Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty

by Daniel Schulman

  Market-Based Management caused controversy in other areas, too, as Charles and his ideological lieutenants attempted to apply the technique to the constellation of nonprofits he funded. “If I get a concept in my head that I think is the way the world works,” Charles admitted, “I apply it to everything.” There even came a point when Charles tried to impose his management philosophy on the private school his children attended.

  Located nearly across the street from the Koch compound, the Wichita Collegiate School was cofounded by Bob Love, Fred Koch’s John Birch Society sidekick and later Charles’s libertarian compatriot. A generous benefactor of the school, Charles chaired its executive council in the early 1990s. In 1993, the billionaire ignited an acrimonious uprising at the school, after its well-liked headmaster abruptly resigned due to efforts by Charles and other trustees to foist Market-Based Management on Wichita Collegiate and meddle with hiring decisions. Incensed parents threatened to pull their children from the school; faculty members quit; students wore black in protest. Charles stepped down from the board of trustees citing, among other reasons, the school’s refusal to integrate his management style. But in a sign of just how much influence he exerted over the school, Richard Fink, one of Charles’s key advisors and an architect of Market-Based Management, was installed as Collegiate’s interim head. The outrage ran so deep that, as Fink tried to tamp down the uproar, he was hung in effigy around campus.

  A couple years later, similar discontent roiled the Institute for Humane Studies, which had relocated from California to the Arlington, Virginia, campus of George Mason University, where in the 1980s, Charles and Fink had established a beachhead of free-market research and scholarship. The mission of IHS is to groom libertarian intellectuals by doling out scholarships, sponsoring seminars, and placing students in internships at like-minded organizations. The impact of the institute’s work was not easy to discern. Charles nevertheless grew intent on measuring the intellectual dividends of the institute’s programs, as if manufacturing libertarian ideologues and widgets were one and the same.

  “Koch, evidently beginning to despair at the prospects of achieving political goals in his lifetime, became obsessed with a quick fix and decided that IHS needed to have ‘quantifiable results,’ ” noted Auburn University philosophy professor Roderick Long, who was affiliated with the Institute for Humane Studies. “Massive micromanagement ensued.”

  Professor Long recalled that “the management began to do things like increasing the size of student seminars, packing them in, and then giving the students a political questionnaire at the beginning of the week and another one at the end, to measure how much their political beliefs had shifted over the course of the week. (Woe betide any student who needs more than a week to mull new ideas prior to conversion.) They also started running scholarship application essays through a computer to measure how many times the ‘right names’ (Mises, Hayek, Friedman, Rand, Bastiat, etc.) were mentioned—regardless of what was said about them!”

  “These,” he noted, “were the days that my friends and I used to refer to as ‘the Shadow falling on Rivendell’ ”—an allusion to the evil pall Sauron casts over the elven stronghold of Rivendell in J. R. R. Tolkien’s The Lord of the Rings trilogy.

  While efforts to impose Market-Based Management outside of Koch Industries faltered, it eventually flourished within the company. “You couldn’t avoid it,” a former Koch executive said. A copy of Charles’s 2007 management manifesto, The Science of Success, is standard reading for new employees, and the company’s ubiquitous ten “Guiding Principles” (“integrity,” “principled entrepreneurship,” and “value creation,” among others) are stamped on the time cards of factory workers and printed on coffee cups. Koch employees at every level attend a two-day Market-Based Management Academy. Managers, meanwhile, receive additional instruction on how to identify the characteristics of an ideal Koch hire—that is, someone who will be receptive to the Market-Based Management–driven culture.

  “They have a very rigid selection and development process,” the former executive said, noting that more than a dozen Koch employees screened him before the company made him an offer. “They want to make sure they’re hiring the right people with the right ethics and the right business orientation.” He added, “I never met a dumb person at Koch. Everyone was brilliant.” The company’s interview process relies heavily on SBO—situation, behavior, outcome—questions to identify candidates in the Koch mold. “Have you ever made a mistake at work?” is one typical interview question. Another: “Tell me about a time that you failed.”

  The company went through a phase of recruiting talent from elite universities, including University of Chicago–trained MBAs, but it found that many of these hires—often headstrong and overconfident—didn’t survive long within Koch’s corporate ecosystem. Instead, Koch has largely built its business with men and women who share its Midwestern roots, drawn from the University of Kansas, Oklahoma State, and other nearby state schools.

  “They’re always looking for what’s called an ‘upper right quadrant’ person,” noted Nancy Pfotenhauer, who once ran Koch Industries’ Washington lobbying operation and is a veteran of a handful of Koch-funded nonprofits. “If you have humility on one axis and ability on another, they’re looking for that combination.”

  It also helps if you fall in the right quadrant politically and buy into the libertarian ideology that is so deeply embedded in Koch’s corporate DNA. Fully embracing the Koch mind-set means believing, as Charles does, in the self-regulating powers of the market and the socialistic evils of big government. It requires sharing the company’s Adam Smith–inspired philosophy that acting in one’s self (or corporate) interest benefits society as a whole in the long run.

