Market Based Management

WHO IS CHARLES KOCH.

Nationality: American.

He Was Born in November 1, 1935, in Wichita, Kansas.

Education: Massachusetts Institute of Technology, BA, 1957; MA, 1958; MA, 1959.

Family: Son of Fred (founder of Koch Industries) and Mary (homemaker; maiden name unknown); married Liz (homemaker; maiden name unknown); children: two.

Career: Arthur D. Little, 1959–1961, engineer; Koch Engineering Company, 1961–1963, vice president; 1963–1971, president; Koch Industries, 1966–1974, president; 1967–, chairman and chief executive officer.

Awards: Adam Smith Award, American Legislative Exchange Council, 1994; Distinguished Citizen Award, Boy Scouts of America, 1995; member of the Kansas Oil and Gas Hall of Fame, 1996; Year 2000 National Distinguished Service Award, the Tax Foundation.

■ Charles Koch took over his father's moderately successful oil company, Rock Island Oil and Refining, in 1967 and over the next three decades transformed it into Koch Industries, a diversified petroleum products and trading company that, with an estimated $40 billion in annual revenues, is the second-largest privately held company in the United States. Koch companies include Flint Hills Refineries, which processed 600,000 barrels per day of crude oil in 2003; Koch Minerals, which traded about 20 million tons of mineral and fertilizer products in 2003; and Koch Ventures/Genesis, which invested nearly $185 million in technology-based startups between 1997 and 2003. Koch is known for his "Market-Based Management" (MBM) style of leadership, in which employees are encouraged to act as entrepreneurs within Koch Industries. He is also one of the leading contributors to conservative politicians and think tanks, having founded the prominent libertarian think tank the Cato Institute.

LEARNING THE BUSINESS

Charles Koch said that his career, like the name of his business, is a tribute to his father, an independent Texas oilman who established Koch Industries' predecessor company in the 1940s. Fred Koch made his first mark by helping the Soviet Union build its oil industry in the 1920s but lost most of his fortune during the Great Depression. By the time Charles and his three brothers were growing up in Wichita, Kansas, the family business was well established. Charles attended the Massachusetts Institute of Technology, where he received several engineering degrees. After briefly working for Arthur D. Little, he joined the family company to be groomed for leadership. But leadership came to him sooner than expected.

Fred Koch's death from cancer in 1967 put Charles in charge of Rock Island Oil and Refining, a prominent regional oil company but far from a major national player. Through the 1970s and 1980s Charles aggressively grew the company and expanded it from its base in oil refining into other oil-related fields. By the year 2000 Koch Industries employed 17,000 people and owned 37,000 miles of oil and gas pipeline in the Midwest and Great Plains. Among its prominent subsidiaries, Koch Materials Company was selling enough asphalt through its facilities in the United States, Mexico, Brazil, and China to pave 125,000 miles of road annually; Koch Nitrogen Company had the largest production capacity for free ammonia in the Western Hemisphere; and Koch Financial Corporation had completed more than $3.7 billion in public financing transactions. Koch even employed 25 cowboys—for its cattle ranches in Kansas, Montana, and Texas.

MARKET-BASED MANAGEMENT

Central to the acquisitions and to Koch's growth philosophy, Koch said, was his commitment to "Market-Based Management," a term he uses to describe encouragement of entrepreneurship within his company. The thinking behind MBM reflects the free-market philosophies of the economic theorists Friedrich von Hayek, Ludwig von Mises, Joseph Schumpeter, and others who believed that encouraging entrepreneurial behavior and individual responsibility would make societies wealthier.

Koch felt that the same principles that underlie market economies could be applied with success to an individual company. Working to create a culture of continuous improvement, Koch eliminated employee salary structures and formal job titles for all but the most senior officers; instead, Koch Industries paid based on the "value" employees brought to the company. In addition to the company's seven-member board of directors, there is a 20-member "discovery board" that discusses strategy quarterly. Koch considered the private nature of Koch Industries crucial to the company's success, as it allowed the company to focus on long-term goals rather than make shortsighted decisions