The Kochs have been at the top of the list of the world's richest families for many years, and their Koch Industries group is involved in a wide range of fields, from chemical fuels to household goods, and employs more than 100,000 people in more than 60 countries and regions around the world, with annual revenues of more than $100 billion.
The Kochs have not only become a $100 billion family, they have also been able to extend their power into every aspect of American society. Led by the liberal philosophy of the family's backbone, Charlie Koch, Koch Industries became one of the most powerful lobbying organizations in the United States, so large that it was nicknamed "Kochtopus" (a combination of Koch and the word "octopus"). octopus).
Paradoxically, while Charlie was a self-described libertarian, Koch Industries was a classic example of a business that thrived on crony capitalism. By employing a huge army of lawyers and lobbyists, they have only a hand in a monopoly industry that is closely tied to government subsidies and regulation.
The Koch Family Series is organized into three themes: family, politics, and business, with this article focusing on the Kochs' business past.
(For the rest of the Koch family series, click here: Family; Politics.)
Fred Koch, one of the largest men in the state of Kansas, died in 1967, leaving behind his wife and four sons with significant assets, including Rock Island Oil and Refining Co. Refining Co., Matador Cattle Company, Koch Engineering Co. and others.
The second son, Charles Koch, who ran the business, was 32 years old at the time. Over the next half-century, he not only took over the business, he outperformed his father in all areas.
A few months after Fred's death, Charlie set his plan in motion. He began by consolidating the disparate companies into a single entity, Koch Industries, moved the office from its original location in downtown Wichita to a lower-key suburb, and finally streamlined the core management team, leaving behind only people Charlie admired and trusted, like Sterling Varner, whom he relied on heavily in the early days.
Sterling's business mindset had a profound impact on the growth of Koch Industries, and he was keen to build on what the company already did and expand upstream and downstream. He also encouraged all executives to explore new M&A opportunities in their day-to-day work and held regular investment meetings on the subject.
It wasn't long before Charlie was faced with the first major challenge of his career: labor unions.
During his lifetime, Fred had owned part of the Pine Bend Refinery, one of only four refineries in the US at the time that could import cheap oil from Canada, and was therefore sitting on huge profits. Charlie took over, increasing his holdings in exchange for shares in Koch Industries, and became the sole owner of Pine Bend in late 1969.
But Charlie initially had very little say in Pangbourne, where unions were very powerful in the late 1960s, and many of the union leaders were extremely well-paid, even with corruption scandals, and had long since moved away from the original purpose of unionization. In Pangborn's case, the factory's workers' working methods and wage scales were all set by the union.
Many business owners chose to obey the union, but Charlie decided to fight to the end. Bernard Paulson, who had extensive experience in union relations, was appointed to lead the battle.
Paulson understood why Charlie was so anxious to weaken the unions when he arrived at the refinery in early 1971.
The union that the Pangbourne employees turned their backs on was called the OCAW, and its head was named Joseph Hammerschmidt. Employees sleep during work hours and are unresponsive to the demands of their superiors, and the scope and hours of their work are extremely rigid, resulting in even minor glitches being extremely labor-intensive and time-consuming to complete. Many of the employees themselves find the work rules incredibly lax.
Paulson thought this state of affairs would bring the plant down, and in April 1972, he took the first step: he asked Joseph to work overtime on Easter. When Joseph refused, Paulson immediately fired him. At the end of that year, Koch renegotiated the labor contract with the OCAW, cutting out many of the perks and leaving no room for the union to negotiate.
On January 9, 1973, the union went on strike, setting up a "picket line" outside the refinery, preventing trucks from entering and exiting, and covering the road with spike strips. In the first few months of the strike, Koch spent $100,000 on replacing truck tires alone.
Paulson was also prepared for a long fight, putting an improvised bed in his office and sleeping there for the next nearly a year, barely leaving the refinery. The only workers left at the plant were non-unionized, and to address the shortage, Paulson called in helicopters and borrowed workers from plants in other states to help out in Pangbourne.