  Even the company’s quarterly newsletter, Discovery, is an overtly political organ that contains editorials promoting climate change skepticism (“much of this ‘information’ is discredited science”) and jeremiads about the tyranny of regulation, federal spending, and unwarranted government intrusions into the marketplace.

  “A growing government is often the worst enemy of liberty,” Charles warned in one Discovery column during the 2008 presidential race. “Judging from what we’ve heard from the presidential campaigns so far, we could be facing the greatest loss of liberty and prosperity since the 1930s.” On the eve of the 2008 election, another Koch executive stressed “the importance of keeping our principles in mind and being an informed voter in this election.… Imagine what our world could be like if every candidate for public office was measured by the standards of our MBM® Guiding Principles.”

  People of all political persuasions work for Koch, but given the company’s strong institutional perspective, some employees with liberal beliefs tend not to advertise their politics.

  “You either drink the Kool-Aid or you keep your mouth shut and walk the line,” said Randy Rathbun, a Wichita lawyer and former U.S. attorney in Kansas who has many friends who work for the company. When Rathbun ran for Congress in 1996 as a Democrat, his campaign received numerous contributions from supporters at Koch Industries, but the donations were uniformly small, he said. He appreciated the support, but the relatively diminutive size of the contributions puzzled him. Rathbun later learned that Koch employees had intentionally contributed low-dollar amounts in order to skate under state campaign contribution reporting limits. They feared the consequences if the company discovered them supporting a Democrat, especially one that Koch Industries’ political action committee along with top Koch executives had targeted for defeat. “I have never seen a place where people are afraid like this where they work,” Rathbun said, noting that some of his friends who work for Koch jokingly refer to it as the “evil empire.” He added, “There’s a culture of fear out there.”

  Because of the company’s insistence that its employees conform to the Market-Based Management model, some have complained of a cultlike atmosphere. “Everyone is walking around like they are in the George Orwell book, 1
984,” commented one former employee.

  In contrast to his brother David, who is respected by the company’s rank-and-file but not seen as the driving force behind the company’s success, Charles is viewed as a near-mythic figure, a man of preternatural intellect and economic prowess, whose mystique is only intensified by his quotidian persona. He is unquestionably powerful, but unfailingly humble; elusive, but uncomplicated; cosmopolitan, yet thoroughly Kansan. Although Charles could have his lunch flown in daily from Paris if he chose, employees often spot him in the cafeteria, tray in hand and waiting patiently in line at the “healthy choice” station.

  Charles has been described as a businessman so shrewd that “in a fifty-fifty deal, he keeps the hyphen,” but he projects the image of a brainy professor, not a cutthroat mogul. “I am Charles Koch,” he once introduced himself to a classroom of junior executives who had gathered for training in Market-Based Management. “I’m in the philosophy department.”

  He’s known by friends and colleagues alike as a voracious consumer of knowledge. Even on the short commute between his home and office, a drive of no more than fifteen minutes, he pops in heady audiobooks such as Thomas Sowell’s Ethnic America or Eric Foner’s Reconstruction. Every conversation is an opportunity to profit intellectually, and when Charles hits upon a subject that fascinates him, he drills for details. “If he’s even in the elevator with you,” said Pfotenhauer, the former Koch lobbyist, “he’s trying to learn from you. He doesn’t waste a minute.”

  Charles is a true believer, whose free-market beliefs are unquestionably self-interested—but also undeniably sincere. His value system is apparent in all aspects of his company, including Koch’s lobbying operation. Until the early 1990s, the company didn’t have a Washington presence; this, one former Koch lobbyist said, reflected Charles’s inherent distrust of politicians and his antigovernment bent. Once it did open a Washington office, prompted by the wave of government investigations and the bad PR stirred up by Bill Koch, the company’s lobbyists operated differently than the K Street–hired guns that stalk the halls of Congress for their corporate clients.

  Koch’s lobbyists don’t shift their positions based on the political headwinds. According to one Senate Republican leadership aide, they won’t be found pressing for subsidies in one bill and opposing them in another. “They’re not rent seekers,” he said. The overriding factor guiding the company’s lobbying agenda is not whether a legislative proposal will be good or bad for Koch Industries, but whether it is consistent with Charles’s libertarian beliefs.

  Richard Fink, Charles’s top advisor, enforces ideological consistency across the spectrum of Koch business units, and he frequently intercedes to prevent them from inadvertently transgressing Charles’s free-market creed. Such was the case when one Koch business unit, which had developed an environmentally sensitive incinerator, sought permission to work with government regulators to strengthen environmental rules. This might have improved the company’s competitive position, but it went against Charles’s overarching philosophy. Fink spiked the idea.

  Charles’s goals have always been larger than building a business. He created a free-market society in miniature at Koch Industries, but his decades-long effort, and David’s, to catalyze social change on a broader scale has proven far more difficult. The brothers are “driven by their feeling that the way they run their company is the way the country should be run,” the former Koch manager said. As the Obama era dawned, the brothers felt America desperately needed a Koch-style turnaround.

