to a fault and not content to continue his father’s more conservative traditions, Charles Koch leveraged this burgeoning energy company from “a mere multimillionaire into the behemoth it is today. Fossil fuels, commodities trading, chemicals, paper products, fertilizer: Koch Industries has inserted itself into nearly every aspect of daily life, raking in billions along the way” (Singer, 2019, p. B8). Indeed, Charles did not lose any time in forging the Koch energy empire, and by 1974 he made his views about the fundamental purpose of business clear for all to hear.
Several episodes depicted in the book stand out in this regard. For instance, in chapter 4, “The Age of Volatility Intensifies (1975-1975), the author reports that in 1974, Charles Koch delivered a speech to the Institute for Humane Studies wherein he emphasized that, “To date, business has attempted to defend itself by taking a conciliatory attitude rather than exposing the fallacies in the anti-capitalistic arguments” (p. 95). In other words, from Koch’s perspective, business leaders were being too conciliatory to their critics and even ashamed of making money, but Koch stressed that there was no such thing as “too much money” when he said, “When the oil industry and other are criticized for having ‘excess profits,’ businessmen should argue that in a free market, there is no such thing as excess profit – that without high profits, there would be no signal to invest more capital in order to increase production to meet the consumer demand that created the profits” (p. 95).
Likewise, Charles Koch refused to back down from a fight, and his relentless efforts to protect his company and what he had built were especially poignant. For example, in chapter 7, “The Enemies Circle (1985-1992),” Leonard points out that when confronted with legal challenges, “Charles Koch did more than circle the wagons. He helped coordinate a broad counterattack aimed not just at his brother but also the U.S. Attorney’s Office. This marked a turning point in Koch’s history and its efforts to influence U.S. politics and public policy” (p. 135).
Although this episode represented a turning point for Charles Koch, his efforts to sway public policy and public opinion were seriously hampered by the high-profile litigation his company was embroiled in as well as his negative portrayal in the mainstream press where Koch Industries attracted a great deal of criticism for its cut-throat and seemingly illegal business practices. in chapter 10, “Failure (2000),” Leonard reports that for Charles Koch, “The previous decade had been a public embarrassment. To the degree that Koch Industries was written about in the popular press, the stories tended to focus on Koch’s lawbreaking and litigation. To the degree that Charles Koch himself was written about, he was described as a character in a pathetic family feud that showed just how crazy billionaires could be” (p. 215).
The second part of the book, “The Black Box Economy,” begins with chapter 11 (“Rise of the Texans [2000]) and describes Charles Koch’s aggressive efforts to rebrand his company – and himself. In this regard, Leonard writes that, “Over the course of one short year, Charles Koch and a small team of trusted executives, reinvented Koch Industries. The company was redrawn in a series of urgent, and sometimes tense, private meetings, an effort that was kept secret from the outside world and even employees” (p. 221). In addition, Charles Koch replaced members of his leadership team who did not share his values and vision for the future of Koch Industry.
The Great Recession of 2008, though, introduced yet more challenges for Charles Koch and his company and the point is made in chapter 16, “The Dawn of the Labor Management System (2006-2009), that, “Convulsion tore across the economic landscape and shattered the structures that had stood there before. Everything would be different in its wake. It was the worst downturn to hit the economy and Koch Industries since the Great Depression and there was every indication that Charles Koch was not ready for it” (p. 343).
Part two ends with chapter 17, “The Crash (2008 – 2010),” wherein Leonard reports that by mid-2008, Charles Koch actually seemed ready for anything. Indeed, he had amassed a personal fortune in excess of $19 billion, and the billionaire began a series of philanthropic donations which he could easily afford. These philanthropic initiatives, though, as well as Koch Industries’ revenues, were also adversely affected by the Great Recession and Charles Koch’s political activism gained new momentum as a result. According to Leonard, “Charles Koch seemed to believe that the United States was slipping towards tyranny. When he looked out on the horizon, he saw a threat. The power of the state was rising and Koch Industries was directly in its crosshairs but he never backed down from a fight” (p. 363).
Part three, “Goliath,” covers the period from 2013 through 2018, and describes Charles Koch’s efforts to develop the fresh insights that were needed to compete in the new energy environment, and Leonard notes that he solicited feedback from industry experts before formulating his own strategy for moving forward. In addition, Leonard reviews Charles Koch’s continuing efforts to influence public policy and opinion during this time, and notes he spent tens of millions of dollars in the process. Chapter 20 concludes with an especially telling observation by Leonard: “Koch Industries stood at center stage during this shift in America’s energy industry, and it reaped rewards in ways that people on the outside could not see” (p. 461). The book ends with chapter 25, “Control (2018),” describes the book project that Charles Koch collaborated on with Leonard, and the author concludes that, “Charles Koch had already published two books about market-based management, which he argued was the ultimate solution for running a prosperous business” (p. 574). In sum, the basic ideas of identifying opportunities, maintaining confidentiality, and standing up for one’s beliefs form the theses of this book, and the usefulness of these basic ideas is examined below.
Usefulness of Book’s Basic Ideas for Business Students
In many ways, some of the basic ideas presented in this book are a “how not to” guide to modern business practitioners. In fact, most entrepreneurs lack the deep pockets that Charles Koch enjoyed throughout his business career so some of the choices he made may not be especially relevant for them. For example, many struggling business owners would likely jump at the chance to reap the benefits of an initial public offering (IPO) by taking his company public since this is a proven method of building a personal fortune. From Charles Koch’s viewpoint, though, taking his company public would mean having to share revenues with even more stakeholders than he was already burdened with, an eventuality that clearly rankled his business sense. For instance, according to Szalai (2019), “Koch Industries is one of the largest privately owned companies in the world; this means it isn’t beholden to the same transparency requirements of a publicly traded company, whose shareholders expect to see the books” (para. 4).
