Charles Koch: How to change a company and a country (+videos)

Charles Koch responds to questions during an interview at Koch Industries in Wichita on Oct. 19.
Charles Koch responds to questions during an interview at Koch Industries in Wichita on Oct. 19. The Wichita Eagle

Charles Koch, the billionaire who has spent most of his 80 years avoiding talking publicly about his company, his politics or his political spending, is talking a lot, expanding on ideas he offers in his new book, “Good Profit,” and trying to set the record straight.

Much of the political world might regard him as a political player but he says he detests politics. For two hours in his Wichita headquarters recently, he talked about his children and grandchildren, about tolerance, about the poor and vulnerable, about how “corporate welfare” damages our country.

He told how he agonizes over his company accepting what he calls corporate welfare, even as he denounces it.

He said politicians of both parties are beholden to corporations and cronies who get them re-elected.

“And so it’s welfare for the wealthy,” he said.

He talked about the 153 death threats he received last year and being on al-Qaida’s hit list.

He said he doesn’t want any more government shutdowns, or more of the government overspending he says is ruining our future. He talked of Barack Obama, Calvin Coolidge, criminal justice system abuses, his company, his political spending and his goals.

He said Mitt Romney was wrong to say the 47 percent of Americans getting government assistance are lazy. He said we’re headed for a society “destroying opportunities for the disadvantaged and creating welfare for the wealthy.”

He wants to stop that, he said.

Political spending

His critics have bashed him for his political spending and for helping start the Freedom Partners Action Fund, a super PAC supported by wealthy business people who attend invitation-only seminars on economic freedom. A “secret bank,” Politico called the PAC.

The seminars started in 2003 during the George W. Bush administration, which Koch says was worse for the country’s finances than Bill Clinton’s.

Bush “added all sorts of harmful regulations, one of which caused this artificial boom in housing, but then collapsed and brought down the whole economy,” Koch said. “And he got us involved in terrible, counter-productive wars that cost trillions of dollars.”

Few of the business people attending the seminars were willing to donate money to influence policies during the Bush years, Koch said. With Obama’s election, that changed.

The seminar network, as he calls it, will spend about $250 million supporting state and national candidates in 2016, less than the $300 million projected during the seminar in Palm Springs, Calif., in January.

Koch said he gave $2,700 to political candidates this year, all to U.S. Sen. Jerry Moran. He said he may give about $5 million next year to political candidates through Freedom Partners, the same amount he gave in 2014.

“But I could give more or less, depending on what I see are the opportunities to support people who are going to help what I view as improving the country,” he said.

Before the 2016 election, the network will raise about $500 million to $550 million more, beyond the $250 million. Most of it will go to educational institutions, student scholarships, think tanks and nonprofit foundations. Koch contributed $111 million to the network last year. Of that, $106 million went to universities and to support programs to reform the criminal justice system and the policies that destroy opportunities for the disadvantaged, he said.

Money, secrecy and power

Most seminar donors refuse to disclose their names and contributions, which draws criticisms of secrecy. But Koch said the donors’ refusal is understandable.

He and his brother David have been accused of trying to buy democracy and at one time were on Obama’s enemies list.

Beyond that, he said, “Since we get attacked daily, and get all these death threats, a lot of people don’t want that.

“If we said, ‘If you want to donate, you’ve got to have your name there, and give the amount you’re donating,’ then there would be a lot less donation from people.”

He’s on al-Qaida’s “hit list … urging sympathizers to find a way to kill me. And they have a handbook – they have instructions on how to go about it,” he said. It’s on a public al-Qaida website, he said.

Al-Qaida wants to kill Warren Buffett too, he said, and Bill Gates, a guy whom his wife, Liz Koch, plays tennis with often.

“They think I am, or we are, big contributors to the economy, and if they kill us it will help undermine the economy,” he said.

Death threats from Americans – and the lack of tolerance of new ideas – seem to trouble him more.

“This is very scary for our society to have the culture degenerate to that point where somebody disagrees with you, you want to kill them,” he said.

Many of his critics are not concerned with his transparency, he said. Instead, “It’s an attempt to shut down opposition so that they can continue to gain power, from my perspective.

