“Most disturbing, Triad is poised to become a model for future elections.”
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Koch Industries’ political operations only continued to expand, but Charles Koch focused most of his efforts inside the company. In 1992, Koch Industries built the largest office tower in Wichita. The structure was located on the north side of Koch’s campus and was constructed with dark granite and black windows. The building was the perfect symbol of Koch Industries. The stone gleamed in an enticing way but was dark and inscrutable. People soon referred to the new building simply as “the Tower.”
The Tower was a testament to Koch’s growth and an expression of its desire to grow even faster. Koch Industries moved two thousand employees into the building. That was more than triple the number of employees who’d been there when Charles Koch took over the company, and it represented just a fraction of the thirteen thousand employees who worked for the company worldwide. But even 2,000 employees couldn’t fill the Tower. Almost half the building was empty. The table was set for expansion.
Charles Koch’s office was located on the third floor of the Tower, on the north side of the building. His large desk was covered with neat stacks of papers and a telephone placed near the left corner. There was an oil painting of Fred Koch on the wall above Charles Koch’s chair. Directly across from the desk, there was an open area with a conference table for small meetings and a small sitting area with a couch surrounded by chairs. The northern wall of the office was all windows, offering a panoramic view of the Kansas prairie and tall grass. The rest of the walls were lined with built-in bookshelves. These books seemed to be Charles Koch’s prized possessions. There was a multi-volume edition of the Oxford English Dictionary. There were works by his favorite philosophers, economists, and historians.
Charles Koch liked to tell people that “true knowledge results in effective action.” True knowledge was the important part of the equation. Charles Koch aimed to discover the truths undergirding society and business by reading all the books in his library. He wasn’t satisfied anymore to borrow the thinking and methods of people like W. Edwards Deming. Charles Koch wanted to codify his own understanding of the truth. In 1990, he put a name to this effort. His set of rules would be called Market-Based Management.
One of the first things Charles Koch did in his new office was to get the rules written down. He hired two academics to help him: Jerry Ellig and Wayne Gable. They were both employees of think tanks that Charles Koch funded. The men had meetings and hashed out lessons from Hayek and von Mises and all insights gleaned from decades of running Koch Industries. They began to distill all of this into a framework that could guide Koch Industries in its next phase of growth.
In 1993, the team produced a glossy booklet, sixty-three pages long, called Introduction to Market-Based Management. The booklet was an operator’s manual; the rulebook for working at Koch Industries. Charles Koch taught Market-Based Management with the same rigor that he had instituted the teachings of Deming. He held seminars for managers, and then those managers held seminars for their employees. Copies of the booklet were printed and shipped to Koch facilities everywhere. The unionized workers at Pine Bend sat through lectures about it. Managers looked at charts describing it and broke into small groups to learn it. A new vocabulary was disseminated throughout the company ranks. Employees didn’t have responsibilities, they had “decision rights.” They weren’t managers anymore, but “process owners.” The vocabulary was drilled into everybody.
The words of Market-Based Management were not simple slogans. They were a code of conduct that would guide life inside Koch Industries during the 1990s. This was a decade of explosive growth for Koch; a time when it would take full advantage of economic conditions that favored complexity and bigness.
But it was also a time of dysfunction and challenge. Charles Koch liked to say that growing was a lot like the process of scientific inquiry: You came up with a hypothesis, and then you tested the hypothesis against the hard rocks of reality. You did this again and again until you found out what was true.
The 1990s were a time that tested Charles Koch’s deepest hypotheses. He believed that he had discovered the “true knowledge.” He believed he had cracked the code for building a prosperous and enduring company, but the hard rocks of reality would not be kind to this hypothesis. As Market-Based Management was rolled out through the company, it would wreak its own kind of havoc. There would be accidents and spectacular business failures. There would be public humiliation and, worst of all, a host of criminal charges brought against the company.
One of the worst debacles happened right inside the company’s crown jewel: the Pine Bend oil refinery. And all of it started with the best of intentions.
* * *
I. Ballen said that a few other instances of oil theft were discovered, but they were isolated incidents perpetrated by very small companies. It was not the “systematic” theft indicated by evidence collected from Koch Industries.
II. During an interview in 2016, Senator Dole had a hard time recalling details about his relationship with Koch Industries. Dole was ninety-two years old at the time, but even at that advanced age, he regularly went to work at his law office in downtown Washington, dressed in a neat suit and crisp red necktie. Dole recalled working with David and Charles Koch, and remembered attending a fund-raiser at Charles Koch’s home in Wichita. However, the senator did not recall any events regarding Koch’s oil measurement practices or the Senate investigation into them. The topic did not seem to spark a hint of recollection from Dole’s long and storied political career.
III. Leonard is not related to the author.
IV. Schmidt declined to comment on the case.
CHAPTER 8
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The Secret Brotherhood of Process Owners
(1995–1999)
A business firm is not just a piece of society, but a mini-society in its own right.
—Introduction to Market-Based Management, 1993
Heather Faragher arrived for her new job at Koch Industries’ Pine Bend refinery in the winter of 1995. During those long, cold months, the refinery landscape was frozen and bone white. The empty fields surrounding the facility were covered in snow, and the sky was often slate gray. The gloom was broken only by the twinkling lights of the refinery towers in the late afternoon when darkness started to fall.
In spite of this barren landscape, the refinery itself was a vital place, full of life and excitement. Faragher joined the company as an environmental engineer, specializing in wastewater treatment. The refinery produced millions of gallons of water each day tainted with toxic chemicals, and it was Faragher’s job to make sure that the water was purified—as much as it could be—before it was flushed into the Mississippi River. This was Faragher’s third job as a wastewater engineer. She was only twenty-eight years old but had already done two stints at large paper mills in New York and Alabama.
Faragher’s new boss was a kind and energetic young woman named Karen Hall. Hall seemed like a former hippie, a positive woman who was fluent in the language of environmental protection. Soon after Faragher arrived, she got a tour of the environmental engineering office at Pine Bend. It was located in the main refinery office complex in a U-shaped complex of cubicles and offices. Everything was wide open and bright. The offices had big glass windows—the employees called them fishbowls—which made the whole floor seem like one big collective space. And everyone inside it was so young. There must have been thirty environmental engineers, and most of them seemed to be in their twenties. There was energy everywhere, and it was more than just youthful exuberance. The employees had a sense that they were part of something big. They belonged to an enterprise that really mattered.