Fortune magazine interviewed Charles Koch of The Evil Koch Brothers fame:
Koch Industries, when Charles took over, had about $200 million in revenue. Today it has a $115 billion in revenue. We’re told the revenue doubles every six years or so. Could you have done that if you were a public company?
Well maybe somebody could. I couldn’t have because I would have been fired. Because I had these crazy ideas drawing from my interest in the philosophy of science, the scientific method, and my studies of how people can best live and work together.
And so I would say, okay, I’d like to take those ideas on what makes societies more innovative and progressive and productive than others. And let’s find out how to sue those inside an organization.
Why would that have gotten you fired?
Well, because most of the time it didn’t work. Because an organization’s different than a society, so you just can’t take private property; every employee owns their property and exchanges.
And you have internal markets. Well ,that doesn’t work. So you have to think through, and we did think through, what are the benefits. And then how do we duplicate the benefits? But we’ve got to use a different mechanism.
And I believe that most innovation comes from trial and error. And it’s not just trial and succeed; the error is there for a purpose. Like I say to our people, “If you think you’re experimenting and you never have any failures, you’re not really experimenting.” You’re not trying anything new. And so we went through quite a period where what I was doing was hurting the company. Because everybody was confused. And then we finally came up with an approach that really started to pay off.
Can you briefly describe the approach and how it works?
It’s based on the philosophy of science, and we learned to boil it down into a framework of five elements called, vision, virtue and talents, knowledge process, decision, rights and incentives.
And each one is a package of dozens of principles, elements, and practices. And we find when all those are working together in an integrated reinforcing way, you really get performance.
Can you give us one example of how that works in practice that’s dramatically different from the way most public companies work?
In the experience of people we hire and the companies we acquire, we find that most [companies] hire first on talent and then they hope that the values are compatible with their culture.
We hire first on values. And we have ten guiding principles. Many companies have principles but we found also in many companies that there are some they stick in the drawer. It’s a poster on the wall. These principles are who we are as a company. They guide everything we do including who we hire. That’s one.
Another is the division of labor by comparative advantage. And what I mean by that is that rather than you have a vision, you need certain roles filled and you try to get the best person for each one. We try to optimize every person’s role according to what they’re good at and have a passion for. And this is not easy, as you can tell. This takes a lot of work and intensive care.
But we find when we get all that right, the right people in the right roles with the right vision and the right values, then we really have great innovations.
So choosing, getting the right people. Choosing the team comes first.
Now I’ve told you it’s my theory that the reason you after being so incredibly private for 49 years have started to talk more publicly is because in the competition for talent, you feel like you have to get a positive story out there or people aren’t going to want to work for Koch Industries.
That’s a good part of it. No question. As usual, you have great insight Alan.
Thank you. And is it working? You have this sort of notoriety that was created by the press, in part because of your political activities. I wonder by the way, did your political activities in that sense hurt Koch Industries?
It’s not measurable. We have a lot of boycotts against us. And then we have a lot of people who write and say, “we’re going to start using all your products.” So I don’t know what the balance is. But we can’t measure it. I would think overall it’s positive.
You never thought, we should just shut this down and focus on doing our business?
Shut it down? As I like to say, I’d rather die for something than live for nothing. So there’s no alternative for me. This is who I am.
So since we’re on this topic, talk a little bit about what you have spent literally hundreds of millions of dollars, probably more than that. You spent a fair amount of your fortune trying to change the political system.
Well, I mean we’ve spent a considerable amount, but we’ve raised a lot more.
You’ve raised other money as well. Talk about what you ere trying to achieve with that.
Well we see, or I should say I see that the country headed towards a two-tiered society. A society increasingly based on control, dependency, and cronyism. Which is pitting individuals and groups against each other.
And my dream would be to move us toward a society that maximizes peace, mutual respect, and well-being for everybody.
Now in the money you’ve invested in your business you’ve gotten incredible returns. And the money you’ve invested in politics, how do you feel about the return you’ve gotten?
Well, most of that is obviously not in politics because it’s hard to find politicians who are really working, trying to change the trajectory from where it’s going, to where I believe it could go. And so most of it has been on education, community programs, things of that sort.
But you’ve spent a fair amount in politics. You’re one of the largest givers.
Yes, you are.
Okay, well I’ll take your word for it.
How do you feel about the progress you’ve made in the political arena?
Well not so much in politics, but in policies. We’ve done some good over the years. Moving towards less regulation, less – well, let’s say productive rather than destructive regulation.
Generally that means less regulation.
Yeah, because there’s a lot of regulation that’s very destructive and anti-competition and anti-innovation.
I want to come back to the anti-innovation point but before we do, since we’re on politics can you talk about what you see in the current presidential election?
Yeah, I see two people that as of this point, we’re not supporting.
But the day may come where you have to make a choice, for one of them.