“And they talk about the money that our group raises as being overwhelming and dark? It’s a drop in the bucket to what’s being spent to promote government policies. Look at all the free air time, and the billions spent, or tens of billions spent to subsidize those who support them.”

When he says “they,” he means nearly all the elected politicians in Washington and elsewhere, he said.

“It isn’t just the money,” he continued. “It’s those in office who have the power to distribute money to pick winners and losers. … You look at the re-election rate in Congress of incumbents. That shows there needs to be some force to get new ideas if you want to have any hope of changing the trajectory of the country.”

‘Destructive direction’

He turns 80 this week. For several weeks, following foot surgery, he has had one foot in a cast and has wheeled around the half-mile-long Koch Industries headquarters with one knee resting on the seat of a medical scooter.

He works nine or so hours a day, has dinner with Liz, then works some more. He likes to watch football on weekends – rooting for whichever team he has a $10 bet on.

“In a football game there’s only like eight minutes of action, so I work and try to look up and time it so I see the plays,” he said. “I miss a few. But I can get a tremendous amount of work done during a football game and still get to watch the football game.”

His book “Good Profit,” released in mid-October, quickly rose on the New York Times bestseller list. It describes how he and David grew their company from $21 million in 1961 to the world’s second-largest private company.

He says he may write another book on political and economic policy.

He has four goals for the country:

▪ Reduce debt. “We’re headed for a financial cliff, including government debt, and this is just the federal level, not including state and local. We have over $100 trillion – that’s trillion – in funded debt and unfunded liabilities. And this isn’t just Democrats. Democrats and Republicans have gotten us in this mess.”

▪ Remove poverty-causing regulations by bringing about criminal justice reform, reducing requirements for occupational licenses and reforming the education system. His staff pointed to a recent news story about two black women suing the state of Iowa for the right to start a hair-braiding business without a cosmetology license, which would require 2,100 hours of education and cost $22,000.

▪ Reform the welfare system. “We have the same 15 percent (of the population) that are considered in poverty we had back in 1965,” when President Lyndon Johnson started the war on poverty.

▪ End corporate welfare. “That’s creating waste, it’s reducing people’s standard of living and enriching those who have the most influence in the government.

“We’re headed toward a two-tiered society … a society that’s destroying opportunities for the disadvantaged and creating welfare for the wealthy,” he said.

“Democrats are taking us down that path at 100 miles an hour. The Republicans are taking us at 70 miles an hour. I’d be happy to support Democrats – any Democrat who would be better than the Republican he or she were running against, if they would just move us a little in this direction. Or slow down the pace we’re going in what I consider the wrong direction. The destructive direction.”

Corporate welfare

One of the paradoxes of his corporate and political policy life is that Koch Industries has accepted corporate welfare even as he has spent decades denouncing corporate welfare.

Corporate welfare corrupts our country, he said. There is at least $1.6 trillion in corporate welfare in the tax code every year, he said, out of an economy worth $15 trillion.

Beyond the tax code, there’s more of this curse embedded in regulations designed to reduce competition, permitting processes, tax breaks, tariffs and government loans and mandates, he said.

Corporate welfare distorts markets and entices companies to take taxpayer money instead of grow business honestly, he said. He realized all this by the early 1970s, he said, when he announced that the company would no longer accept corporate welfare.

His managers told him they would have to shut down Koch Industries.

The company takes advantage of accelerated depreciation in the tax code to lower taxes. It makes products protected by import tariffs to keep out foreign competition. It invests in other companies that receive subsidies.

“So I said, ‘OK, you got me,’ ” he said.

“We’re going to oppose every one of these (corporate welfare examples) and work to eliminate them. But we’ll play by whatever the rules are.

“And whatever people think of that … that’s the best we can do.”

Criminal justice reform

Not long after Obama became president, Koch thought that maybe he and the president might soon have a chat.

“Somebody I know – Obama called him … and wanted him to be a top adviser. And he said, ‘I can’t do it, I have other commitments.’ But he said, ‘If you want advice on the economy, you ought to call Charles Koch; he’s got some of the best ideas on that.’

