But when the board meeting arrived, Bill bypassed Charles, handing out bound copies of his proposal and appealing directly to the company’s seven directors, which in addition to the three Koch brothers, included Sterling Varner; Tom Carey, the company’s chief financial officer; Texas oilman J. Howard Marshall II, who’d helped Charles gain control of the Great Northern Oil Company; and Fred Koch’s cousin Marjorie Simmons Gray, the daughter of L. B. Simmons, whose Oklahoma-based refinery and pipeline Fred had acquired in 1946.
The directors were dubious of Bill’s proposal and ultimately sided with Charles. Struggling to persuade them, Bill grew more and more distraught. David, who was in town from New York for the board meeting, recalled him beginning to sob; he cringed at the sight of his brother embarrassing himself. “He was very upset, and I thought he presented his case tremendously badly,” David said.
Bill’s behavior concerned David, and after the meeting ended, he pulled his twin aside.
“Bill, you didn’t handle that at all well,” David said.
By then Bill had regained his composure. “Yeah, I was too emotional, I agree with you,” he responded, according to David. “I just didn’t do a good job. My emotions carried me away.”
By college, the boyhood animosities between Bill and Charles had largely dissipated. Or so Charles thought. Beginning in late 1979 and continuing through 1980, tensions between the brothers built, then built some more until relations between them were worse than ever. Bill was openly dismissive of Charles in front of David and, worse, other Koch employees. Behind his back, Bill referred to him as “Prince Charles” and derisively compared his stewardship of Koch to a member of royalty lording over his court and kingdom. Over dinner at Boston’s Algonquin Club with David and Wichita real estate developer and family friend George Ablah in early 1980, Bill trashed Charles. The Kochs had recently joined with Ablah in a $195-million deal to purchase Chrysler’s real estate holdings. As the three men sat beneath the pewter chandelier in the dining room of the McKim, Mead & White clubhouse, Bill commented that Koch had a reputation for screwing over its business partners, David recalled. David was outraged. “You’ve got to retract that statement,” he said.
Bill was not terribly discreet. Nor did he seem to care. Word of his belligerent comments soon got back to Charles, who in late April 1980 angrily scrawled out a note to his brother: “What is the purpose of these attacks on me? I hear from all over the country that you’re constantly criticizing me.” Lately, Charles went on, Bill had gone out of his way to criticize his management during reports to the board and his memos carried “accusatory” undertones. Charles warned his brother that he was on a “destructive” path. “Whatever I’ve done to make you so bitter toward me is in the past,” he wrote, adding that if the brothers could not work together “in friendship,” they should at least do so “civilly.”
Bill’s criticisms of Charles—intemperate as they could sometimes be—were not merely rooted in sour grapes or in a bitter sibling rivalry. Bill and other Koch Industries shareholders had developed some legitimate worries about the direction the company had taken under Charles’s management.
Koch’s record of growth was unassailable. That wasn’t the issue. What concerned Bill and other shareholders was the company’s increasing run-ins with the government. Lately Koch Industries had managed to run afoul of agencies ranging from the Department of Energy to the Internal Revenue Service. The company faced not just civil penalties, but criminal prosecution.
In early 1980, the Justice Department empaneled a federal grand jury to investigate whether Koch Industries and a half-dozen employees of Koch’s oil exploration division, based in Denver, had conspired to rig a Bureau of Land Management lottery for federal oil and gas leases. By June, the grand jury had returned criminal indictments against Koch Industries and its employees.
The Department of Energy, meanwhile, was auditing Koch (along with other oil and gas companies) for violating federal controls on the price of oil and overcharging customers. In the worst-case scenario, the company’s top accountant confided to Bill, Koch could be liable for more than $1 billion. Perhaps enough to sink the company. (Just a few years earlier, federal regulators had accused Koch of overcharging on sales of propane by $10 million.)
Bill initially supported Charles’s libertarian projects, but he had grown troubled by the increasing amounts of company money Charles diverted to his “libertarian revolution causes”—causes Bill now considered loony.
