Charles asked Marshall what they should do. “He said, ‘Well, there’s one thing that Howard III understands, and that’s money. And I’ll go buy my stock back,’ ” Charles Koch recalled.
Howard III lived in Los Angeles. His father wanted to go there and meet with him personally to close a deal to buy back his son’s stock. Charles agreed to fly to Houston and take the seventy-five-year-old Marshall to California himself.
Charles Koch and the Marshalls arrived in California on Sunday night. The next morning, Howard Marshall met with his son and agreed to buy back his stock for $8 million. The deal would move the voting shares back to the elder Marshall and back into the column supporting Charles Koch. It would effectively end Bill Koch’s coup. Bill caught wind of the deal and offered $16 million for the shares, according to Howard Marshall II, but the son refused. He didn’t want to break the deal he’d made with his father.
The next day, Charles and Howard Marshall went to the son’s house to sign the paperwork on the stock sale. As they talked with Marshall III, the phone rang. It was one of Bill Koch’s lawyers, calling for Charles.
Charles went into another room and took the call. The lawyer, Jim Linn, said that Bill Koch had called off his special meeting. Linn asked Charles Koch not to make a deal with “that foolish Marshall” kid. They should have a meeting instead to solve their differences.
Charles said he could not agree to that. He hung up and went back into the other room to close the deal. Eventually Marshall’s son signed over his shares for $8 million. The coup attempt ended there, and so did Bill Koch’s future with the family company.
* * *
When they were children, Bill Koch hit his twin brother David in the head with a polo mallet, leaving a permanent scar just behind David’s eye. Later, Bill stabbed David Koch in the back with an African sword from their father’s collection at the family compound, leaving another scar. David forgave his twin brother for both attacks. David Koch affectionately called his twin brother Billy, and when young Billy flew into rages as a child, David would act as a peacemaker between Billy and Charles. Now, David was put in a position where he would have to choose between them.
There was a board meeting on December 5, at which Bill Koch’s failed coup attempt would be dealt with. Sterling Varner asked Bill Koch to resign from the company, and Bill Koch refused.
During the meeting, a motion was put forward to fire Bill Koch. When the votes were counted, the motion carried. Bill Koch’s career at the family company was finished. David Koch abstained from the vote.
* * *
Although Bill Koch was terminated as an employee, he was still a major shareholder. He continued to use that leverage over Charles, agitating for the company to go public or be sold. During 1981 and 1982, Charles Koch was challenged on multiple fronts to choose one of the two options.
But going public would destroy the machine that Charles Koch had built. It would also mean that Charles Koch would lose control. Shareholders would have a vote. A new board of directors might have the power to fire him. Koch’s business strategy revolved around rapid decision-making: managers brought a plan to Charles Koch and Sterling Varner, and they had the authority to approve it on the spot. Publicly traded firms had to take their shareholders into account, leading to the proliferation of the kinds of committees and review groups that Charles despised.
Charles pressed his case to the board and to the small group of shareholders, and his case was a convincing one. When Charles joined his father’s company in 1961, the company had three hundred employees. It earned a profit of $3.5 million a year, and paid annual dividends of roughly $150,000. Twenty years later, Koch Industries earned $300 million in profits and had seven thousand employees. Even though dividends were a small share of profits, Koch still paid out $27.5 million in annual dividends because the profits were so high. That was a ninety-one-fold increase over the level paid when Fred Koch died. The company overall was worth $1.5 billion in 1982. It had been worth just 3 percent of that amount in 1967.
Charles Koch made the case to his directors and shareholders that if they stayed at his side, if they believed in his vision, the future would be just as strong.
* * *
Bill and Freddie Koch finally came to a resolution with Charles and David. Koch Industries would buy out Bill’s and Fred’s ownership stakes for more than $1 billion. This would finally sever the business ties between the bothers. Koch Industries borrowed $1.1 billion to finance the buyout. The massive loan cut against Charles Koch’s distaste for debt, but it was an emergency measure necessary to expel Bill and regain control.
When it came time to close the deal, Charles Koch turned for help to Brad Hall, the young finance whiz who had helped Bill Koch manage the Koch Carbon division. Hall had since made it clear whom he’d rather be working for, and he was just beginning a career under Charles Koch that would last more than twenty years.
In 1983, Hall accompanied a Koch Industries lawyer on a flight to New York, where they met Bill Koch and his team of lawyers to close the settlement deal to buy out Bill’s ownership. There was a festive atmosphere as the papers were signed. Bill Koch, after all, had just earned something in the neighborhood of $470 million. “They were having a big party and everything, and [Bill] wanted to have his picture taken with me,” Hall recalled with a sad grin, shaking his head at the memory. “He told me to tell his brother that he still loved him.”
About one year earlier, Bill had been fighting Charles for a deal that would have paid out $25 million if he stayed at the company. Now he had several times that amount. Bill was about to embark on a spending spree, describing himself as feeling like a child again. He bought opulent houses in the most exclusive beachfront communities. He bought a helicopter, fine art, and the world’s finest wines.
Like his younger brother, Charles Koch had big plans for what he wanted to do with the family fortune.
CHAPTER 6
* * *
Koch University
(1983–1989)
In the early 1980s, after he was unfettered from his dissident brothers, Charles Koch began to reveal just what his management dreams would look like.
There was an auditorium at Koch Industries headquarters, and Charles Koch began to hold events there, filling the seats with between four hundred and five hundred of his most senior managers. Lynn Markel, Brad Hall, Bernard Paulson, and others would file into the room and take their seats. The events were not the typical corporate presentation; Charles didn’t use the forum to talk about business operations or to hold some kind of pep rally. Instead, Charles Koch often sat in the audience himself, taking notes. The executives sitting near Charles Koch saw that this wasn’t a business meeting—class was in session. In fact, they were attending the first seminars in a decades-long curriculum that would become the central work of Charles Koch’s life. The curriculum outlined a specific and codified philosophy; an operator’s manual that defined an immutable set of rules for creating prosperity. He would ultimately call this philosophy Market-Based Management. But in the beginning, the philosophy had no name. In the beginning, there were only the seminars in the company auditorium.