Markel was hired as the assistant controller over Koch’s oil division. Just over a year later, he was promoted to be controller over the entire corporation. It was a job that gave him a bird’s-eye view of all financial transactions at the company and how Charles Koch handled them.
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Like many other people at the company, Markel was struck by just how fluid, how adaptable, things were at Koch. There were about two hundred people in the company headquarters, and more were being added every day. It was a big company by Wichita standards, but it didn’t feel like a big company. It felt like an ongoing experiment. Roles changed quickly. New hires were brought in. There wasn’t a bureaucracy to stifle people or hold back new ideas.
One of the thorniest problems that Markel dealt with was the issue of budgets. It was common practice for each division in a company to set a budget for the year (and sometimes for each quarter) and then to measure how it did against that budget. That was simply the way things were done in corporate America, but the outside world was refusing to cooperate with standard operating procedure. For the first time in history, the price of oil was liable to drop by half in a period of a few months or to unexpectedly double in the same period.
“Frequently, within the first quarter, the budget for the rest of the year was almost worthless,” Markel recalled. In spite of this reality, Koch managers still spent a large portion of their time between July and December tabulating and writing up budgets, and the managers expected that their performance would be measured against those budgets.
Many of these employees, like Markel, came from publicly traded firms where the quarterly budget was considered a holy document. Publicly traded firms must report their profits to Wall Street every three months, and a bad report could send shares of the company stock falling. Writing budgets gives companies a way to predict what their quarterly performance might be, and they can telegraph the expectations to investors. In this way, everything inside the business starts to revolve around the budget. Managers figure out how much they are going to spend and how much they are going to earn, and they share the information publicly. Then they would spend the year trying to hit the budget targets.
Because Koch Industries was not publicly traded, it didn’t have to transmit its profit expectations to anybody.
Markel sat in on many meetings in the small cluster of offices surrounding Charles Koch’s office on the second floor, an area that was the hub for executive decision-making. Markel and others were trying to puzzle out how they could get more precise budget figures when the market veered so wildly from one month to the next. One of the executives in those meetings was a young man named Paul Brooks. He was a former Exxon employee with an engineer’s grasp of complicated problems. But Brooks also had a creative streak that hadn’t been fully utilized in Exxon’s rigid culture, and he quickly became a close confidant of Charles Koch’s. During one meeting on budgets, Markel was surprised when Brooks made a simple proposal: “Why not do away with them?”
Charles Koch loved the idea, and so did Markel. Getting rid of budgets would instantly dispose of hours’ worth of drudgery that defined a financial controller’s life. Koch invented a new set of metrics to replace budgets. And the numbers that the company focused upon were telling. Charles Koch didn’t care much about sales or costs—he cared about profits. He wanted to know how profitable any line of business was and how profitable it could be under the right management. He steered all of his managers to think this way. The key thing they needed to focus on was the return on investment, or ROI—what was the best use of Koch Industries’ money?
Soon each division was writing a profit goal for the quarter, rather than a budget. Sales, costs, and prices could veer wildly, but what mattered was whether a division hit its profit goal for the year. And Charles Koch was thinking in terms of years, not quarters. This was critical for a company in a highly volatile business. A graph showing Koch’s sales and costs and the price of oil might spike and dip violently from week to week. But Charles Koch was only interested in whether the return on investment climbed steadily over the years. “You didn’t know what the exact trajectory was going to be. But you knew it was up, and to the right,” Markel recalled.
To keep things moving up and to the right, Charles Koch had an unwavering philosophy about debt. He was rigid in his belief that debt should be kept as low as possible so that interest payments didn’t eat up Koch’s cash. The reasons for this were strategic. Every downturn brought opportunities for companies that were prepared. Downturns weakened competitors and made them ripe for takeover. Downturns made assets cheaper to buy. For this reason, Markel and his team were discouraged from borrowing large sums even if banks were more than willing to lend it.
“It was really based upon kind of looking forward to opportunities,” Markel recalled. “The reason you like to build up cash and not have a lot of debt is so that you can capture opportunities that you couldn’t capture if you were fully loaded in debt and had no cash.”
The economic ups and downs would begin to play to Koch’s advantage. “When the value of assets out there in the economy hit a low point, that’s the best time to buy. It’s pretty simple economics,” Markel said.
Koch made full use of this strategy. It began to profit from market downturns by snapping up its competitors. This was most evident in Koch’s giant oil gathering and pipelines division. Roger Williams, the vice president over pipelines, oversaw an expansion funded by the cash that Charles Koch was pouring back into the company. Koch’s pipeline network grew from six thousand miles of pipe when Williams joined in 1969 to roughly fourteen thousand miles by 1976. The company purchased some of the pipe from other firms, and it built between seven thousand and eight thousand miles of new pipeline on its own. This expansion helped make Koch the single largest purchaser of crude oil in the United States by the 1980s.
Even as Charles Koch streamlined his own organization and reduced debt, he operated in a political and economic world that was moving in the opposite direction. Every industry in which Koch operated was becoming subject to new and onerous regulations, price caps, and government controls emanating from Washington, DC. Charles Koch had always been something of a political dissident, espousing views that were outside mainstream politics. But during the early 1970s, his views hardened and prompted him to take action.
During this time, Koch came to embrace a concept that was embedded in the philosophy of thinkers like Hayek and von Mises, but that was rare in the thinking of corporate CEOs. He realized that there were not two separate spheres of American life: the public sphere of government action and the private sphere of business enterprise. Instead, there was only one tangled web of a nation’s political economy, the deeply interlaced workings of government policy and corporate structures. One intimately affected the other.
This reality was painfully apparent in the oil business. Government intervention affected every aspect of the industry. And the intervention reached its peak as Charles Koch was building his company.
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On November 7, 1973, shortly after the Arab oil embargo, President Richard Nixon proposed a sweeping government response. The government would cut the “allocations” of heating oil for homes and businesses by 15 percent, essentially rationing the vital fuel. Nixon said utility companies would be banned from switching from coal to oil as a fuel source. He would ask Americans to turn down their thermostats by about six degrees. He would ask Congress to pass a bill that would lower the national speed limit to fifty miles per hour, curtail the hours that shopping malls could be open, and impose other rationing measures.