Kochland Page 27
Another strength was knowledge. Charles Koch had built an organization that learned, and learned constantly. Every transaction was a data point, every relationship was a conduit for information, every business unit a listening post. At Charles Koch’s direction, the company had filled whole rooms of its basement with computers and processing power, the ability to churn and analyze mountains of information. Koch built a company around learning.
Charles believed there were quantifiable laws that drove the world, unbreakable laws that were true whether a person believed in them or not. These laws were the principles by which he tried to live and run his business. He never doubted these principles, even in the darkest days of the late 1990s. The principles had been correct. He had simply made mistakes in carrying them out.
So he would do better. His solution was simple:
“I just work harder.”
PART 2
* * *
THE BLACK BOX ECONOMY
CHAPTER 11
* * *
Rise of the Texans
(2000)
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. The Koch Industries that emerged on the other side of this transformation was radically different from the faltering machine that Charles Koch oversaw in 1999. The firm was reshaped from its boardroom all the way down to the refinery floor.
The revolution began with a purge. Charles Koch needed a new leadership team to take him where he wanted to go. Bill Hanna, the company’s long-serving president and chief operating officer, was replaced. F. Lynn Markel, the true-blue Koch employee who joined the company in 1975 and rose to become its chief financial officer, was replaced. Corliss “Corky” Nelson, a vice president and head of Koch Capital Services, who had been with the firm since 1978, was replaced. The chief technology officer, replaced. The vice president and head of structured finance, replaced. The purge reached down into Koch’s business units as well. The head of Koch Petroleum, replaced. The CEO of Koch’s polyester division, replaced. The head of trading across Koch’s divisions, replaced.
After the purge was complete, Charles Koch didn’t replace his leaders with fresh employees who were hired from the best business schools or other companies. Instead, he promoted loyalists who knew the Koch way. The new CFO, Sam Soliman, graduated from Texas A&M University and had worked most of his career at Koch. The new head of Koch Petroleum, David Robertson, spent his entire career at Koch, having joined just after he graduated from Emporia State University in Kansas. The new president and COO, Joe Moeller, was a Koch lifer and a graduate of the University of Tulsa. The new team was composed entirely of men who were steeped in Charles Koch’s values and who were imbued with the lessons of Koch University. These were people who spoke the language of Market-Based Management. Charles Koch promoted players from his own farm team into the big leagues.
The change in personnel was only the beginning. Between 1999 and 2001, Charles Koch and his team overhauled the company’s strategy and its corporate structure. The new strategy emerged from a set of private debates after Charles Koch pulled his new management team into meetings and pushed them to think of a way forward. It seemed that every idea was put on the table and considered. There was discussion of moving Koch’s headquarters out of Wichita so the company might have a better chance of recruiting top talent—it had always been a tough sell to convince people to move to an isolated city in south central Kansas. Houston and Scottsdale, Arizona, were proposed as new homes for the company. There was even talk of breaking apart the company and of David Koch potentially selling off his ownership stock. Charles Koch drove his team forward, pushing them to consider every possibility. His message to the new leaders seemed simple: “I don’t like losing,” as one of them recalled. Their new mission in life was “Stopping stupid,” ending the follies of the 1990s.
The evidence of past mistakes was still everywhere in 2000. Koch Industries was still carrying the accumulated litter that was left behind by countless Value Creation Strategies, years of acquisitions, and rapid growth. As Koch reviewed its holdings, one executive described the corporate structure as representing a table piled high at a rummage sale, full of odds and ends that had no apparent rationale for belonging together. Koch began to unload these properties, selling off pipeline holdings like the Chase Transportation Company. It sold a chemical firm called Koch Microelectronic Service Company and closed down a new $30 million chemical plant in Bryan, Texas. Over a period of years, Koch would sell off thousands of miles of pipelines. The corporate odds and ends were discarded.
The remaining businesses at Koch were restructured and streamlined. The most important division, Koch Petroleum, was renamed Flint Hills Resources and given new leaders. Other businesses were consolidated under a new, simplified structure that put them under the umbrella of a few new companies like Koch Minerals, Koch Supply & Trading, and Koch Chemical Technology Group.
This change in Koch’s corporate structure and strategy ushered in a decade of unprecedented growth. Over the following decade, Koch Industries became perfectly suited to thrive in the strange political economy of the 2000s. It was an era that favored big corporations that could master complex systems—in both markets and in the political system—two characteristics that already defined Koch Industries. It was also an era that favored debt-fueled expansion and buyouts, a skill that Koch Industries came to embrace and dominate. The biggest profits of the decade were gained by financial companies and trading firms, a shadow economy into which Koch Industries expanded dramatically. By the end of the decade, Koch Industries came to reflect the broader American economy, where tremendous wealth was generated for a few, wages stagnated for most, and the biggest US companies grew larger than ever.