As the strike grew longer, the unionized workers became increasingly agitated. Paulson seized on their use of violence and filed legal action, and a court filed a restraining order against the unionized workers. This made the workers who had been without income for a long time as a result of the strike become even angrier and take more militant action.
On March 15, 1973, strikers drove an empty train into the refinery. Fortunately, the train derailed before hitting plant equipment, which would have resulted in the deaths of all the people on duty at the plant.
On April 17, strikers shot through a giant transformer. Charlie and Paulson saw these crazy moves and in turn became even more determined never to give in.
Seeing that the strike wasn't going anywhere, the OCAW got a new chief, John Kujawa, and the government's labor department intervened, but nothing changed. Paulson threatened the OCAW that if the two sides could not come to an agreement, Koch would not hire any unionized workers in the future.
On September 23, the OCAW accepted a new contract from Koch, bringing an end to a strike that had lasted nearly nine months. Charlie took back the voice.
Paulson, who had made a name for himself, was promoted to vice president, in charge of all of Koch's refining operations. He set up a refining database and was ahead of his time in bringing in several IBM computers to analyze the data. To improve the quality of refining, Koch spent a lot of money on equipment and tried to drive down prices to squeeze out competitors.
With multiple efforts, Pangburn became Koch's super-moneymaker in less than a decade, funding Charlie's later expansion in other areas and playing a key role in making Koch bigger and stronger.
Along the way, Koch gradually developed its own style. The company was not listed, and did not need to make budgets for external view, so it could instead set milestones with real data such as profits. The company's shares are controlled by the Koch brothers and a few close relatives, and Charlie doesn't pay dividends to shareholders like other companies do, but instead invests all of his profits in the company's expansion. Employees get bonuses, but never shares.
As the company grew in size, new employees kept coming in, and the management of their minds was on Charlie's agenda. Charlie invited scholars according to the characteristics of Koch, for the company's executives to compile a curriculum, and named it "market-based management" (Market-Based Management). Charlie asked executives to cascade the curriculum down to ensure that every employee understood the operations and culture of Koch.
Through acquisitions, Koch's transportation pipeline went from 6,000 miles in 1969 to 14,000 miles in 1976, and Koch became the largest purchaser of crude oil in the United States in the 1980s. But their extraction process had a set of built-in rules, which became the reason Koch was mired in litigation in the 1990s.
Koch had multiple internal standards for measuring the amount of oil it extracted, which resulted in the recorded extraction being slightly lower than the actual amount extracted, and the total amount of oil that Koch "stole" was a very high number. The monthly assessment of the employees in charge of mining and surveying work is also closely related to the amount of extraction, which makes them know that they have to carry out gray operations.
In May 1989, the Senate Select Committee on Indian Affairs held a hearing on the issue, presenting evidence of Koch oil theft gathered by investigator Ken Ballen and FBI agent James Elroy. After the hearing, the evidence was presented to the U.S. Attorney's Office for the State of Ohio, and a criminal investigation was then launched against Charlie.
Because Charlie's fourth brother, Bill Koch, was at odds with him at the time, and in order to watch out for Bill, Koch had ordered, as early as 1988, that all documents related to oil measurements within the company be sealed or destroyed. As a result, when Nancy Jones, the prosecutor in charge of the oil theft case, became convinced in 1990 that the company was guilty of criminal behavior, it was already difficult to find any evidence from within Koch.
In an effort to get out of the lawsuit as quickly as possible, Koch also stepped up its political investments, inviting dozens of magistrates to skiing, beach vacations, seminars, and other events, in addition to donating money to senators such as Bob Dole (R-Ohio) and pulling in favors (Koch's political network formed an organization called the Law & Economics Center in 2016, which specializes in entertaining judges at all levels).
The case was dismissed in 1992, but Koch paid the price anyway, as Bill followed up with a massive evidence-gathering effort, and the material dealt Koch a death blow. Koch eventually had to admit that they were making about $10 million a year by stealing oil and forging 25,000 documents to do so, and in 2000 the oil theft case ended with Koch paying a $25 million settlement ($7.4 million of which was paid to Bill).
