Hoffmann had never even heard of Koch Industries before, and he was intrigued when he saw the want ad. He wanted to leave the world of billable hours and go in-house at a corporation. The job posting at Koch seemed like the perfect chance. But first, Hoffmann had to sell his wife on the idea of moving to Wichita. She was involved in the theater scene in Cleveland, loved urban culture, was an outspoken liberal, and didn’t like the idea of living in central Kansas. Her father was a medical professor and an environmental activist. He didn’t respond well when he found out where his son-in-law wanted to work.
“When he found out I was working for Koch Industries, he was like: ‘I gotta sit down and talk to you,’ ” Hoffmann recalled. “We had this really bad dinner conversation. I almost got disowned.”
With the disapproval of his father-in-law and the grudging acceptance of his wife, Hoffmann moved to Wichita in 2005. He spent more than two days sitting in an auditorium, learning about Market-Based Management. He and his wife found the one coffee shop in town where the liberals hung out. They bought a house in the historic district. Hoffmann still didn’t know if he would be helping Invista comply with environmental laws, as the job posting had promised, or if he would be aiding and abetting a corporate conspiracy to pollute the environment, as his father-in-law had feared.
When Hoffmann arrived at work, he discovered something that would have surprised outsiders who considered Koch Industries to be little more than a rogue corporation. Hoffmann became part of a corporate compliance SWAT team. Its dedication to obeying the law wasn’t just genuine, it was fanatical. They were about to fundamentally transform Invista.
Hoffmann worked in the new Invista headquarters, a low-slung annex of offices that were connected to the east side of the Koch Tower in Wichita. He joined a team of so-called subject matter experts, or SMEs, in Koch parlance. The team had fewer than a dozen people, and each one was an expert in a different area of regulation, like health and safety rules or industrial waste management. It was significant that this team was based in Wichita rather than in the facilities that they would oversee. The compliance team would no longer be broken up among the various facilities, occupying second-rate offices and vying for the attention of the plant managers. Back in the 1990s, Koch’s legal compliance team followed the lead of the operations managers. At the Pine Bend refinery, Heather Faragher and her team had been subordinate to the process owners. Now, the power dynamic would be transformed. The operations managers had to listen closely to the compliance team. The environmental lawyers had power.
The centralized compliance team was located a short walk from Charles Koch’s office. The team was sent out into Koch’s new factories to meet with plant managers and make site visits. The occasions were similar to an army general visiting a forward operating base for inspection. The managers knew that Hoffmann’s team was carrying the full weight of Koch Industries’ leadership team. The visits were often a surprise. They were not always pleasant.
Hoffmann worked with Jim Mahoney, a large man with bright blue eyes and a blunt manner of speaking. Mahoney could be affable and friendly, but any trace of collegiality seemed to disappear when he set foot onto Invista property. He and Hoffmann were led through the facility to inspect its compliance program, and Mahoney didn’t so much ask questions of his tour guides as he demanded answers from them. In one facility, Mahoney grilled a manager about a set of pressure relief valves—Mahoney wanted to know about the safety inspections of the valves. It wasn’t that the valves were malfunctioning, broken, or posed any kind of danger. Mahoney simply wanted more information about how the valves were being inspected, and the manager was not providing satisfactory answers.
Mahoney snapped.
“He said at one point, ‘I’ll close this plant right now if you can’t tell me the answer to this question,’ ” Hoffmann recalled. “It scared the shit out of people.” To strengthen their enforcement, Hoffmann’s team hired local attorneys near the plants to act as eyes and ears on the ground, monitoring compliance when the subject matter experts from Wichita weren’t visiting. Hoffmann and Mahoney were spreading Charles Koch’s new doctrine, called the 10,000 percent compliance rule. The mantra described a simple idea: Koch’s operations would be in 100 percent compliance with the law, 100 percent of the time.
Koch Industries backed up the philosophy with drastic actions. In Victoria, Texas, Koch discovered that a benzene treatment system wasn’t operating according to code. The system was immediately shut down. In Camden, South Carolina, Koch discovered that DuPont had expanded its processing equipment without getting proper permits beforehand and was running the machines out of compliance. Similarly, DuPont had expanded a boiler in Seaford, Delaware, without getting the proper permits and was running the boiler without the proper pollution control technology. In the past, Koch had tried to solve such problems on its own, before regulators discovered what was happening. This time Koch reported everything to the EPA, disclosing nearly seven hundred violations to the agency just months after Koch took ownership of the new factories. Koch entered into an agreement with the EPA that gave the agency power to audit Koch every quarter to ensure that it was complying with a schedule of improvements. Koch spent about $140 million to get everything up to code. Then it sued DuPont for $800 million in damages.
This 10,000 percent compliance regimen was applied across Koch’s operations, from Invista to Georgia-Pacific, to the refineries at Flint Hills Resources. There was more behind it than the good-hearted desire to be a solid corporate citizen. The strategy was a pragmatic tool to maximize profits. When Koch bought new factories and companies, it simply needed them to run smoothly and efficiently. It needed to keep them out of legal trouble and keep federal inspectors off company property. Violating the rules cost money and created distractions. Ten thousand percent compliance eliminated them. With those distractions gone, Koch could execute the more important elements of its growth plan. Those elements could be observed at Georgia-Pacific’s pulp mills, where things changed immediately after Koch became the new owner.
* * *
The Brunswick pulp mill plant was a surreal landscape that mixed pastoral southern charm with a futuristic, mechanized world scaled up to the size of giants. The wooded hills around the plant were traversed by two-lane country roads. Confederate battle flags hung from the beams of old wooden porches where small groups of people sat and sipped cold drinks in the afternoon, waving to motorists as they passed by. As the road descended down toward the mill, the idyllic landscape gave way to the industrial. The narrow road outside the plant was often crowded by long rows of trailer trucks loaded with recently cut pine trees. Just inside the gates, truck after truck deposited its load onto an impossibly tall pile of tree trunks. The pile was arranged in a semicircle at the foot of a giant mechanical claw that towered several stories in the air. The claw pivoted and grabbed a bunch of limbs like a drunken giant, feeding them to a chipping machine the size of a small apartment building. The fountain of golden wood chips was funneled inside the plant, where they were liquefied and pressed into the paper-like rolls of fluff pulp.
Wesley Jones, who had given the investor presentation to Hannan and his team, was the head of Georgia-Pacific’s pulp division in 2004. He saw firsthand how Koch Industries revitalized the operation. Jones had watched the pulping operation decline during a long era of deprivation and underinvestment. The problem traced back to Georgia-Pacific’s corporate culture. When he first joined the company, there had been a scrappiness to it. Georgia-Pacific managers liked to employ the word “maverick” to describe their corporate culture. Then Georgia-Pacific went on its corporate buying spree in the 1990s, and the company started focusing on administrative function and cost reduction. Experimentation and failure were not quite so prized, while paperwork and superior process were. Decisions had to be approved by committees, investments were slowed, and autonomy was shifted from the ground level to the ranks of middle managers or above. The problem grew worse after the deal to buy Fort James in 2000. After that, the executives slowed down capital investment plans as they steered more money into paying off debt. The neglect was causing wear and tear on the plant’s equipment. Jones was worried that the machinery would start to break down, in large and noticeable ways.