Why do I have to? Are you going to put a gun to my head?
No, but I can tell from talking to you that you’re a conscientious citizen who will want to cast a vote in November.
But if I had to vote for cancer or heart attack, why would I vote for either?
And can you tell us which is cancer and which is heart attack?
Oh, I get confused on that issue. I just don’t want them both at the same time.
But what about Donald Trump, what’s your problem with Donald Trump?
I’m sure he’s a fine fellow underneath, but when you look at our guiding principles, you see that his guiding principles are in many ways antithetical to them and a great many of his policies are antithetical.
For example, if we’re going to put on a 40% tariff, the Smoot Hawley was 60% increase in tariff. And it caused a reduction in world trade by 70% and lead to worldwide depression. So I think that’s a monstrosity.
So not a great way to go.
No. And there are a number of others. But we don’t have time to go through all those.
But I think in one television interview, you were asked well then would you vote for Hillary Clinton and you said something like, “Well I might.”
No. It’s like I rode up in the elevator with Charles Barkley at the Barcelona Olympics. And he was being attacked, and I said something and he said, “yeah, the media never lets the truth get in the way of a good story.” And that’s it.
I’m here to let you tell the true story.
Okay. So the deal is – what I said is, would you ever support her? I said it’s possible if she totally changed everything she stood for. And they spun that around to I might support Hillary.
Okay, I’ve got to be more careful of what I say. You can see why all those years I didn’t give interviews.
Let’s talk about innovation for a minute. Because this conference is really created around innovation. And we’ve already had a lot of conversation today about the perception that the speed of innovation is faster than it’s ever been.
And yet you have concerns about what our culture is doing to squash innovation.
Right, and fortunately in information technology it hasn’t been as intrusive. But as you all know, there are a lot of forces out there trying to move that in the same direction it has on pharmaceuticals and agriculture and so many other areas.
And to me, this is frightening because I think if we had permissionless or open innovation, the growth rate in this country could be beyond what anybody believed. Because that’s the driver of improvement.
People think okay, it’s capital. If we just said more capital, go back to before we had automobiles and airplanes. We’d have more horse and buggies. Okay that would slightly make peoples’ lives better but what really made it better is innovation. Developing automobiles, and airplanes.
And if we had the same precautionary principles on getting innovations like that improved. Particularly things that are unsafe as airplanes and automobiles, there’s no telling how long and how much money that would take.
So that’s what we’re worried about. But our whole company is based on innovation. And I like to think one of our most powerful innovations was coming up with our management philosophy. And maybe some of our people disagree with that, which is great.
But what we try to model our company around is what a philosopher scientist [Michael] Polanyi called “The Republic of Science.” And that is where all the people working on a problem share knowledge. You try to bring the best technology and ideas from around the world and you integrate them, and you challenge.
Nobody has the best answer. You challenge at every level. And so we have a number of mechanisms to do that. The first one is who we hire. We try to hire people who are open, who want challenge, who have humility. They don’t have all the ideas that none of us know very much. No matter how smart or knowledge we think we are.
And then to combine that with other people’s knowledge. So if we’re in a field, we try to constantly gather all the relevant information. Not only in our fields but other fields that could benefit us. And then we share knowledge internally.
And we have something called the Discovery Board. We meet once a month, and everybody, everyone of the participants, rotating, of course, brings up a problem or an opportunity, and the rest of us challenge it.
And I love it. I [say], “here’s an idea of something we ought to do and here’s how I think we ought to do it.” And the last one I got six different attacks. I don’t mean just, oh that is wrong.
They do that?
And you don’t fire them?
I love it. Are you kidding me? Because those people who don’t want criticism of their ideas because their ego’s too fragile? Well, how about if you implement it and you fail? Talk about a fragile ego at that point. Your career is ruined. So they can keep me from a disaster; I love it.
And then we have something called Innovation University where we put out materials to share innovations throughout the company. And the principles of innovation. For example, as I said on experimentation, that what we expect if somebody’s running an experiment to design it in a way that if it fails, you learn enough that you’re glad you did it.
It’s like Edison said on inventing the light bulb: It had 3,000 or more failures. And a friend said gosh, “I’m so sorry you had all those failures.” He said, “I haven’t had any failures. I’ve learned 3,000 things that don’t work.”
And so that’s our attitude. Now if you don’t design it properly, you don’t really learn. And you don’t attack the most critical problems first. If you kind of prove some marginal things, but the main potential problems you haven’t dealt with, then that’s waste.
You need to start with the toughest problem first, and then try to disprove what you’re doing. Because it’s like when we used to do oil exploration, what I used to hope for was a clean dry hole. If we weren’t going to have a gusher, the next best thing is to have a clean dry hole.
Why do I say that? Now we’ve got to test another reservoir. Maybe drill another well to prove there’s —
It’s fail fast.