The issue of environmental pollution is also one that oilmen like Koch can't get around. To meet the requirements of the Clean Air Act, Koch launched a $220 million program in 1992 to install equipment to produce cleaner fuels.
Wastewater from the refinery is treated at a wastewater treatment plant and then transported to purification ponds, where it is piped directly into the Mississippi River after the sediment it carries sinks to the bottom of the ponds. So keeping the water in the purification ponds up to data standards is key.
But as the Pangbourne refinery's capacity continued to increase, the environmental equipment came under pressure, and in 1996, a sour water stripper used to reduce ammonia emissions from the wastewater malfunctioned and went undetected by the staff, leading directly to a large amount of substandard effluent being discharged into the river.
When the malfunction was discovered, Brian Roos, Ruth Estes, and other executives took reckless "remedial" measures: they collected the wastewater in several large catchment basins at the plant in order to cover up the problem, and when the basins were nearly full, they discharged it directly to nearby land. When the tanks were nearly full, they discharged the water directly onto nearby land without telling anyone about it.
By November of that year, Koch was required to submit routine pollution sampling reports to the state. In response to this inspection, they did it again, discharging 6 million gallons of contaminated water overnight, and for the first three months of 1997, Koch continued to make irregular discharges.
The story finally broke because an employee named Heather Faragher, under intense pressure, kept reporting it to the state EPA. After much investigation and evidence, in 1998, the Minnesota Pollution Control Agency, of which Pangburn is a member, issued Koch a record-breaking $6.9 million fine, and in 1999, Koch pleaded guilty in federal court and paid fines totaling $11.5 million.
But those fines pale in comparison to Pangburn's income. In addition Ruth, who was initially involved in concealing the contamination, was promoted to manager of strategic planning for Koch's oil division in 2010. It's not an isolated case, either, as a similar incident occurred at Koch's refinery in Corpus Christi, Texas. These lawsuits have done nothing to slow down Koch's expansion.
Innocent residents have paid for Koch's sloppy management with their lives, and in the summer of 1996, a Koch pipeline in Texas ruptured due to age and leaked butane gas. Two unsuspecting teenagers driving nearby set off an explosion and ended up being burned alive. The case ended with Koch paying a $35 million fine and an unspecified settlement.
In 1995, Koch Industries had annual sales of about $24 billion, more than 135 times what it had been when Charlie first took over the company. This achievement affirmed Charlie's business philosophy, and gave him the backing to increase the size and scope of his acquisitions.
In the late 1990s, Koch created a low-profile, new-company acquisition division called the Corporate Development Group. It had high hopes, but it didn't take long for the group to fall on its face.
Charlie had a very valued subordinate, Dean Watson, and in 1998, at Watson's insistence, Koch, who had always been reluctant to borrow money, took the rare step of financing $550 million, plus $100 million of his own money, to acquire Purina Mills, then the largest animal feed producer in the U.S.
Not long after the acquisition, the U.S. hog market collapsed. The U.S. hog market came crashing down, prices plummeted, and Purina Mills, with its 6 million hogs, took a huge hit, with Koch's predicting losses of at least $80 million. Charlie did not hesitate to fire Watson, nor did he use his own funds to rescue Purina Mills from its massive debt.
With $100 million of its own money invested, Koch lost a lot of money. Fortunately, the debt used to finance Purina Mills was non-recourse debt, so the creditors had no recourse against the parent company, Koch. But Koch put up another $60 million to pay off the debt in order to prevent the possibility of losing a lawsuit against the creditors.
This fiasco taught Koch an important lesson. Since then Koch has created a corporate structure that is more complex and opaque than ever before. The company also undertook the first layoffs in the company's history, laying off about 500 workers and 300 contractors. Looking back, Charlie says the late '90s were the most difficult period of his life.
