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  The next day, Charles and Howard Marshall went to the son’s house to sign the paperwork on the stock sale. As they talked with Marshall III, the phone rang. It was one of Bill Koch’s lawyers, calling for Charles.

  Charles went into another room and took the call. The lawyer, Jim Linn, said that Bill Koch had called off his special meeting. Linn asked Charles Koch not to make a deal with “that foolish Marshall” kid. They should have a meeting instead to solve their differences.

  Charles said he could not agree to that. He hung up and went back into the other room to close the deal. Eventually Marshall’s son signed over his shares for $8 million. The coup attempt ended there, and so did Bill Koch’s future with the family company.

  * * *

  When they were children, Bill Koch hit his twin brother David in the head with a polo mallet, leaving a permanent scar just behind David’s eye. Later, Bill stabbed David Koch in the back with an African sword from their father’s collection at the family compound, leaving another scar. David forgave his twin brother for both attacks. David Koch affectionately called his twin brother Billy, and when young Billy flew into rages as a child, David would act as a peacemaker between Billy and Charles. Now, David was put in a position where he would have to choose between them.

  There was a board meeting on December 5, at which Bill Koch’s failed coup attempt would be dealt with. Sterling Varner asked Bill Koch to resign from the company, and Bill Koch refused.

  During the meeting, a motion was put forward to fire Bill Koch. When the votes were counted, the motion carried. Bill Koch’s career at the family company was finished. David Koch abstained from the vote.

  * * *

  Although Bill Koch was terminated as an employee, he was still a major shareholder. He continued to use that leverage over Charles, agitating for the company to go public or be sold. During 1981 and 1982, Charles Koch was challenged on multiple fronts to choose one of the two options.

  But going public would destroy the machine that Charles Koch had built. It would also mean that Charles Koch would lose control. Shareholders would have a vote. A new board of directors might have the power to fire him. Koch’s business strategy revolved around rapid decision-making: managers brought a plan to Charles Koch and Sterling Varner, and they had the authority to approve it on the spot. Publicly traded firms had to take their shareholders into account, leading to the proliferation of the kinds of committees and review groups that Charles despised.

  Charles pressed his case to the board and to the small group of shareholders, and his case was a convincing one. When Charles joined his father’s company in 1961, the company had three hundred employees. It earned a profit of $3.5 million a year, and paid annual dividends of roughly $150,000. Twenty years later, Koch Industries earned $300 million in profits and had seven thousand employees. Even though dividends were a small share of profits, Koch still paid out $27.5 million in annual dividends because the profits were so high. That was a ninety-one-fold increase over the level paid when Fred Koch died. The company overall was worth $1.5 billion in 1982. It had been worth just 3 percent of that amount in 1967.

  Charles Koch made the case to his directors and shareholders that if they stayed at his side, if they believed in his vision, the future would be just as strong.

  * * *

  Bill and Freddie Koch finally came to a resolution with Charles and David. Koch Industries would buy out Bill’s and Fred’s ownership stakes for more than $1 billion. This would finally sever the business ties between the bothers. Koch Industries borrowed $1.1 billion to finance the buyout. The massive loan cut against Charles Koch’s distaste for debt, but it was an emergency measure necessary to expel Bill and regain control.

  When it came time to close the deal, Charles Koch turned for help to Brad Hall, the young finance whiz who had helped Bill Koch manage the Koch Carbon division. Hall had since made it clear whom he’d rather be working for, and he was just beginning a career under Charles Koch that would last more than twenty years.

  In 1983, Hall accompanied a Koch Industries lawyer on a flight to New York, where they met Bill Koch and his team of lawyers to close the settlement deal to buy out Bill’s ownership. There was a festive atmosphere as the papers were signed. Bill Koch, after all, had just earned something in the neighborhood of $470 million. “They were having a big party and everything, and [Bill] wanted to have his picture taken with me,” Hall recalled with a sad grin, shaking his head at the memory. “He told me to tell his brother that he still loved him.”

  About one year earlier, Bill had been fighting Charles for a deal that would have paid out $25 million if he stayed at the company. Now he had several times that amount. Bill was about to embark on a spending spree, describing himself as feeling like a child again. He bought opulent houses in the most exclusive beachfront communities. He bought a helicopter, fine art, and the world’s finest wines.

  Like his younger brother, Charles Koch had big plans for what he wanted to do with the family fortune.

  CHAPTER 6

  * * *

  Koch University

  (1983–1989)

  In the early 1980s, after he was unfettered from his dissident brothers, Charles Koch began to reveal just what his management dreams would look like.

  There was an auditorium at Koch Industries headquarters, and Charles Koch began to hold events there, filling the seats with between four hundred and five hundred of his most senior managers. Lynn Markel, Brad Hall, Bernard Paulson, and others would file into the room and take their seats. The events were not the typical corporate presentation; Charles didn’t use the forum to talk about business operations or to hold some kind of pep rally. Instead, Charles Koch often sat in the audience himself, taking notes. The executives sitting near Charles Koch saw that this wasn’t a business meeting—class was in session. In fact, they were attending the first seminars in a decades-long curriculum that would become the central work of Charles Koch’s life. The curriculum outlined a specific and codified philosophy; an operator’s manual that defined an immutable set of rules for creating prosperity. He would ultimately call this philosophy Market-Based Management. But in the beginning, the philosophy had no name. In the beginning, there were only the seminars in the company auditorium.