In sum, throughout the book – and Charles Koch’s career – secrecy has been the watchword. Given the enormous amount of negative publicity that this billionaire has experienced over the years, Charles Koch’s penchant for absolute secrecy about his business operations is more understandable, but it does seem to run contrary to his desire to wield a significant amount of influence on the national and international political stage. Nevertheless, Charles Koch has managed to pursue this mutually exclusive objective in ways that would likely defy others who sought to emulate his example. For instance, one industry analyst points to “. . . the hazy scrim that has long shielded Koch, his company Koch Industries and his political organizations, including Americans for Prosperity, from public scrutiny. Even though his influence is felt throughout Koch Industries, and throughout America's political system, Charles Koch remains a remarkably opaque figure. He prizes his privacy and cherishes secrecy." (Singer, 2019, p. B8).
Assuming that business practitioners are able to secure the leadership of a major energy company today (inheriting it or otherwise), they could potentially benefit from the strategy that has been used by Charles Koch over the years to build his company and his personal fortune. Similar to a game of “whack-a-mole,” Charles Koch believes that it is better to keep a low profile in order to avoid getting beat down by critics. For example, Koch is fond of observing that, "The whale that comes above sea level gets harpooned" (as cited in Singer, 2019, p. B8). Here again, this advice would seem contrary to conventional business wisdom, but the proof is in the billions of puddings that Charles Koch has accumulated during this professional career. In this regard, Singer (2019) points out that, “Koch has had his share of ups and downs over the years. But his net worth -- $53.5 billion as of last year -- shows that his blend of libertarian politics and business acumen has led to far more successes than failures” (p. B8).
Yet another basic idea that has some salience for modern business practitioners is the need to “keep your eye on the prize” over the long term. This basic idea was evinced by Charles Koch’s refusal to accept a highly lucrative IPO offer early on because he recognized that given enough time, his business strategy would pay off in major ways – an eventuality that came to fruition despite all of the challenges that were arrayed against him. As Singer (2019) concludes, “In battles with unions, government agencies, liberals in Washington, even members of his own family for control of his burgeoning empire, Koch's long-term perspective has helped him survive and thrive” (p. B8). During an era of calls for increased transparency in business operations and highly profitable IPOs, this strategy would seem counterintuitive -- but it did work for Charles Koch. As Szalai (2019) emphasizes, “Charles Koch, the chairman and chief executive, has taken care to keep it this way. In 1981, Wall Street bankers offered him a windfall for what was then an ‘obscure, midsize energy company.’ He refused” (para. 4).
As noted above, Charles Koch was adamantly dead-set against sharing any more of his wealth with others as possible, including members of his own family. In this regard, Szalai (2019) adds that, “Secrecy was a strategic necessity for Koch Industries. So was family control. (Two brothers, Freddie and Bill, were bought out of their shares in the early ’80s; David, who ran for vice president on the Libertarian Party ticket in 1980, retired from Koch Industries [in 2018])” (para. 5). Moreover, these same points are also made by Leonard. For example, in chapter 25, “Control (2018),” Leonard concludes that, “Charles Koch was so rich in part because he fought so hard, for so many years, to keep his company private. The vast majority of Koch Industries’ ownership wasn’t spread among thousands of shareholders but only two” (p. 571). In addition, Charles Koch also engaged in some other business strategies that fly in the face of conventional wisdom concerning optimal approaches to motivating employees.
In fact, many authorities today advocate some type of profit-sharing options to engage employees and motivate them to higher levels of performance (Javed, 2018), but this was not part of Charles Koch’s plans either. In this regard, Leonard advises that, “The employees at Koch Industries – including its senior executives, could not earn a real equity stake in the firm, no matter how hard they worked. They earned, instead, the right to shadow stock, essentially a derivatives contract based on the company’s performance” (p. 571). It is little wonder, then, that turnover at Koch Industries has been inordinately high. Indeed, Leonard points out in the preface that “so many people come and go” that a 10-page list of individuals who were involved with the development of Koch Industries as an appendix to the book. Conclusion In his book, Kochland: The Secret History of Koch Industries and Corporate Power in the United States, Christopher Leonard provides an in-depth analysis of the life and career of Charles Koch, a multibillionaire who has managed to keep his company, Koch Industries, privately held for the past 80 years. Over the course of that time, Charles Koch weathered a serious lawsuit, a major economic downturn, and waves of negative publicity to emerge as one of the wealthiest people in the world who is completely unapologetic about his success. In the final analysis, the main takeaway from Kochland is the importance of a long-term perspective and the confidence that is needed to stay the course.

References Javed, T. (2018, January 1). Employee ownership and financial performance of state owned entities: Mediating role of motivation. Journal of Management Information and Decision Sciences, 21(1), 1. Leonard, C. (2019). Kochland: The secret history of Koch Industries and corporate power in the United States. New York: Simon & Schuster. Szalai, J. (2019, August 13). ‘Kochland’ Measures the reach of a politically influential corporate giant. The New York Times. Retrieved from https://www.nytimes.com/2019/08/13/ books/review-kochland-secret-history-koch-industries.html. Singer, D. (2019, August 18). 'Kochland' explains powerful company and how it had a rare failure in St. Louis. St Louis Post-Dispatch, B8.