Charlie made a big change in the company. He replaced the leadership team with a large number of veterans and replaced them with "Koch people" who had joined Koch shortly after graduation and were y influenced by Charlie's values, such as the new president of Koch Petroleum, David Robertson, the new CFO, Sam Soliman, the new COO, Joe Moeller, and the new CEO. Joe Moeller, and so on. Subsidiaries that couldn't generate profits were sold off one by one.
Koch also used an entirely new corporate structure. Koch Industries became a nominal investment company, and the business units were legally completely separate from it, with their own internal systems for human resources, information technology, and so on. This not only reduces Koch Industries' legal risks (especially debt risks), but also greatly avoids the sense of redundancy of a traditional large corporation.
But Koch did not abandon its acquisition strategy, and the company created a new team, the Corporate Development Board, to look for acquisitions and receive up-to-date industry information from all of Koch's subsidiaries, a stream of high-value information that allows the team to anticipate future trends to get ahead of them. This stream of high-value information allows the team to anticipate future trends in order to find acquisitions ahead of time.
In 2003, Koch was back on the acquisition trail. With a cash-rich company and only two shareholders, Charlie and his brother David, Koch had a competitive advantage against some of the largest firms on Wall Street. By 2006, Koch had completed a series of acquisitions that fundamentally changed the company, from annual sales of $40.7 billion in 2001 to $90 billion in 2006.
Koch's acquisition of fertilizer maker Farmland Industries is a case in point. Agrium, a Canadian fertilizer company, was also interested in acquiring Farmland Industries, but because Agrium is a publicly traded company, it had far more to worry about than Koch, and lost out. Koch eventually completed the purchase for $290 million and renamed Farmland Industries Koch Fertilizer. Over the next 10 years, Koch invested $500 million in technology upgrades and a global distribution network, and Koch Fertilizer became one of Koch's most profitable divisions.
Another famous Koch acquisition was Invista and Georgia-Pacific. In November 2003, Koch bought DuPont's synthetic fiber plant, Invista, for $4.4 billion, increasing Koch's workforce from 15,000 to 33,000 employees.
Joe Too is one of the world's largest wood and paper products companies, with about 55,000 employees across the U.S. and annual sales of $20.3 billion in 2003. Yet the company was heavily indebted, stumbling, and facing serious financial problems as a result of making years of haphazard acquisitions.
Koch first bought Joe Too's two pulp mills for $610 million and incorporated them into the newly formed Koch Cellulose LLC. A year after the acquisition, Charlie was so pleased with its operations that he immediately began pushing for the full privatization of Joe Too. Given that the company was carrying billions of dollars in debt, Koch financed the acquisition under the name Koch Forest Products (Koch Forest Products), which was eventually completed for $21 billion. The deal made Koch the largest privately held company in the United States.
For the large increase in new employees after the acquisition, Koch will quickly carry out the process of "Kochization": employees must be trained in Koch's corporate culture, and daily work standards to meet the standards of Koch's "Labor Management System" (LMS). The Labor Management System (LMS) quantifies all employee actions, accumulates data, and measures each employee's productivity.
The 2008 financial crisis hit many companies, and Koch was not immune, laying off about 2,000 employees. The subsequent election of Barack Obama as president also became a major distraction for Charlie. Yet over the next few years of Obama's presidency, Charlie's net worth doubled, growing faster than ever before.
This was partly due to the demise of the Cap-and-Trade Act, which controlled emissions of polluting gases, and partly due to the drilling technique known as fracking. To prepare for the latter's widespread adoption, Koch has been quietly making a series of what might seem to outsiders to be strange, if not irrational, moves since 2010.
In March 2010, Koch boosted pipeline capacity in stagnant South Texas by 25 percent, and in December of that year, Koch built a new pipeline in Texas that can export 120,000 barrels of crude oil per day. In February 2011, Koch bought a terminal in Corpus Christi, Texas, to export oil, and in April of the same year, Koch built a new pipeline to export oil. In addition, Koch built a highway to transport crude oil from the Eagle Ford Shale in Texas, where oil production has been slow to pick up.
