Commentary: Good Profit (June, 2016)

by John McClaughryJohn McClaughry

The mere existence on our planet of the billionaire industrialists Charles and David Koch drives Sen. Bernie Sanders to torrents of outrage. They, according to Sanders’ imagination, are the secret owners of the Republican Party, the Tea Party (is that still around?), and a long list of organizations opposed to the Sanders agenda, such as the political action group Americans for Prosperity.

This is amusing, inasmuch as the Koch brothers, being libertarians, couldn’t possible own the Republican Party that seems to have selected the eminent crony capitalist Donald Trump as its presidential nominee.

But in any case, the Kochs – particularly Charles, the CEO of Koch Industries (David is mainly a philanthropist) – have become exhibit #1 in Sanders’ gallery of horrors. He directs his followers’ wrath onto them as despicable examples of the greedy “one percent” at the top of the income ladder. They are, in Bernie lore, evil geniuses pocketing the rightful earnings of the oppressed working class, and using their wealth to roll back the socialism that America has accumulated over the past century.

So now comes a new book by Charles Koch that describes how his vast business empire uses Market Based Management to achieve its objectives. It’s titled Good Profit, a label that will undoubtedly send Sanders, who despises profit altogether, right up the wall. Incidentally, there is no political commentary at all in the book.

By “good profit”, Koch doesn’t mean “high margins, or high return on capital, or lots of profit by just any means.” He means “creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity.”

One insight is particularly compelling .Charles’ early partner was a man named Sterling Varner. He was born in Ranger, Texas, grew up driving mules hauling wagons of goods to oilfields, and rose to be president of Koch Industries.

At a high level meeting it was found that the company would make a higher than expected profit from some deal. Some of the men around the table started laughing about how they had outsmarted the customer.

Varner was livid. “You boys are way out of line… Our customers are our friends. They are the ones who keep us in business. We don’t make fun of our friends. If we continue doing it we won’t have any friends and we won’t have any business… we have to build trust by treating them with respect.” Adds Charles, “good profit is attained not through exploitation but through delivering value to others.”

Unlike the greedy and amoral Wall Street stock jobbers portrayed in the movie of that name, eight of the nine Koch business groups actually make and transport stuff – fuels, minerals, petrochemicals, metals, energy equipment, nylon, toilet paper, electronic equipment , and much more. Koch Industries was valued at $21 million in 1967, when Charles took it over from his chemical engineer father. Today, according to Forbes, it’s valued at around $100 billion. It employs over a hundred thousand employees in some sixty countries.

Among Koch’s products is ethanol. Koch got into ethanol back in 1990, when it was more an industrial feedstock than a motor fuel additive. But out of principle, Koch opposes the present government mandate to blend ethanol into gasoline as a political scheme that produces “bad profit.” “We profit short term from these market distortions. But rules like these that don’t lead to good profit, leave virtually everyone worse off long term, including us.”

Good Profit has an interesting history of the growth of Koch Industries, including some painful recollections of mistakes along the way. Unlike many business leaders, Koch sees creative destruction – the recurring disruption of industries by innovation and entrepreneurship – as essential to progress and human wellbeing. That disruption is based on human freedom to develop new and better ideas and products; hence Koch’s commitment to preserving freedom from monopolies, government-rigged deals, and high government barriers to entry by innovators.

Good Profit contains a wealth of practical experience and valuable insights into how to build and manage large and diverse business enterprises. Koch has succeeded where many others have failed by focusing on the well-defined principles that he calls Market Based Management. Its five components are Vision, Virtue and Talents, Knowledge Processes, Decision Rights, and Incentives.

Koch sums it up thus: “Allowing the people the freedom to pursue their own interests (within the limit of just conduct) is the best and only sustainable way to achieve societal progress. For individuals to develop and have a chance at happiness, they must be free to make their own choices and mistakes, rather than be forced to accept choices made for them by others.”

None of this could Bernie Sanders possibly understand, alas.

- John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).

 

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