During this decade, one of the most important features of the new Koch Industries was the impervious strength of its corporate veil—the legal barrier that separated Koch’s various divisions. Under the new structure, Koch Industries became little more than a holding company, a big investment firm that owned a lot of smaller, nominally independent firms. And those companies would be strictly segregated from one another, and from Koch central, by a thick wall designed to be legally impenetrable. The corporate veil became reflected in the vocabulary of Koch employees. They didn’t refer to the company’s subsidiaries as units or divisions, but as “companies,” reinforcing the notion that each unit was fully independent. Many of these “companies” developed their own internal systems for human resources, information technology, and other services, creating just the kind of big, redundant systems that most US corporations were striving to eliminate. These redundancies might have cost Koch money, but their value far outstripped the cost. Koch could now argue persuasively that each company division was a stand-alone company, one that could assume its own liabilities. Never again would angry creditors be able to threaten the cash reserves of Koch Industries’ central treasury, as the lawyers from Purina Mills had done. Now liability would only travel to the top of each company that Koch held. This new structure would allow Koch Industries to amass billions of dollars in debt over the next decade, heaped onto divisions that were nominally independent companies.
The strategy of dividing Koch Industries’ various holdings into independent companies was often discussed in terms of free-market principles—animated by the principle that the company would survive or fail on its own merits in a market system. In fact, the strategy was a way to expand while limiting the downside risk. Shielding Koch’s liability increased the company’s appetite for new acquisitions because the risk of failure was contained. During the 2000s, Koch would make deals that dwarfed anything Charles Koch had even considered during the 1990s.
Koch Industries, the central holding company, institutionalized this drive to expand. The company created a new team of top executives call
ed the business development board, whose sole job was to look for other companies to buy. This group was essentially a reincarnation of the central development group that Brad Hall had overseen in the late 1990s, but it was restructured in a way that made it larger, more influential, and capable of closing deals that were larger by an order of magnitude than anything Koch had done before. The new development group rivaled any deal-making entity on Wall Street. The team had a steady river of cash to work with thanks to the steady flow of money generated at Pine Bend and other assets. The team also made use of Koch Industries’ nearly pristine credit rating,I which made it cheap and easy to get big loans.
Even this new strategy—to push for growth and limit risk with a corporate veil—rested on a deeper, more important idea. This idea was the centerpiece of Koch’s new game plan, which relied on one competitive advantage more than any other: Koch’s superior information.
Koch was seen by outsiders as an energy company, but, within the firm, it was seen quite differently. Charles Koch and his lieutenants considered Koch to be an information-gathering machine that built up stores of knowledge that were deeper and sharper than its competitors’. This strategy traced back to Koch Industries’ earliest days, but with the new business development board in place, it reached the level of a fine art. Koch’s newly designed companies, like Koch Minerals, each had their own mini development teams that became like searchlights, trained on the various industries in which they operated. Whatever they saw and learned was transmitted to the central development board, which synthesized the information with knowledge that was flowing in from Koch’s other companies. The development board also undertook studies of its own, looking for new opportunities beyond the existing Koch universe. The development board ran blue-sky studies in which it teased out economic trends going out ten to twenty years, considering how Koch could make bets that would yield big returns in the future. When the development board saw a deal it liked, it moved with stunning speed. There were no layers of bureaucracy between the board and Charles Koch—there was only a short walk down the hallway. There were no public shareholders to consult, only Charles and David Koch. Again and again, Koch exploited these advantages. The development board recommended acquisitions, and Koch Industries acted before its competitors even seemed aware of what was happening.
Charles Koch made significant changes to how the company operated new facilities once it purchased them. He imposed a new compliance regime that helped avoid the sort of legal troubles that ensnared almost every significant part of Koch’s business up until the 1990s. Like everything Charles Koch did, this new effort carried its own slogan: “10,000 percent compliance,” meaning that employees obeyed 100 percent of all laws 100 percent of the time.II This slogan might have seemed banal, even empty, to Koch Industries employees in the beginning. There isn’t a company in America that doesn’t profess to obey the law. But the glib nature of the slogan was deceiving: it represented an entirely new way of operating. Koch Industries expanded its legal team and embedded them into the firm’s far-flung operations. Now if process owners like the managers at Pine Bend decided to release ammonia-laden water into nearby waterways, they often had to first consult with teams of Koch’s lawyers. Koch’s commodity traders consulted the legal team when devising new trading strategies. Teams of inspectors from the legal department descended on factories and threatened to shut them down if managers couldn’t prove that a valve had been properly inspected. The mandate to comply with the law was very real, and it served a strategic purpose. Koch would keep state and federal regulators off its property.