The boost in production that the new technology has given Koch has been quite impressive: in July 2010, the Eagle Ford Shale was producing 82,000 barrels of oil a day; by 2014, that figure had become 1.68 million barrels, about a fifth of the nation's total production at the time.
But the Kochs' oil business faces a growing threat from the spread and adoption of new energy technologies. Traditional industry tycoons, represented by the Kochs, have made a number of moves to that end:
Between 2005 and 2008, Koch's alone donated $25 million to dozens of organizations fighting climate reform. Robert Brulle, an academic, found that between 2003 and 2010, more than a hundred nonprofits received more than $500 million to "manipulate and mislead the public about the threat of climate change.
In addition to political maneuvering, Koch has also moved into new areas with acquisitions: between 2013 and 2014, Koch spent billions of dollars on companies in the chip, steel, and glass sectors, among others.
As Koch's empire grew larger, conflicts with labor unions resurfaced, only this time Koch was far stronger than it had been in the 1970s, as was the case in their fight with Joe Too's union, the IBU, in Portland, OR. Steve Hammond, one of the union's top executives, spent 75 percent of his time dealing with employee complaints. Under Koch's LMS, workers are forced to work overtime and are often disciplined for minor infractions.
Joe Yar's work environment is fraught with danger, with 579 very serious workplace injuries alone at the plant in 2010. Koch invested in improving safety measures, but the situation did not improve much, and in 2011, there were still 545 serious workplace injuries. The volume of orders has also increased in direct proportion to the volume of injuries, with the number increasing to 584 in 2012 and reaching a record-breaking high of 644 in 2014, when another six workers were killed on the job.
In 2015, it came time for the IBU to negotiate a new contract with Koch. The parties' 2010 contract negotiations were not pleasant, and the 18-month tug-of-war left the union devastated. They didn't want to repeat that mistake, but it was not to be, and the union had long been marginalized and had no leverage in its hands.
Charlie, who is 85, has repeatedly said he will work until the end, but his grooming of a successor has long begun. He had a daughter, Elizabeth (Elizabeth Koch), and a son, Chase (Chase Koch), in 1975 and 1977, respectively. Elizabeth had no interest in business and stayed away from the family business, and Chase, who had been given high hopes by Charlie, had been evasive about taking charge of Koch.
Charlie has copied his father Fred's parenting style, trying to create another version of himself, but Chase is not a second Charlie. He obeyed most of Charlie's demands, such as playing sports and interning on a farm, and did well, but he was not as ambitious as Charlie.
In 1993, at the age of 16, Chase was sentenced to 100 hours of community service, 18 months' probation, and a 10-month curfew after he accidentally struck and killed a passerby while driving. Chase, already a steady character, has kept an even lower profile since then. Almost all of the Koch employees who have come into contact with him have given quiet, unassuming, good-tempered comments.
In 2003, Chase was persuaded to formally join Koch, and began a shift at the top, and in 2006, he began to feel uneasy about this state of affairs, feeling that he had only a superficial grasp of all the business. So he started as a regional salesman for Koch Fertilizer Company, marketing fertilizers in the north-central U.S. Not only did he understand the fertilizer business meticulously, but he also achieved quite outstanding results.
Chase was then promoted and became president of Koch Fertilizer in 2013. But over time, the high-pressure, complex, and hectic job brought him less and less enjoyment, and in 2015, he stepped down as president to pursue his favorite investment, an act that marked his formal exit from the specifics of managing Koch's business empire.
Chase's retreat into the background has intensified competition among several of the most highly regarded executives. Koch now has two major divisions: Koch Enterprises and Koch Resources. The former includes Joe Too, Molex, and Invista, and is headed by Jim Hannan, while the latter includes various energy, fertilizer, and trading businesses, with CEO Brad Razook. In addition, the president of Koch Industries, David Robertson (David Robertson) is also a favorite successor to Charlie position.
The only thing that's certain is that whoever of the three ends up taking over is just a gatekeeper to the Koch empire.