“So I was ready to go meet. But the phone never rang.”

He grinned. “I don’t understand it.”

But he has garnered praise from some liberals (and conservatives) because of a campaign he has launched, and backed with millions of dollars, to reform American criminal justice. One of his allies in this? Obama.

Koch 12 years ago began pouring money into efforts to overhaul the justice system, shortly after the Justice Department had indicted the company for Clean Air Violations at its oil refinery in Corpus Christi, Texas. Koch writes that an employee falsified test results. The company believes that the Justice Department withheld a key fact from the grand jury.

Koch spent millions defending his company, until the case mostly went away. The 97 charges were dropped to one charge.

Mark Holden, Koch’s top lawyer, says if this could happen to their company, it could happen to anybody, including poor people who don’t have Koch’s ability to hire skilled lawyers. Koch said he realized from that case that millions of Americans live at the mercy of prosecutors who might take their power too far.

Last December, Koch gave one of his rare interviews, talking publicly about how we have too many people in prisons, that jail and prison sentences are too long.

He made a key change at Koch Industries. Job applicants no longer have to check the box with a question that asks whether the applicant has ever had a felony conviction.

He partnered with a range of organizations, including the ACLU and the National Association of Criminal Defense Lawyers, to help train defense lawyers and reverse what some see as a national trend to “get tough on crime.” Koch says that national trend has damaged not only people but the national economy.

Holden went to the White House to talk with Valerie Jarrett and other Obama aides about criminal justice reform.

“He has a different vision of how the world works than I do,” Koch said of Obama. “But he’s working with us” on this.

If he got that call from Obama, he’d make still another pitch:

“I would hope we could get him to work with us to eliminate these poverty-causing regulations, starting with this occupational licensing, to combat that, and to help reform the education system so all kids have the opportunity to learn the values and skills required for success,” he said.

“And then try to get him to understand this corporate welfare is destructive of the very things he says he’s for, which is helping the disadvantaged improve themselves.

“I don’t believe, as Mitt Romney said, that 47 percent of the people are just lazy. They’re locked out through the criminal justice system, through the education system, through these regulations from having that opportunity.”

Risk averse

As a Wichita teenager, Charles Koch ducked work, got in fights, rammed a fellow student’s head into a window, got expelled from military school for drinking and disappointed Fred, his father, many times.

Fred told his sons he didn’t want them to be “country club bums,” so he put Charles to work at age 6, digging up dandelions, digging ditches, shoveling manure in livestock stalls, while Charles’ friends went swimming. Charles resented this.

“I’d sneak out at night and go out with my friends, drinking and stuff.”

He credits his dad’s toughness with creating his work ethic. His dad’s threat to stop paying the college tuition bills at MIT forced him to apply himself.

By that time he’d fallen in love with math, then science, then the scientific method. He read books on philosophy, history and economics – and began to think he could change the world.

But years later, on fire with ideas about how to run a company, he made disastrous decisions. He owned a fleet of oil tankers during the OPEC oil crisis in the 1970s and nearly bankrupted his company.

“We had this big international trading operation that I had recklessly set up,” he said. “And when that hit – the oil embargo and the oil cutback – I mean everything collapsed; the shipping market collapsed, the oil prices and chemical prices went through the roof, they put in price controls in this country.”

If you want to ruin a country, he said, impose wage and price controls.

He is risk-averse, he said, even when he makes sports bets. Golf seems more interesting with a bet involved, but he structures his golf betting so that he can never lose more than $55 a round.

In his book, he told about one day in the 1970s, sitting on the rim of the hole dug for the foundation of his new Wichita house. He swung his legs back and forth in the hole and told Liz that he had added up what money they had left. Just enough to fill in the hole.

”The first thing we did was hunker down,” he said. They went forward with the house.

“We compromised and built the basic structure and then we didn’t finish one wing. We didn’t finish the basement and then we cut corners on every aspect we could in the house. And that’s the same thing we did in the company.”

Creating value

He followed that cautious rebuilding period with a drastically different approach to running a company.

