Politics & Policy

Charles Koch: How Good Profit Benefits Everyone

He should be applauded, not vilified.

America is in the midst of a labor crisis. Workforce-participation rates are near record lows; the middle class is under tremendous economic pressure; and the U.S. has slipped to 12th among developed nations in business-startup activity.

Almost 60 percent of Americans feel that the American Dream is out of reach for their children. Rightly so. Many recent college graduates saddled with student-loan debts find themselves without jobs or working in jobs with no connection to their majors. Also, surveys of college graduates tell us that many of them have jobs with no connection to a fulfilling life vision or the larger purposes of life.

Into this void steps Charles Koch, chairman and CEO of Koch Industries, and author of the new book Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies.

At a time when work is becoming a down-market commodity, especially among a segment of the young male population, Koch aims to revive our belief in entrepreneurship, labor, the joys of work, and the ability of a free people to prosper, innovate, and create value for themselves and others.

He does so primarily by telling his own story — a story of Homeric achievement. He explains how he helped develop his father’s company, valued at $21 million in 1961, into the second-largest private company in America, valued at $100 billion in 2014 (about 5,000 times larger), with approximately 60,000 employees in the United States.

Koch credits much of his success to the wisdom of his father, Fred Koch, a first-generation American whom he describes as a self-made, John Wayne–type figure intent on inculcating in his children a moral compass and appetite for work.

From an early age, his father instilled in him the value of hard work and persistence. “I should regret very much to have you miss the glorious feeling of accomplishment,” the younger Koch recalls his father telling him. “Remember that often adversity is a blessing in disguise and is certainly the greatest character builder.”

In other cases his counsel was a little blunter. “I hope your first deal is a loser; otherwise you will think you’re a lot smarter than you are,” Fred Koch said when his son took over the company.

Koch will be the first to tell you that losses were plenty, and they still are today. But Koch sees losses as essential to innovation and part of a healthy system of creative destruction where businesses rise and fall on the merits of their ideas and innovation, not political connections or special deals. This is why Koch detests crony capitalism, or, as he calls it, “corporate welfare.”

These ideas manifest themselves in Koch’s central theme — the pursuit of “good profit,” which he describes as “creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity.” He explains that “Good profit comes from making a contribution in society — not from corporate welfare or other ways of taking advantage of people.”

Koch’s philosophy is not to maximize short-term profit, but rather to create and sustain value for his customers over time and to do so in an ethical manner.

In other words, Koch’s philosophy is not to maximize short-term profit, but rather to create and sustain value for his customers over time and to do so in an ethical manner, not through special favors. In fact, in the book, Koch takes to task CEOs who make exorbitant salaries through corporate welfare, but he defends those who earn their income through “good profit” because, as he argues, “good profit” benefits all parties involved.

Good Profit is as much a course in ethics as one in business management, and Koch is a business icon with the soul and inclination of a philosopher. For example, he attributes much of his company’s success to his Market-Based Management (MBM) system, which he spent years developing and refining. The core tenets of MBM are vision, virtue, talent, knowledge processes, decision rights, and incentives. These aren’t just a set of feel-good slogans, but a philosophy of management that pervades all of Koch Industries.

For starters, in hiring, Koch Industries chooses people on the basis of values and work ethic before talent or knowledge. In the book, Koch points out that the last four employees who succeeded him as president were educated not in the Ivy League, but rather at Murray State University School of Agriculture, Texas A&M, the University of Tulsa, and Emporia State University.

His point is that it’s not the institution or pedigree that’s important; it’s the person’s character. Koch recognizes that character is forged in the formative years, and if you are not taught values at an early age, especially the value of work, you may never acquire them. And if you are not so blessed, you may become one of those seeking dependence on the government, either through individual welfare or through crony capitalism. If everyone had someone like Fred Koch in his early life, then America’s work crisis would be a fraction of what it is today.

Now 79 years old and the CEO of a multi-billion-dollar company, Koch still works nine-hour days. Why? Not because he’s greedy or obsessed with profits, but because he believes that business pursued properly — to create value for others in an ethical manner — is one of the most rewarding and meaningful experiences in life.

This is the uplifting vision of entrepreneurship and work that America needs right now. Business leaders like Charles Koch should be applauded, not vilified by the likes of Senator Reid, President Obama, and other political opportunists. They, perhaps more than anyone else, should read Good Profit and learn what business should be and can be when led in a virtuous and wise manner.

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