  CHAPTER THIRTEEN

  Out of the Shadows

  In late January 2009, as Richard Fink strode into Koch Industries’ imposing dark-glass-and-granite headquarters on the outskirts of Wichita, the nation’s economy was in free fall. The stock market had cratered. Credit markets had seized. There was talk of bank nationalization, another Great Depression.

  The Bush administration had responded by throwing open the national vault: It rescued failing banks and financial firms with a $700 billion bailout and doled out $17.4 billion to save America’s ailing automakers. Additional billions would soon be on the way to Detroit. The incoming Obama administration, just a few days in office, was meanwhile pressing forward with plans for another massive outlay of federal cash via a stimulus package of close to a trillion dollars.

  There was nothing free about this market, in which U.S. taxpayers kept foundering businesses on life support and the government injected the economy with money the country didn’t have to spend. General Motors had in effect been nationalized. It was Keynesian economics on steroids. The Austrians were spinning in their graves.

  In the 1930s, under similar economic conditions, FDR had ushered in the New Deal, reshaping the scope of government in ways that conservatives had been fighting to roll back ever since. Under the new administration, Fink believed, there was no telling how large the bureaucracy might balloon, how expansive and entrenched government programs might grow, how much economic freedom might be robbed from the private sector in a federal power grab. There was a Democratic House. A Democratic Senate. A Democratic president. To Fink and his bosses, Charles and David Koch, this augured a trifecta of doom. The last time a Democrat had sat in the White House, the company had weathered one of the rockiest periods in its history, as environmental regulators and Justice Department lawyers mercilessly besieged Koch Industries.

  Fink had been considering retirement, hoping to play more golf and spend time unwinding at his vacation home in Delaware’s Bethany Beach. The silver-haired strategist had spent more than thirty years in the ideological trenches. He oversaw Charles’s multifarious philanthropic, political, and public policy endeavors, as well as the whole of Koch Industries’ public sector group, which encompassed its lobbying, communications, and legal divisions.

  Now the country, as far as Fink could see it, had reached a crossroads. It faced not just an economic crisis but an ideological one. He and the Kochs had spent decades trying to turn the tide, fighting their own kind of culture war to remake America into their free-market, small-government ideal, a place of unfettered capitalism where the market’s “invisible hand” would always guide society in the right direction. The progressive administration of Barack Obama threatened to roll back much of what they had achieved. Fink was a veteran of many political street fights, and he had at least one more left in him. Retirement could wait.

  That day in Wichita, Fink huddled with Charles and David to discuss the political climate and plot their next moves. Just a few days earlier, Obama had taken the oath of office, placing his hand on the same velvet-bound Bible that Abraham Lincoln had used in 1861. Already the Kochs and their top political advisor were looking ahead to Obama’s defeat.

  Though Charles and David had supported George W. Bush—and a host of Koch employees had joined his administration—they were no big fans of his presidency. Bush had led the country into two costly wars, assailed civil liberties in the name of national security, expanded the size of government, and run up the federal deficit. If that was compassionate conservatism, they preferred the original, tough-love variety. But from their perspective, at least Bush’s policies had fostered a more hospitable regulatory environment.

  Obama was a different story. He talked of overhauling health care, tackling global warming, reforming the financial system. Charles considered him a “dedicated egalitarian” who had “internalized some Marxist models.” David, the more bombastic of the pair, declared him “the most radical president we’ve ever had as a nation,” a leader steeped in the “hard core economic socialist” politics of his Kenyan father.

  The Obama administration, Fink told the brothers, was poised to push the country over the precipice. Labor unions, social programs, regulation, tax hikes—nearly everything the administration stood for, they stood against. The brothers had two choices, Fink said. They could keep their heads down and watch the country slide into oblivion, or they could come out swinging. Fink counseled jihad.

  “If
we are going to do this, we should do it right or not at all,” Fink told the brothers. “But if we don’t do it right or if we don’t do it at all, we will be insignificant and we will just waste a lot of time, and I would rather play golf.”

  The risks were clear. Fink and others at Koch Industries feared political retribution of the kind they believed the Clinton administration had targeted them with. Back then, the Koch brothers, through an advocacy group called Citizens for a Sound Economy, had fought health care reform and other key pieces of Clinton’s agenda. After years of prosecutorial scrutiny, the Clinton administration’s parting shot, a little more than a month before the 2000 election, was a 97-count felony indictment against Koch Industries and four of its employees. It accused the company of releasing at least 91 metric tons of the cancer-causing pollutant benzene from its Corpus Christi oil refinery, which it alleged Koch officials had tried to conceal. The case fell apart, and the company ultimately pleaded guilty to a single charge of “covering up environmental violations” and paid a $20 million fine (the equivalent of a parking ticket for a company that earned in excess of $30 billion in revenues that year).