“No shareholders had any influence over how the company was being run and large contributions and corporate assets were being used to further the political philosophy of one man,” Bill said later.
Charles’s activism had drawn unwanted attention to the company and the family. Their father had loathed publicity, scrupulously guarding the family’s privacy, especially after his John Birch Society involvement landed his name in the paper. Now that Charles had coaxed David into running as the Libertarian Party’s vice presidential candidate, the family was in the media spotlight as never before.
Bill and other Koch shareholders—who by now included Marjorie Simmons Gray’s daughters, second cousins to the Koch brothers, and the two sons of J. Howard Marshall II—also had concerns about liquidity. Bill was one of the richest men in America, worth hundreds of millions of dollars. But only on paper. He had needed to borrow money to buy a mansion in the tony town of Dover, on Massachusetts’s South Shore, which seemed ludicrous given the scale of his wealth. Nearly all of his net worth was locked up in a closely held, private company. Unlike a publicly traded company, the market value of Koch stock was opaque and there were strict rules over to whom the shares could be sold. If any of Koch’s shareholders wanted to cash in their holdings, they would likely be forced to do so at an extreme discount.
Koch shares did pay a dividend (about 6 percent of the company’s earnings), but Bill considered it stingy. The growth-obsessed operating style of Charles and his right-hand man, Sterling Varner, called for plowing almost all of Koch Industries’ earnings back into the company. “That was our religion… to make things grow… to push, push, push,” according to Varner. This strategy expanded Koch Industries, though not the bank accounts of its shareholders, at least not immediately.
Bill’s brothers, meanwhile, considered his appetite for money “insatiable.” He earned nearly $4 million in annual dividends and another $1 million in salary and bonuses—how much was enough? To Bill’s mind, though, what was the point of being filthy rich if you couldn’t enjoy it? He had other interests he wanted to pursue outside the firm: art, fine wine, yachting. And he wasn’t getting any younger. In May 1980, he had turned forty.
Frustrated with his role at Koch and the paltry dividends he received—and frightened by the government investigations looming ominously over the company—Bill began furtively meeting with Koch shareholders, including the Marshall brothers, Pierce and Howard III, to discuss the liquidity problem and other issues of concern. Some of them, it turned out, shared his frustrations. The most obvious solution was taking the company public. But Charles vehemently opposed this option. (Koch Industries would go public “literally over my dead body,” he later emphasized.) He preferred keeping a tight rein on Koch; the last thing he wanted was more oversight and interference from government bureaucrats. When Bill raised the possibility of going public with Koch’s top lawyer, Don Cordes, he immediately shot the idea down. “This should never be a public company. If this were a public company, all the officers and directors would be in jail,” Cordes told him without elaborating, according to Bill.
Charles had maintained that the oil-lottery-rigging mess which resulted in criminal charges and fines for the company and three employees was the fault of a few bad apples working in the company’s Denver office. But knowing that his brother kept close tabs on every aspect of the business, Bill wondered whether Charles—and perhaps even Sterling Varner—had known about the illegal activities that had led to the charges. (His suspicions were
never proven.)
On Thursday, July 3, 1980, an eleven-page single-spaced letter landed on Charles’s desk. He had learned to greet Bill’s frequent, overheated missives with a mixture of dread, annoyance, and mild anxiety. His blood pressure rose as he read. This wasn’t a memo. It was an indictment that blasted Charles on everything from his supposedly autocratic management style to his libertarian activism and his role in pushing David’s vice presidential candidacy. Though the letter was addressed solely to Charles, he soon discovered that Bill had circulated it to some of the shareholders. Bill had taken Charles to task on several fronts—his lack of concern about regulatory violations and his insensitivity to shareholders’ demands for dividends, among them.
Bill accused Charles of keeping the board in the dark about key corporate matters, including “the pricing policies and activities” that “resulted in the government alleging both civil and criminal violations” of wage and price control regulations. “As a result… the directors and the shareholders must look on helplessly as the corporation’s good name is dragged through the mud by one set of indictments and is threatened by more such actions.”
