Varner said, “Billy, I know that you and Brad understand all this fancy stuff and everything. I know Brad’s done all these calculations. And that’s great. But I just want to know: Is this a good deal?” Hall recalled.
Hall was frozen in place.
Is this a good deal? That statement would reverberate in his head many decades later. “It’s like somebody hit me with a sledgehammer,” he said. He called the statement “classic Sterling.” It cut to the quick and exposed how flawed Hall’s presentation really was. Brad Hall realized in an instant that he’d gotten lost in the minutiae of his analysis without thinking about the broader strategy that should have been behind it. He had a thousand computer runs to tell him what the internal rate of return might be under various conditions. But he couldn’t present any critical analysis about why the deal might be a good idea over the next decade, or why Koch Industries more than any other company was the right company to do the deal.
“I had no idea what I was doing. I was all tied up in these details and everything. And there’s this whole other spectrum of strategy” that Varner employed when considering a deal, Hall said.
Almost right away, Charles Koch began asking questions about other competitors in the business and the marginal suppliers in the industry. They were strategic questions, and they cut to the bone.
For Brad Hall, these questions cemented one realization. Hall knew whom he wanted to work for, and that person was not Bill Koch.
The message could not have been lost on Bill Koch himself.
* * *
Like all vice presidents at Koch Industries, Bill Koch had to periodically answer a battery of probing questions from Charles that evaluated how well he was doing. But Bill was different from other executives in one vital way: he owned a big chunk of stock in the company.
Charles, Bill, and David had very large numbers of shares, each son with roughly a 20 percent share of the company that had been left to them by their father. Their older brother, Frederick, also had shares, even though he wasn’t involved in operations. J. Howard Marshall II, the former co-owner of the Pine Bend refinery, owned another large piece of the company. Marshall gave some of these shares to his son, J. Howard Marshall III. There was a smattering of other small shareholders, including cousins from Fred Koch’s side of the family who were simply referred to as the “other Kochs.”
Being a major stockowner complicated Bill Koch’s standing with Charles.
As a vice president, Bill reported to Charles. But as a major shareholder, he was, in many ways, Charles’s equal. As Bill Koch spent more time at the company, he started to focus more on his role as a shareholder—the one role in which he could contend with Charles on equal footing.
Bill’s stock gave him a seat on a special executive committee of the board of directors, a committee that included only himself, Charles, and David, with Sterling Varner as an alternate. Starting in the late 1970s, Bill began to pursue his role on the executive committee aggressively. He peppered Charles Koch with questions about his decision-making and about the company’s operations. Charles complied with Bill’s questions and sent him reams of documents, only to find new requests were waiting behind them.
Bill’s requests started to focus on one issue, and they started to take an accusatory tone. Why, Bill wondered, wasn’t Charles reporting certain developments to the entire board of directors?
There was a problem at a Koch Industries office in Denver, for example. Employees there had been indicted for rigging a government lottery system used to disburse energy leases. Why hadn’t Charles Koch told the board about this problem earlier, before the indictments were issued? Bill also asked about a pending US Department of Energy inquiry. The department was investigating several companies for possibly violating federal energy price controls. The alleged violations went back many years. The parameters of the investigation were unclear, but someone in Koch finance who studied the issue said that, theoretically, the government might demand as much as $1 billion to compensate for overcharges. Bill Koch asked Charles why he had not reported this fact to the board of directors. Wasn’t a potential $1 billion fine worth reporting?
Charles said the $1 billion figure wasn’t significant; it was just a theoretical data point. Nobody in the company seriously believed that a fine that large would be imposed. It simply wasn’t worth reporting to the board.
Bill Koch was doing more than asking questions. Soon he was using his questions to tell a story to the company’s board of directors. He painted a picture of his older brother as an autocrat, a “dictator” who ruled the family company with no tolerance for dissent and a penchant for secrecy. Bill even coined a nickname for his brother, “Prince Charles,” and he began dropping it in conversations with coworkers. Charles became aware of the nickname, and did not seem amused.
Bill did more than subtly accuse Charles of wrongdoing. He began to openly challenge him. The biggest challenge that he pursued was against one of Charles Koch’s most important business strategies: the use of dividends. Bill pointed out that dividends at Koch Industries were exceptionally low when compared with those of other companies. He argued that this punished Koch’s shareholders, what few of them there were. The Koch brothers were tremendously wealthy, but that wealth existed mostly on paper; their access to their wealth was extremely limited. Bill wanted higher dividend payments—he wanted cash up front from his father’s inheritance. He complained that he was “one of the wealthiest men in America,” but still he had to borrow money to buy a house.
Charles Koch resisted Bill’s challenges on every front. He dismissed the idea that Koch should pay higher dividends—he had already explained to the board of directors how dividend money could be put to better use by reinvesting it in the company. He also dismissed the idea that he was secretive and kept important information hidden from the board. He gave directors all the information they needed, he said, and didn’t need to give them more.
On April 27, 1980, Charles Koch sent his youngest brother a handwritten note:
Dear Bill,
What is the purpose of these attacks on me? I hear from all over the country that you’re constantly criticizing me. Each of your recent reports to the board includes a slam at me. Even your memos to me are acerbic and accusatory. It seems to me that none of this serves any useful purpose; that, in fact, it is destructive, destructive to you and to the company. Whatever I’ve done to make you so bitter toward me is in the past. The best course for us both to follow now is to attempt to work together, if not in friendship, at least civilly and in mutual respect without the past suspicion and ill feeling. I, for my part, will do my best to accomplish this.
Your brother,
Charles
Bill did not stop.
On June 12, 1980, he sent a memo to Charles that carried the title: “The Right of Directors to Be Informed on Substantive Issues That Could Affect the Company.” It was a broadside against Charles and his leadership, implicitly accusing him of deception and abuse of power. But most importantly, the memo stabbed at the most sensitive nerve that the Koch brothers possessed. It suggested that their father, Fred, would be ashamed of Charles.
“The corporation’s good name is dragged through the mud by one set of indictments [in the Denver case]. . . . The corporation’s good name is threatened by more such actions,” Bill Koch wrote in the memo. The corporation’s good name, of course, was their father’s good name. Bill implied that Charles was tarnishing it.