The Fighter
(1967–2019)
On May 18, 1981, four Wall Street bankers traveled to Wichita, Kansas. They went there to make an offer to Charles Koch, the CEO of an obscure, midsize energy company. The bankers, from Morgan Stanley, wanted to convince Koch to take his family’s company public, offering shares for sale on the New York Stock Exchange. Their deal was squarely in line with the conventional wisdom of corporate America at the time. Going public was seen as a natural progression for companies like Koch Industries, offering them access to big pools of money and promising enormous paydays for the existing team of executives. All it required from the CEO was to surrender control. Morgan Stanley, in return, would collect a small fortune in fees.
Charles Koch was forty-five years old. He had run Koch Industries since he was thirty-two, when his father died suddenly. He was trim, tall, and had an athlete’s build. He spoke quietly in meetings and seemed almost passive. The bankers laid out their plan to take Koch public. They revealed what, to most executives, at least, might have been the most significant detail: if Charles Koch agreed to the deal, he could earn $20 million overnight. The bankers seemed incredulous when they prepared a confidential memo about Koch’s reaction.
“He does not want this cash,” the memo reported.
Charles Koch calmly explained to them why their offer made no sense. His company was breathtakingly profitable. It operated in vital, deeply complex corners of the American energy industry. During the 1980s, Koch Industries was the largest purchaser and transporter of US crude oil. It owned an oil refinery. It employed teams of commodities traders who bought and sold a wildly diverse menu of raw materials and financial products, from gasoline to paper futures contracts. This might have encouraged most CEOs to take their company public. Koch Industries, however, did not want outsiders to know how much money its traders were earning. Taking the company public would expose too many of its secrets.
“Certain of [Koch’s] commodity traders are particularly worried that their high salaries, once disclosed to the public, would be used against them by their trading partners,” the memo said.
Secrecy was a strategic necessity for Koch Industries. Charles Koch did not want to surrender it. He also didn’t want to surrender control. He had a specific, clear vision of how to run his company, and he didn’t need Wall Street investors to interfere.
If the bankers expected Charles Koch to go along with the conventional wisdom of their time, then they, like so many outsiders, did not understand him. Beneath his low-key veneer, Charles Koch was, at his core, a fighter. He had unmovable ideas about how things should be, and he did not back down when challenged. When he was challenged by his own brothers for control of Koch Industries, he fought them in a bitter legal battle that lasted decades. When he was challenged by members of a powerful labor union during his first years as CEO, he fought them even as they committed an act of industrial sabotage that nearly destroyed Koch’s oil refinery. When the FBI and the US Department of Justice launched a criminal investigation into Koch Industries’ oil gathering business, Charles Koch fought them with every legal and political tool at his disposal. When a liberal Congress and President Barack Obama sought to impose regulations on the fossil fuel industry to control greenhouse gas emissions, Charles Koch fought them in ways that changed US politics.
In each of these fights, Charles Koch prevailed.
When Charles Koch dismissed the bankers in 1981, it was just a small skirmish in the larger war to control Koch Industries. After prevailing in that fight, he created a company that was true to his vision. He avoided the snares that entangled many publicly traded companies that report their financial results to investors every three months. Koch Industries didn’t have to think quarter to quarter. The company thinks year to year. An internal think tank and deal-making committee, called the development group, will sometimes think through a business deal on a timeline measured in decades. This long-term view made Koch nimble where other companies stumbled. In 2003, for example, Koch Industries bought a group of money-losing fertilizer plants when no publicly traded company was willing to take the risk. Today those plants are as profitable as a broken ATM machine that spews out cash around the clock. Unlike publicly traded companies, Koch Industries does not pay out rich dividends to investors. Charles Koch insists on reinvesting at least 90 percent of the company’s profits, fueling its constant expansion.
This strategy laid the foundation for decades of continuous growth. Koch Industries expanded continuously by purchasing other companies and branching out into new industries. It specialized in the kind of businesses that are indispensable to modern civilization but which most consumers never directly encounter. The company is embedded in the hidden infrastructure of everyday life. Millions of people use Koch’s products without ever seeing Koch’s name attached. Koch refines and distributes fossil fuels, from gasoline to jet fuel, on which the global economy is dependent. Koch is the world’s third largest producer of nitrogen fertilizer, which is the cornerstone of the modern food system. Koch makes the synthetic materials used in baby diapers, waistbands, and carpets. It makes the chemicals used for plastic bottles and pipes. It owns Georgia-Pacific, which makes the wall panels, beams, and plywood required to build homes and office buildings. It makes napkins, paper towels, stationery, newspaper, and personal hygiene products. Koch Industries owns a network of commodities trading offices in Houston, Moscow, Geneva, and elsewhere, which are the circulatory system of modern finance. Koch traders sell everything from fertilizer, to rare metals, to fuel, to abstract derivatives contracts. Koch Industries’ annual revenue is larger than that of Facebook, Goldman Sachs, and US Steel combined.
The profits from Koch’s activities are stunning. Charles Koch and his brother David own roughly 80 percent of Koch Industries. Together the two men are worth $120 billion. Their fortune is larger than that of Amazon CEO Jeff Bezos, or Microsoft founder Bill Gates. Yet David and Charles Koch did not invent a major new product or revolutionize any industry. The Koch brothers derived their wealth through a patient, long-term strategy of seizing opportunities in complex and often opaque corners of the economic system.
This book tells the history of Koch Industries and shows how the Koch brothers’ fortune was made. In doing so, it also provides a portrait of the American economy since the 1960s. Koch’s operations span the entire landscape of the American economy. The company’s story is the story of America’s energy system, of its blue-collar factory workers, of millionaire derivatives traders, corporate lobbyists, and private equity deal makers. To examine Koch is to examine the modern American economy.
This account is based on hundreds of hours of interviews, conducted over six years, with dozens of current and former Koch Industries employees, managers, whistle-blowers, and senior executives, including Charles Koch. Also interviewed were outside regulators, prosecutors, politicians, bankers, and competitors. These verbal accounts were supplemented by internal company memos, minutes of executive meetings kept by firsthand witnesses, government documents declassified for this book, legal transcripts, regulatory filings, contemporaneous news accounts, and other documents.
Ralph Waldo Emerson famously said that an institution is the lengthened shadow of one man. This observation would seem to be particularly true of Koch Industries, which has been led by one CEO since 1967. Charles Koch’s control of the company is complete. His portrait hangs in the company’s lobby, and employees are trained with his videotaped speeches. Every employee must embrace Charles Koch’s highly detailed philosophy called Market-Based Management. But Emerson’s quote captured only half of the truth about institutions. They are shadows of people, but they are also shadows of the political and economic systems in which they exist. A large corporation in China, for example, is quite different from a large corporation based in America. The laws, culture, and economic incentives are radically different in each nation. Koch Industries, then, reflects an American system in which it grew and thrived.