He decided, he said, to turn Koch Industries into a giant laboratory. It was his idea, for example, to turn Koch Industries from an oil refining/gathering company into “a company of capabilities,” marketing everything from Dixie cups to paper towels.

And it was his idea to create what he calls market-based management. The dynamics of it are not easy to teach, and he says himself that he sometimes has taught it imperfectly.

But what it does is create conditions inside the company where employees are challenged to act as though they are running their own businesses, he said. It all worked beyond his wildest imaginings, he said.

Charles Koch is now worth $41 billion. David Koch is worth another $41 billion, according to Forbes, and Koch Industries is worth $100 billion. The goal is to double the company’s earnings every six years.

How he got from the hole in the ground to the Koch tower, where he now employs 100,000 people, is the storyline of his book.

It isn’t about taking reckless risks, he said. It’s about understanding people and the principles they and their organizations operate under.

It’s about creating value for customers and emphasizing to employees that to keep up with rapidly changing technology, marginal improvement is not enough – employees and the company have to think of new ways of doing things better.

Following those principles has made the company worth 70 times more than what he thought it could be.

He says he won’t retire, ever.

“If I weren’t doing this, I’d be dead by now,” he said. “I’d be so frustrated. I’m doing everything I can, and a lot of it isn’t any good, it doesn’t work. But I’m trying to learn and improve.”

And beyond running a business, he said, he believes deeply that he has ideas that offer hope to everyone in a country he loves.

“You don’t need to agree with me, but I’m actually trying to change things because I have the luxury of being in a private company and not having to depend on anybody, not having to be popular, having people love me or want to vote for me.

“But somebody needs to tell the truth and try to change things to save what is best in America.”

Contributing: Kelsey Ryan of The Eagle

Reach Roy Wenzl at 316-268-6219 or rwenzl@wichitaeagle.com. Follow him on Twitter: @roywenzl.

Charles Koch

On the company’s future and speculation that his son, Chase Koch, will take over:

“No,” Charles Koch said. “We don’t approach it that way. We try to run a meritocracy here. Whatever position he has or compensation he has … will be determined by where he can create the most value. And whether he could create the most value or whether he could do a better job being CEO or somebody else is … that’s the only way you succeed.

“Family companies who put the family person in – that usually does not create a good future.”

On his grandchildren:

“Boy I’ll tell you, these kids today, they are amazing, Annie’s (his daughter-in-law) amazing. She’s the mother. Before they turn 1, she has them doing sign language. When they can’t talk. Like, there’s a gesture for please, another one for help, and another one: ‘I want more.’ And so I asked: ‘Son, how come your kids are so much more advanced at that age than you were?’ He said, ‘It’s simple, Pop. My kids have much better parents than I did.’ 

On the perfect president:

“Calvin Coolidge cut government spending in half, cut the tax rates by two-thirds, reduced the national debt by a third, and cut unemployment by 80 percent, from 12 percent to 2.4 percent. I’m looking for somebody like that. … But I don’t think we can depend on a white knight, another Calvin Coolidge. I’m not sure – well, Calvin Coolidge couldn’t get elected today; he was too honest.”

On foreign policy:

“The more we intervene, the more terrorists there seem to be. And the more it ruins people’s lives in these countries. And then people say, ‘Well, Bush kept us safe.’ We don’t consider the troops? In Iraq and Afghanistan, between 7,000 and 10,000 Americans, depending on how many of those contractors who died were Americans – I don’t know the answer to that – 50,000 injured … our wounded warriors, well why do we have all those? We went over to these hostile places and hundreds of thousands have applied for disability at the VA and we’ve spent trillions of dollars. For what?”

On forming ideas to improve society:

“I started reading everything I could on the subject from all different perspectives, from communists, libertarians, conservatives, everybody from all different disciplines, philosophy, economics, psychology, anthropology, history, all of it. And as I did that, I started, ‘OK, I understand this principle.’ And boy, when I’d understand it, I’d think I have a new principle in mind that I could use – I’d be so thrilled. That shows you what kind of geek I was. That would turn me on more than anything, to gain that little piece of understanding.”

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