  In the earliest sessions, Charles Koch invited outside speakers to address the crowd. He ran workshops on the Dale Carnegie theory of management that built on Carnegie’s famous book How to Win Friends and Influence People. These classes focused on the art of management and productivity, and required managers to give short speeches to help them learn to communicate effectively.

  The classes got more technical, and more strategic, over time.

  Charles Koch invited one of the brightest young business consultants in the nation to speak in Wichita, a Harvard professor named Michael Porter. Porter published a book in 1980 called Competitive Strategy that offered a new framework for how to run a business. The book provided a detailed plan for companies to analyze the market in which they operated. Porter visited Koch Industries multiple times, accompanied by a team of consultants. The team helped Koch’s managers look into their own business lines and apply Porter’s ideas, using good data to figure out the best path toward boosting profits and growing. Porter helped Koch executives learn how to analyze their competitive advantage, analyze their competitors, and come up with the best plan to capitalize on the company’s market position.

  Then Charles Koch began to teach the classes himself. He led sessions with smaller class sizes, maybe a dozen or so senior managers. This intimate setting helped Charles Koch give more attention to each manager. But he wasn’t content for his teachings to reach only the senior leaders. Charles Koch wanted to multiply his efforts. After they attended Charles Koch’s lectures, executives like Markel were expected to return to their offices and repeat the lectures to their own employees—executives were even given pamphlets and slideshows to help them. In this way, Charles Koch’s lectures were passed down through
the chain of command, from his senior managers at headquarters out to the most remote branch offices. The managers who attended Charles Koch’s seminars began to call them “Koch University.”

  Charles Koch wanted to ensure that every new employee learned how things were done at Koch Industries. He also wanted to ensure that the company culture could endure over time. Sterling Varner, for instance, was the father figure who guided Charles Koch after Fred Koch’s death. Varner was the company’s living library. But Varner was getting older and wouldn’t be at the company forever. Charles Koch wanted to codify Varner’s teachings before he left.

  These teachings—the “classic Sterling” guidelines—were some of the key elements of Charles Koch’s new philosophy. Opportunism was one: every employee needed to keep their eyes open for new deals on the horizon. Humility was another: “knowing what you know and what you don’t know,” as Brad Hall recalls it. Humility dictated that while it was important for Koch to expand, the company needed to expand into fields where it already had expertise. Strength would be built upon strength.

  But in the early 1980s, Charles Koch’s philosophy was just beginning to be incubated. He didn’t have a fully formed set of guidelines to pass on to his managers. Instead, Charles Koch focused on the fully formed set of guidelines shaped by another man, a consultant named W. Edwards Deming. Charles Koch became fixated on Deming, and he set out to apply Deming’s methods across Koch Industries.

  W. Edwards Deming was not simply a business consultant. He was more like a guru. For many years, he remained an obscure thinker within the United States, but he had become a major figure in Japan, where Deming helped Japanese automakers improve their factory production and build some of the strongest manufacturing companies in the world. Like Charles Koch, Deming stood apart from the mainstream thinking of America’s business community, and he wasn’t afraid to speak his mind about it.

  “Deming’s passion was for making better products, or, more accurately, for creating a system that could make better products,” the journalist David Halberstam wrote. Deming wanted to overhaul American management using mathematics. He was a quality control engineer at heart, and he thought that the manufacturing process could be improved only by using hard statistics. Deming taught companies to measure what they were doing, to analyze it, and then to improve it.

  Deming’s concept of continuous improvement was applied throughout Koch Industries, and the results were dramatic. One of the most successful students of continuous improvement was Phil Dubose, the oil gauger in Louisiana who had already mastered the Koch method of measuring oil. Dubose would eagerly absorb the lessons of Koch University. In doing so, he would see firsthand why Koch Industries became one of the largest companies in America even when most people had never heard of it.

  * * *

  After rising through the company ranks over the years, Dubose was promoted in 1982 to oversee Koch’s marine operations around the Gulf of Mexico. This put Dubose in charge of a fleet of barges that went from terminal to terminal, collecting crude oil and then shipping it to refineries in Texas. Some of his barges even traveled north on the Mississippi River to Koch’s refinery in Pine Bend, Minnesota.

  Dubose was terrified by the promotion. There had been two previous managers of the marine unit, and both of them had failed to turn a profit. “If it failed again, I was going to go down with it,” he recalled. Dubose was determined to make the shipping barges turn a profit. He knew he had one tool to help him do this: the charts of W. Edwards Deming.

  The fleet Dubose oversaw initially consisted of five large barges. They each carried about 8,500 barrels of oil. Each barge had a skipper and crew who lived on the craft while it traveled from port to port. The first matter of business that Dubose focused on was keeping costs down. Fuel was the largest cost the barges incurred. Rather than let the skippers fuel up the ships when they wanted to, Dubose required them to call his office when they were running low on gas. Then he would call the local ports and find the best price for gas, sending the skipper to the best location. This helped cut costs right away.