Taken together, this was the most important restructuring since Koch Industries was first unified and reorganized after Fred Koch’s death. At most publicly traded firms, such overhauls are announced through press releases and explained at length in interviews with the business press. At Koch Industries, a premium was put on secrecy. Part of this was cultural: Charles Koch always believed that his business dealings were a private matter that journalists had no business in scrutinizing. But a larger reason for the secrecy was strategic. In a company that set itself up to exploit its superior knowledge, it became imperative that no one—not the public and certainly not competitors—could know what was happening inside the black box of Koch’s corporate tower. The restructuring “was done in a way that it wasn’t very obvious to the market or to the employees, even,” said a former senior executive who was intimately familiar with the process. “You don’t necessarily want to attract attention.”
During the year 2000, it was easy for Koch to avoid this kind of attention. This was due in large part to the fact that the United States was undergoing its own change in management, and the process was anything but smooth.
* * *
In Washington, DC, people lined the sidewalks of Pennsylvania Avenue on the morning of January 20, 2001, Inauguration Day, in spite of the bitter rain and gray skies. The motorcade of George W. Bush rolled past the crowds, and the newly elected president couldn’t help but notice the signs held high behind the police barricades and cordons. The hand-painted placards said: “Hail to the Thief,” “BUSH LOST,” and “Restore Democracy and Count All Votes.” They were just the most visible expressions of a deep conflict that had simmered since the presidential campaign of 2000. The campaign itself had been a display of American confusion. Amid all the heat and noise, there didn’t seem to be any kind of debate about the central issue of what role the federal government should play in terms of regulating private enterprise. The broad, national political consensus behind the New Deal had effectively died during the 1970s, but it seemed to have been replaced by no new consensus at all. Ronald Reagan’s deregulatory revolution had failed. The entitlement programs of the New Deal and the later Great Society programs under President Lyndon Johnson (like Medicare and Social Security) remained in place. But now these entitlement programs were coupled with the belief that government should keep its hands off the market. The Clinton administration had only solidified this paradoxical view of government. It cut regulations on banks and boosted government programs.
If the new era was defined by any term, it was still the soupy and ambiguous term of “neoliberalism,” which combined the machinery of a welfare state with deregulatory efforts for the select few special interest groups that had the money and lobbying power to make their case heard in Washington, DC. There wasn’t a concrete ideology behind this approach and no public political consensus to support it. The political campaign of 2000 reflected this reality. It seemed as if George W. Bush and his Democratic opponent, Vice President Al Gore, spent the entire campaign working as hard as they could to become indistinguishable from each other.
Bush ran as a left-leaning “compassionate conservative”; Gore ran as a right-leaning liberal. The electorate rewarded the candidates with a vote that was split down the middle. In the state of Florida, the margin of victory for Bush was an infinitesimal 537 votes, a difference that was statistically nonexistent. Lawsuits broke out over a recount effort, and the election was decided by litigation rather than by democratic participation. The government hardly seemed capable of orderly continuity.
Bush’s first months in office were unfocused, desultory, and involved clearing brush at his ranch in Texas. He pushed for tax and educational reforms. Then the terrorist attacks of September 11, 2001, drew the world’s eyes to the smoking towers of the World Trade Center and the ruined face of the Pentagon. For the ensuing eight years, the nation’s attention was almost entirely focused on the issues of war and terrorism—issues that seemed to pose an existential threat to the nation.
Beneath the smoke and noise of international conflict, the wheels of the economy continued to grind, and the structure of the economy was remade under the Bush administration. Bush and his vice president, Dick Cheney, both moved to Washington from Texas, where they had deep roots in the fossil fuel industry. They brought with them more than just an affinity for the big energy companies of their home state, such as Exxon and Enro
n. They also brought a governing philosophy that reflected the antiregulatory sentiment of the Lone Star State.
The Bush era would be regarded as a time of deregulation, when rules were stripped away from the private marketplace, and the reach of the federal government over corporations was curtailed. In reality, the Bush presidency only accelerated the trends begun under Reagan and continued under Clinton—and it pushed these trends to an obscene extreme by the end of the 2000s. The government grew larger, more complex, and more intrusive than at any point in history, giving rise to a hyperregulatory state. At the same time, rules were dissolved and enforcement was dropped at key pressure points in the economy, where only a handful of giant companies could operate. The paradoxes of neoliberalism were in full bloom.
Bush cut taxes in a way that primarily benefited the richest taxpayers and financial firms that earned money from capital gains. This caused federal revenue to crash, particularly during times of economic downturn. While the government was cut in some ways, it was enlarged in others. Bush pushed for, and received, a new Medicare program that paid for the costs of prescription drugs, costing tax payers tens of billions of dollars each year. In the wake of 9/11, Bush dramatically expanded national security spending while spending trillions of dollars on wars in Afghanistan and Iraq, which would later be referred to as “credit card wars” for their effect on the federal debt.