Bill delved into the “extremely frustrating” liquidity issue, complaining that it was “absurd” that shareholders who were “extremely wealthy on paper” had almost no ability to utilize their assets. “What is the purpose of having wealth if you cannot do anything with it, especially when under our present tax laws on death they will undoubtedly end up in the hands of the government and politicians?” he asked. Bill accused Charles of “creating Koch Industries as a monument to business success” and neglecting the “desires of the shareholders” in the process.
Then he threw down the gauntlet. “Since I’m not alone in these concerns, failure to solve them… will be destructive to everyone concerned. Indeed if they are not solved, the company will probably have to be sold or taken public.”
The memo Charles held incredulously in his hands was nothing short of a declaration of war.
Six days later, on July 9, 1980, Charles took his customary place at the head of the long, polished table in Koch Industries’ conference room. A large world map, pinpointing the locations of Koch’s global operations, hung on the wall behind him. As usual, David sat to Charles’s right, and Sterling Varner to his left.
Charles was not someone who allowed his emotions to color his judgment. He was better known for his inscrutable impassiveness. But that afternoon, as the directors gathered for a board meeting, he was visibly angry. Charles had added a last-minute item to the agenda: “W.I.K. Has Leveled Serious Charges.”
Once the seven directors had assembled, Charles explained that Bill’s letter had finally convinced him that his brother’s behavior and allegations were so serious that they needed to be addressed by the full board. To Charles, Bill’s continued attacks and behind-the-scenes rabble-rousing posed a mortal threat to the company, perhaps the most serious peril it had faced since their father had fended off Universal Oil Products and the oil majors.
During the contentious four-hour meeting, the CEO went point by point through Bill’s memo, eventually coming out with his suspicions: He accused his brother of angling for his job, or possibly Sterling Varner’s. Charles ultimately unveiled a resolution giving him the authority to terminate Bill from the company, should he continue to attack the management and cause unrest.
“Charles Koch is the boss and will always be so long as he’s the chairman, and he won’t hesitate to run anyone off—anyone off—if that’s indicated,” Varner told the board. Varner had received complaints from middle managers, who felt Bill meddled in aspects of the business outside of his purview and expressed alarm at his hostility toward Charles. “You can’t refer to the management group, Bill, as the prince and his court,” Varner chastised. “Middle management thinks you are unfair to Charles, and they are upset. They like you, but they can’t figure out what you’re up to.”
Marjorie Simmons Gray, their father’s cousin, spoke up. The in-fighting had gotten out of hand, she said, urging Charles to table the resolution. “I don’t believe I have misread Bill’s intention,” she said. “He’s got the company’s best interest at heart.” Gray said that a mountain had been made out of a molehill, that past hostilities should be forgotten and forgiven, and that everyone should go on working for the company.
J. Howard Marshall II, a lawyer by training who prided himself on his skills as a mediator, also implored Charles to back off. Sometimes family blowups, he said, were beneficial, resulting in better relationships once the air was cleared.
Charles relented. He would allow Bill to stay on at the company under one condition. Bill would have to formally pledge to discontinue his attacks and to cease fomenting dissent among the shareholders. “I said I would live up to the rules of the corporation, but I would not give up my rights as a shareholder and as an individual,” Bill recalled. Charles, for his part, agreed to convene a committee to explore liquidity concerns.
Watching the escalating strife between Bill and Charles anguished David. The last thing he wanted was for Bill to be cast out of the company. He just wanted his brother to keep himself in check, to stop stirring up trouble and antagonizing Charles.
Following the board meeting, David felt a temporary sense of relief, even optimism. It had been tense, but the issues were now all out on the table. He thought “progress had been made in clearing up these harsh feelings, that we were back on the same page, and that Billy would continue to work in the company and make contributions, and that it was a very healthy experience to have opened up and discussed all these things very frankly.”
Bill, however, came away with a different feeling. He was as uneasy as ever about Koch Industries and his future there. He didn’t trust Charles. And he had no intention of backing down.
