Charles believed there were quantifiable laws that drove the world, unbreakable laws that were true whether a person believed in them or not. These laws were the principles by which he tried to live and run his business. He never doubted these principles, even in the darkest days of the late 1990s. The principles had been correct. He had simply made mistakes in carrying them out.
So he would do better. His solution was simple:
“I just work harder.”
PART 2
* * *
THE BLACK BOX ECONOMY
CHAPTER 11
* * *
Rise of the Texans
(2000)
Over the course of one short year, Charles Koch and a small team of trusted executives reinvented Koch Industries. The company was redrawn in a series of urgent and sometimes tense private meetings, an effort that was kept secret from the outside world and even employees. The Koch Industries that emerged on the other side of this transformation was radically different from the faltering machine that Charles Koch oversaw in 1999. The firm was reshaped from its boardroom all the way down to the refinery floor.
The revolution began with a purge. Charles Koch needed a new leadership team to take him where he wanted to go. Bill Hanna, the company’s long-serving president and chief operating officer, was replaced. F. Lynn Markel, the true-blue Koch employee who joined the company in 1975 and rose to become its chief financial officer, was replaced. Corliss “Corky” Nelson, a vice president and head of Koch Capital Services, who had been with the firm since 1978, was replaced. The chief technology officer, replaced. The vice president and head of structured finance, replaced. The purge reached down into Koch’s business units as well. The head of Koch Petroleum, replaced. The CEO of Koch’s polyester division, replaced. The head of trading across Koch’s divisions, replaced.
After the purge was complete, Charles Koch didn’t replace his leaders with fresh employees who were hired from the best business schools or other companies. Instead, he promoted loyalists who knew the Koch way. The new CFO, Sam Soliman, graduated from Texas A&M University and had worked most of his career at Koch. The new head of Koch Petroleum, David Robertson, spent his entire career at Koch, having joined just after he graduated from Emporia State University in Kansas. The new president and COO, Joe Moeller, was a Koch lifer and a graduate of the University of Tulsa. The new team was composed entirely of men who were steeped in Charles Koch’s values and who were imbued with the lessons of Koch University. These were people who spoke the language of Market-Based Management. Charles Koch promoted players from his own farm team into the big leagues.
The change in personnel was only the beginning. Between 1999 and 2001, Charles Koch and his team overhauled the company’s strategy and its corporate structure. The new strategy emerged from a set of private debates after Charles Koch pulled his new management team into meetings and pushed them to think of a way forward. It seemed that every idea was put on the table and considered. There was discussion of moving Koch’s headquarters out of Wichita so the company might have a better chance of recruiting top talent—it had always been a tough sell to convince people to move to an isolated city in south central Kansas. Houston and Scottsdale, Arizona, were proposed as new homes for the company. There was even talk of breaking apart the company and of David Koch potentially selling off his ownership stock. Charles Koch drove his team forward, pushing them to consider every possibility. His message to the new leaders seemed simple: “I don’t like losing,” as one of them recalled. Their new mission in life was “Stopping stupid,” ending the follies of the 1990s.
The evidence of past mistakes was still everywhere in 2000. Koch Industries was still carrying the accumulated litter that was left behind by countless Value Creation Strategies, years of acquisitions, and rapid growth. As Koch reviewed its holdings, one executive described the corporate structure as representing a table piled high at a rummage sale, full of odds and ends that had no apparent rationale for belonging together. Koch began to unload these properties, selling off pipeline holdings like the Chase Transportation Company. It sold a chemical firm called Koch Microelectronic Service Company and closed down a new $30 million chemical plant in Bryan, Texas. Over a period of years, Koch would sell off thousands of miles of pipelines. The corporate odds and ends were discarded.
The remaining businesses at Koch were restructured and streamlined. The most important division, Koch Petroleum, was renamed Flint Hills Resources and given new leaders. Other businesses were consolidated under a new, simplified structure that put them under the umbrella of a few new companies like Koch Minerals, Koch Supply & Trading, and Koch Chemical Technology Group.
This change in Koch’s corporate structure and strategy ushered in a decade of unprecedented growth. Over the following decade, Koch Industries became perfectly suited to thrive in the strange political economy of the 2000s. It was an era that favored big corporations that could master complex systems—in both markets and in the political system—two characteristics that already defined Koch Industries. It was also an era that favored debt-fueled expansion and buyouts, a skill that Koch Industries came to embrace and dominate. The biggest profits of the decade were gained by financial companies and trading firms, a shadow economy into which Koch Industries expanded dramatically. By the end of the decade, Koch Industries came to reflect the broader American economy, where tremendous wealth was generated for a few, wages stagnated for most, and the biggest US companies grew larger than ever.
During this decade, one of the most important features of the new Koch Industries was the impervious strength of its corporate veil—the legal barrier that separated Koch’s various divisions. Under the new structure, Koch Industries became little more than a holding company, a big investment firm that owned a lot of smaller, nominally independent firms. And those companies would be strictly segregated from one another, and from Koch central, by a thick wall designed to be legally impenetrable. The corporate veil became reflected in the vocabulary of Koch employees. They didn’t refer to the company’s subsidiaries as units or divisions, but as “companies,” reinforcing the notion that each unit was fully independent. Many of these “companies” developed their own internal systems for human resources, information technology, and other services, creating just the kind of big, redundant systems that most US corporations were striving to eliminate. These redundancies might have cost Koch money, but their value far outstripped the cost. Koch could now argue persuasively that each company division was a stand-alone company, one that could assume its own liabilities. Never again would angry creditors be able to threaten the cash reserves of Koch Industries’ central treasury, as the lawyers from Purina Mills had done. Now liability would only travel to the top of each company that Koch held. This new structure would allow Koch Industries to amass billions of dollars in debt over the next decade, heaped onto divisions that were nominally independent companies.
The strategy of dividing Koch Industries’ various holdings into independent companies was often discussed in terms of free-market principles—animated by the principle that the company would survive or fail on its own merits in a market system. In fact, the strategy was a way to expand while limiting the downside risk. Shielding Koch’s liability increased the company’s appetite for new acquisitions because the risk of failure was contained. During the 2000s, Koch would make deals that dwarfed anything Charles Koch had even considered during the 1990s.