Yeah, fail fast. Absolutely. Karl Popper wrote a wonderful essay on this called “Science as Falsification.” That none of us, none of our hypotheses are very good.
None of us know very much. So our obligation is to try to disprove it. And the author needs to try to disprove it and get challenges to make them think about what could go wrong. And then if you can overcome that, then you can have something you really can go with.
I compared Clinton and Trump to pre-World War II Nazi Germany and the Soviet Union. But heart attacks and cancer works as a comparison too.
Koch then took questions from others:
John Vane: Thank you. My question is do you believe in anthropogenic climate change? And given the risks of being wrong, don’t you think it might make sense to err on the side of caution?
Oh, precautionary principle at work here. Good. No, that’s a great challenge. Yeah I believe it’s been warming and I believe that the evidence is there are such a thing as greenhouse gases, and they’re contributing to that.
But I don’t think anybody knows how much. I don’t think science is settled. I mean how could it be? The people who are projecting, or who have these models, okay, if we do this the other could be increased by one and a half degrees to four and a half or six.
The ocean could rise 20 feet or two feet. So it is not settled. As a matter of fact, science is never settled.
But you’ve been very outspoken about subsidies to renewable energy.
Oh, subsidies to everything. I think this is a big part of what’s hurting this country is cronyism and corporate welfare.
Some of which you get.
Oh yeah, so we make a lot of money off of it as any established company because it’s endemic in the economy. But what I object to is not studying – I think there ought to be more study. It is not the scientific method to criticize and try to silence those who are challenging it.
If we want to have more progress, we need to welcome just as we do in our company, welcome challenges to this rather than name calling and trying to shut them up.
Some people think your challenge has a little more clout than other peoples’ because you can put a lot of money behind it.
Well that would be good. I would hope so. I haven’t seen I have a lot of clout but I’m looking forward to that day. …
Jason Rapp:Hi sir, Jason Rapp from Science Inc. A follow up: if you were spending a lot of money to influence policy, if you were put in charge of climate change policy, how would you approach that? How should a government which is supposed to look at economic externalities, public will overall, how should government approach that issue?
No, that’s a great question. Thank you. No, I’d get rid of all the corporate welfare. I would not have the government picking winners and lowers. Particularly un-economic solutions or products or systems that are making people’s lives worse rather than better.
They even under all the models; they will make very little difference in the future on what the temperature or the weather will be. And instead I would break back all the barriers to innovation and trying new things. New forms of energy, and let people be free. That’s what’s caused progress in the world is free people; liberated people are ingenious. Those people who are trying to silence, enslave, over-regulated or not, that’s our future.
And then that’s win-win. Because we’ll have better forms of energy that will deal with the problem. And what we have now are very inefficient systems that are making peoples’ lives worse.
But there is a market problem here, right? If you believe that carbon is contributing to the warming of the Earth, there is no cost on emitting carbon, so there’s no market incentive that takes that into account.
No, no, there is a market. There are a lot of people who believe in that, so you have pressure from your customers. I mean we in our business with Walmart, we are constantly working on how to save on transportation.
Because your customer wants it.
Because your customer.
Do you think that’s sufficient?
And we want too. And so we got into biofuels and making chemicals with biotechnology because we found that the basic biological, or biotechnology was at a point that we could combine pieces and make chemicals out of C02 and hydrogen cheaper than we could make them chemically.
So we’re doing that. No subsidies or anything. But we have a huge undertaking.
Based on pressure from customers?
Well no, this is based on what many people want. So we’re going to do it, if we can do it economically. But we’re not going to go seek subsidies or advocate subsidies for that because we think that’s counterproductive.
Michael Miller:Michael Miller, Ziff Brothers and PC Magazine. You talked about innovation. One of the things that’s been clear over the past little more than ten years is that productivity numbers in every market across the world have gone down from what they were 10, 11, 12 years ago. How much of that do you blame on regulation? And are there other factors that you think are important?
Well I think that’s the biggest one. And then that comes from my study of history. The slogan I like best of countries is Holland in the 17th century, and it was listen, even to the other side.
And so after they got freed from Spain, they reorganized the society to have absolute free trade, free speech, welcomed dissidents from all over the world. And they had an explosion, they became the wealthiest country in the world through their innovations.
And not only in economics, in art, in everything. And that’s my dream to move our country and every country that would toward that. And then this gets rid of the divide. The divide comes – if you control the political system, you do well and the people who don’t you punish.
And that’s where we’re headed. And we see that more and more. And that’s where the world is headed. So I’d like to see it go in the opposite direction. One of mutual benefit where we work together and have people feel liberated so they take chances and innovate. Which throughout history that’s what’s raised productivity.
Warren Buffett gets a lot of attention because he’s a Democratic billionaire. From what I see the Koch brothers, employers of 2,400 Wisconsinites, have done considerably more for this country than Buffett has, well beyond politics.