Kochland — Christopher Leonard
Kochland is an outstanding masterpiece written by Christopher Leonard capturing the essence of the indomitable Koch industries with an insiders vantage point, starting from the genesis of the company till date.
It was a great pleasure to read this book as it was an eye opener to me on a lot of avenues. I heard about this book from the podcast Pitchfork Economics, about how Koch industries captured the American economy and how a big influencer it was. This just piqued my curiosity towards this book. I downloaded an audio book on my phone to read it during my India trip. Its quite a big beast of 23 hours of audio, but thoroughly enjoyed every bit of it!
Koch Industries is one of the largest multinational conglomerates in the world. Koch Industries is a behemoth of a company that controls oil, fertilizer and a plethora of other commodities. And itjust don't end there. They are omnipresent into all the products in the market like manufacturing of chemicals that make our pipes to the synthetics that make our carpets and diapers to the Wall Street trading in all these commodities. But interestingly, very few people know the extent of Koch industries as they had always wanted to keep it the ‘secret’ way.
Late Fred C. Koch was the original founder and owner of the company. After his death, it was Charles, one of his son who took over the company and transformed it to what it is today. He was joined initially by his own brothers, David, Bill and Fredrick Koch in this ownership. As the history says, Bill and his eldest brother Frederick were against Charles and David at one point to gain the major ownership of the company. Bill Koch is a principled person and was not in agreement in the ways how Koch industries operated with deceive at every step. Due to this clash of principles and values for Bill, there was a feud between these three brothers around the ownership of company, its equity, shares etc. At last, it ended up in an alliance between Charles and David Koch who took over the majority share of the oil, chemical and textile industries while Bill was fired out of the company.
Charles and David Koch took what started as an oil company, multiplied its already established wealth and international reach into the multi-billion dollar conglomerate it is today. Christopher narrates an instance of how Koch industries made tons of profits by duping, selling an ounce of oil less and still continued charging for it. Kochs’ applied this minutia of deceit over tons of gallons of oils from a refinery to gain good amounts of profits incrementally. As there were no audits or no one to question about the oil measurements, the money going behind it, Koch started to build egregious amounts of profits based on this trick. The investigation conducted by Senate and FBI were unable to figure out this trickery which Kochs’ used to mint money. On the environmental front, Kochs’ failed to act responsibly. They allowed their oil refineries to cross the ammonia release thresholds. This showcases the level of craftiness adopted by Koch industries. Being in such a powerful position, there is no higher authority who would pour in their time, efforts and resources to investigate these inextricable matters. This brings us to the harsh reality that being a monopoly industry/company kills the growth of all the small scale industries. This may also lead to such deceits as the rules and regulations are crafted to be so arcane, that its easy to play around the general prosaic mentality. Its an exceedingly tough job to unfold the underlying reality and to bring it out to the world.
As Charles Koch took charge of the industries, his only motive was to generate profits. Like every big organization has its own culture imbibed into it, Charles came up with a set of rules that was codified and later enshrined in a book called Market Based Management (MBM). MBM isn’t a business philosophy. It’s a management philosophy. Its a way for business to create a ‘harmony of interest’ with society. Each chapter examines how it was formulated, evolved over time (especially when the company faced serious crises), and was implemented in different industrial settings. With the detailed study of this book, Christopher has presented numerous such examples where the MBM principles were applied and how Koch industries climbed the ladder of success. Koch industries employees had all the MBM principles deeply ingrained into them. Examples of these principles are — hire talented people with Ivy League degrees, train them to their highest capabilities of acquiring skills in a particular domain, acquire the best knowledge to transform the organization and utilize the best strategies available to gain profits. Leonard has given examples of dozens of men and women within the industry who were successful at imbibing this culture and who aligned with the Koch’s vision. Each story illustrates one corner of a vast corporate empire.
Charles Koch preferred hiring smart and talented people for a reason. He wanted everyone to think ahead of the curve. Their focus was not only to be successful to where they are at, but to be successful forever. Their aim is to be superpower of the nation. And with this aggressive goal, they focused a lot on research going across various fields that would directly or indirectly affect their purchases or sales of their products. An example of this detailed analysis, Koch employees kept a close eye on weather forecast for the next few days/months to be aware of any precarious conditions which might impact the imports/distribution of crude oil or any of the oil refinery operations. Koch’s trading was not only to find out forecasts of which region would have higher oil prices, but if oil prices in mid west is going to rise higher than gulf region. Once they get this information, Koch would buy it instantly, snap up leases, even at the cost of paying premium for it. This is how Koch got hold of such acquired properties well before hand putting other small scale industries in jeopardy. Similarly, they carefully studied all the predictions of upcoming as well as long term shortages or trends that can substantially impact their business. One instance is where one of their employee named O’Neil from Texas found that natural gas derivatives earned more profits than trading just natural gas. And he just capitalized predicated off this to earn ground breaking profits. This is how Koch industries prognosticated and maintained to be leaders across the whole world.
Christopher also gives an instance in this book where Koch realized the importance of sharing knowledge between the various divisions operating within their industries which helped them in flourishing to great extent. With this, Koch established a central committee where employees came together to talk about their strategies applied within their divisions, experiences etc. This lead to birth of insiders traders company whose only job was to communicate and share all the learnings to the key stakeholders of each division. Their trading system was separated from the rest of the industry. For instance, if say department X plans to do natural energy trading, then they had to contact this stand alone trading company, get their inputs and then work as per the directions provided. This way Kochs’ successfully leveraged the insight and experience gained in one industry to get a leg up in others. They aren’t always successful. A big push into agriculture and animal feed in the 1990s ended in disaster. But many of their moves pay off, sometimes lavishly. The Kochs’ were among the first to roll the dice on the shale oil boom, spending hundreds of millions of dollars on speculative pipelines from south Texas to their refinery in Corpus Christi.
Koch staunchly opposed to unions, believing workers are really “entrepreneurs” and don’t need collective representation. A chapter on warehouse operations that tracked workers’ activity down to the minute (each conversation and bathroom trip had to be accounted for) and posted their performance rankings on a bulletin board. It was a ruthless system that pitted the workers against one another. They were unionized, but they felt so exhausted and degraded at the end of the work day that any solidarity began to fade. Koch’s used the MBM principles to their own benefit. As Leonard explains regarding an environmental failure at the Pine Bend refinery, “Koch’s management team felt that the state had no right to know what happened inside the fence line of Koch’s properties. Managers obeyed a code of silence to maintain this wall round Koch operations.” He reveals how this shared mindset led to an environmental crisis at Pine Bend and a similar one at the Corpus Christie, TX, refinery. The bad publicity and fines led Koch to adhere to environmental regulations conglomerate-wide. Leonard emphasizes that over the past 50 years Koch’s management have consistently exploited the potential for large and recurring trading surpluses from market dysfunctions, dominance and asymmetries in market intelligence — especially in energy, basic chemicals and financial trading markets. Their gargantuan widespread in politics and their influence on the world’s economy is so far that its predicted that the current rise in natural gas may be Koch’s role in natural gas supply and other gas by-products.
Koch’s presence and ‘reach’ into lobbying, special interest groups and political arenas cast an analytical eye of the exercise of corporate power in the USA. There was a wider business lobby at work, but Christopher presents the weight of Koch’s role in blocking, delaying and obstructing any implementation of these policies. Overall, it is evident that the many risk-taking activities pursued by the Koch management have been more rewarding than reckless. The record of the effects on the environment, the majority of their labor markets and their exercise of political power are much more circumspect as Christopher has thoroughly researched and written in this book. And the next generation of the family (Chase Koch) looks poised to give continuity to the business and its creed.