  The tools from Deming helped Dubose go even further. Of all the charts he learned to make, he found that by far the most useful was called a run chart. Even decades later, he’d talk about run charts as if he were discussing a cherished family pet. “The best chart out of all of them . . . is that old-fashioned run chart. It’ll tell you where you’ve been and where you’re going,” he said.

  A run chart broke down all the costs that a barge would incur. It had a separate category for each cost: groceries, fuel, maintenance, ship damage, and supplies. The run chart allowed you to track these costs as they shifted from month to month, letting you see “where you’ve been and where you’re going.” Dubose was taught to look for cost spikes. The reason was simple: you figured out what caused costs to spike, and you avoided it. Then you figured out what caused costs to fall, and you replicated it.

  The critical part came next. Dubose printed run charts for each vessel and posted them in the skippers’ cabins. Each skipper could then see for themselves where they were running up costs and where they were saving money. Dubose turned each skipper into his own manager. Skippers were free to make their own decisions based on the run chart. Then Dubose went further. He started tracking the profits and losses for each barge. This made each skipper a small-business owner and each barge a small business. The skipper had all the information he needed to boost profits and the freedom to act on that information. And Dubose had total visibility into his fleet; he knew which ships were losing money and which were making it.

  “It got to the point where the boats were competing against each other. I was just sitting back like a big old Cheshire cat in a tree,” Dubose said. Using data to drive changes at the level of each barge, Dubose boosted profits in the marine unit overall. His profit margin reached 33 percent. The trucking division, by contrast, was lucky to see a profit margin of 8 percent or 9 percent. As he boosted profits, Dubose was given more freedom and more resources. He added more ships, buying larger barges that could ship forty thousand barrels of oil at a time.

  All the while, he was in contact with managers from Wichita. They helped him prepare his run charts, and they taught him other tricks from Deming. As he talked with more managers, Dubose learned that not everyone embraced the Deming formula. A lot of managers were accustomed to making decisions based on gut instinct. They thought the charts were just a gimmick. But as many Koch Industries employees would learn over the years, Charles Koch did not consider his guidance to be a gimmick. And following his guidance was not optional.

  “Some of these poor rascals just couldn’t embrace [Deming’s] thing. They couldn’t get their arms around it. . . . They’d just zigzag a line across with a bunch of numbers. The people who couldn’t support that, well, most of them were let go,” Dubose recalled.

  * * *

  The Koch University seminars were just the most visible aspect of his efforts to encode his company with a very specific culture. There were other elements of the culture that were being institutionalized behind closed doors.

  One of the most important elements of Charles Koch’s philosophy was the need to expand, the need to be opportunistic. Some of this was drawn from Sterling Varner, but there was also a part of it that came from Charles and from his view of the world. One of the key lessons that Charles Koch took from the Austrian economists von Mises and Hayek was that markets never stood still. The status quo never survived. Markets always build up and then tear down. It was an evolutionary process that never ended, and companies that tried to fight the process would only be devoured by the forces of change in the end. Charles Koch wanted his company to change and grow with the markets. He wanted Koch Industries to internalize the forces of change and exploit them rather than trying to fight them.

  This desire was institutionalized in a small office down the hall from Charles Koch’s suite. That’s where he started the company’s first development group. To lead the
new group, Charles Koch turned to one of his brightest young lieutenants, Paul W. Brooks, the employee who had suggested simply jettisoning annual budgets. While Brooks’s ideas might have seemed brash or even radical, he was no corporate swashbuckler. Brooks didn’t come across as someone trying to impress people around him by parading his shining intellect. He was low-key and analytical and very much like Charles Koch in his deliberate approach to problems. Brooks was part of a small cadre of employees who came to Koch Industries from Exxon in the mid-1980s. Exxon approached the market with a certain hierarchical rigor; it was a company that believed in protocols and an engineer’s approach to problems, disciplined and linear. During the 1980s, this approach failed to master the violent ups and downs of the oil business, and Exxon had to let a lot of its talent go, including Brooks. At Koch, Brooks found that he could still think like an engineer but inside an institution that was more flexible, adaptable, and entrepreneurial.

  When he was put in charge of Koch’s development group, Brooks was given one of the most important jobs at the company. The development group would be an acquisition machine. It would work full-time to identify new companies for Koch to buy and new deals in which to invest. The group would formalize Sterling Varner’s instinct to scan the market for new opportunities. The development group was a central hub to which all Koch employees could send potential deals that they’d spotted. Senior managers in every division at Koch were taught to act like scouts in the marketplace, and when they found a deal that was large enough and promising enough, they passed it up the chain of command to the development group for approval. The development group then studied the idea from every angle before deciding how to proceed. The development group also came up with ideas of its own. Over time, executives in the group would undertake blue-sky studies that looked out ten or even twenty years on the horizon and identified new markets in which Koch might want to invest.