By the following month, Bill was back to jousting with Charles, writing in an August 18 letter, “If you have irrevocably decided that you cannot tolerate me in the company simply because I disagreed with some of your management practices, then you should directly and forthrightly state it to me personally, man to man and brother to brother… rather than to fire me on the grounds that I may be disloyal.…” He told Charles that under no conditions would he be “subservient to somebody else’s autocratic desires.”
In August and September, Charles dispatched emissaries, including Varner, to test the waters with Bill on whether he might consider selling his Koch shares. Bill declined. During the summer and into the fall, he had quietly lined up a coalition among Koch’s small circle of shareholders who agreed that the company’s board should expand from seven to nine members in order to more accurately reflect their full spectrum of interests. “Corporate democracy,” Bill called it. He had argued in his July letter to Charles that the board should take a “stronger and… more active role” in the management of the company, and this would be their mechanism for doing so. His allies included the Simmons clan. These cousins held a sizable 13.1 percent bloc of Koch voting shares. Also in Bill’s corner was J. Howard Marshall’s eldest son, J. Howard Marshall III, who owned 4.1 percent of the company. When Marshall’s sons had married, their father had gifted them the bulk of his prized Koch stock—what the elderly businessman referred to as the “family jewels.”
Most important, Bill had persuaded his oldest brother, Frederick, to back his cause. Though partially disinherited by their father, a slight whose sting never truly went away, he still owned 14.2 percent of the company. Next to his brothers, who held 20.7 percent apiece, Frederick was the largest shareholder. Armed with Frederick’s shares, Bill’s consortium would technically control a little more than 52 percent of Koch Industries, enough to push through whatever changes they wished. Charles and David, meanwhile, together held 41.4 percent of the company’s stock; Pierce Marshall and his father owned 4.5 percent; and Sterling Varner and other veteran employees controlled 2 percent of the company’s shares. That brought the combined holdings of Charles’s loyalists to a little under 4
8 percent.
Though Frederick’s stake in Koch Industries entitled him to representation on the board, he had never exercised this right. The extent of his involvement with the company consisted of attending a handful of shareholder meetings in the early 1970s.
Frederick, who was already away at boarding school when his siblings were growing up, was perhaps closest with Bill, with whom he shared a love of fine art. The two were logical allies. Frederick had his own tensions with Charles. His younger brother’s attempt to buy him out of the company after their father’s death had angered him. And when that effort failed, Bill alleged, Charles later resorted to more devious means—what Bill described as a homosexual blackmail attempt to force Frederick to sell his shares, a charge Charles has denied. (“Charles’ ‘homosexual blackmail’ to get control of my shares did not succeed for the simple reason that I am not homosexual,” Frederick said.)
Like Bill, Frederick’s lack of control over his wealth—all of it tied up in Koch Industries shares—frustrated him. He had ambitions as a collector of art and antiques, and as a patron of the theater. Frederick strongly favored taking the company public in order to unlock their assets.
Bill’s coup attempt, which had evolved over the months, hinged on calling a special shareholders meeting, its purpose to both expand the board and elect a new slate of directors, a move that would require first dissolving the existing board. Together, Bill and his alliance controlled a small majority of Koch stock and enough votes to elect five directors. Since Charles refused to accede to shareholder wishes, they would have to force his hand. Taking over the board would give them control over the direction of the company; they could marshal their influence to take the company public, raise dividends, or make whatever other strategic (or management) changes they desired.
They had agreed to vote their shares to elect Bill, Marjorie Simmons Gray, J. Howard Marshall III, Frederick’s longtime lawyer S. Hazard Gillespie, and Jimmy Linn, a prominent Oklahoma City attorney who was also Marjorie Simmons Gray’s son-in-law. Charles and David and their backers would possess the votes to elect four board members. Charles and David were a given, but the chances were good that in this shake-up, J. Howard Marshall II, who had passed the majority of his shares down to his sons, might lose his seat, while Sterling Varner and Koch’s chief financial officer, Tom Carey, retained theirs.
Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty Page 13
