The Investment U e-Letter: Issue #645
Monday, February 26, 2007 Charles Koch: My Lunch With the World's Most Successful Private Billionaire
by Dr. Mark Skousen, Chairman, Investment U The stock value of Berkshire Hathaway has increased a remarkable 1,400-fold since the late 1960s, beating by far the S&P 500. But a lesser-known company, based in Wichita, Kansas, has done even better… Koch Industries, a commodity and financial conglomerate, has advanced 2,000-fold in book value since the early 1960s, including dividends. That's when Charles Koch (pronounced coke) began working for his father's company. Last week, I had the privilege of having lunch with Charles Koch - the billionaire whose company has been outpacing Warren Buffett's - followed by a one-hour private interview. Koch was in New York City to talk about his revolutionary new book, The Science of Success. Here's his secret to superior growth… How the Benefits of Private Ownership Propelled Koch Industries Today, Koch Industries is the world's largest private company, surpassing Cargill when it acquired Georgia-Pacific, the large tissue company, in late 2005. With $95 billion in sales, Koch Industries is now larger than Microsoft (Nasdaq: MSFT), Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HP). At 71, Charles Koch isn't as wealthy as Warren Buffett because he shares ownership with his brother, David. But he is a member of the exclusive Forbes 400 Richest People in America List, and worth an estimated $12 billion. You probably haven't heard of Koch Industries, largely because it doesn't trade on the New York Stock Exchange or the Nasdaq. It is a private company, and Koch has no plans to change its status. In fact, at the luncheon last week, Charles Koch confessed that being private is one of the secrets to his company's success. "Most publicly traded companies focus on short-term quarterly earnings reports and, therefore, have a hard time maximizing long-term value. If we had been a public company, I would have been fired long ago!" Private companies don't have to worry about the draconian Sarbanes-Oxley reports, either. He is especially critical of companies that pay out huge stock bonuses, which he says exacerbates the focus on quarterly reports and the stock price. How has this private firm grown so fast? Free-Market Business Strategies - Charles Koch's Formula for Success In a course at Columbia Business School, I taught "Market-Based Management" (MBM) using Koch Industries and Whole Foods Market (Nasdaq: WFMI) as case studies. Both companies are run by libertarian CEOs who apply market principles such as: - accountability,
- marginal pricing,
- comparative advantage,
- entrepreneurship,
- opportunity cost,
- property rights, and other incentives to create long-term value.
Koch was deeply influenced by the Austrian school of economics, particularly the writings of Ludwig von Mises and Friedrich Hayek, which emphasize these concepts. He is the first to apply these principles to business, and he's been a brilliant success. Two other aspects of Koch Industries' MBM stand out: - an emphasis on rule of law; and
- its vision statement as a moving target.
For Koch, integrity is more important than talent. Superior ability means nothing if you aren't an honest, hard-working employee. Koch also emphasizes maximum compliance with environmental and other government regulations. (They inherited thousands of asbestos lawsuits when they acquired Georgia-Pacific.) Koch doesn't believe in a fixed "mission statement." The company's enterprises are a "laboratory" that vary from year to year; it's a "discovery process," as Hayek calls it. Koch started out as an oil & gas firm, but has since expanded into chemicals, plastics, fertilizers, ranching, paper, and trading commodities, while exiting from pipelines, tankers, fiberglass, and feedlots. Koch is a classic model of Joseph Schumpeter's "creative destruction." But there's been more "creation" than "destruction." The company now employs 55,000 workers and grosses $95 billion in sales. Applying Koch's Principles on Wall Street Although Koch refused to identify any publicly traded companies that adopt similar rules, his approach reminds me of Jack Welch's model at General Electric (NYSE: GE) and John Mackey's Whole Foods Markets. Both executives engaged in a discovery process through decentralized decision making, comparative advantage, internal pricing models, economic value added (EVA), rule of law, and other market strategies. And under their leadership, their company stocks have done extremely well. Good trading, Mark P.S. Investment U has interviewed some of the most influential and successful investors, economists and business owners in the world. Read more from the Investment U Interview Series to tap into the minds of Steve Forbes, Jim Rogers, John Stossel, and many others. Today's Investment U Crib Sheet- Charles Koch's book, The Science of Success (Wiley, 194 pages), reveals his successful business formula, which he's trademarked "market based management." You can purchase the book through Amazon.
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