Charles Koch and Market-Based Management: Background information when reading Kochland

Charles Koch and Market-Based Management

This article relates to Kochland

Charles Koch, the driving force behind Koch Industries and heavily quoted in Christopher Leonard's book Kochland, developed a philosophy he dubbed "Market-Based Management" (MBM). Koch considers these principles a guide to all of life and not just a business strategy. For this reason, all his employees are required to not only memorize MBM's principles but also completely internalize them and apply them to all they do, on and off the job. According to Leonard, anyone who isn't completely on-board with Koch's vision (a.k.a. a "true believer") isn't employed by the company for long.

Koch's way of thinking has roots in his childhood. According to Leonard, his father Fred Koch (the founder of the company) "impressed upon his boys the evils of government and the inevitable overreach that seemed to arise when the state interfered with the activities of free people." Charles was further influenced by the thinking of early twentieth century Austrian academics such as Ludwig von Mises and Friedrich Hayek, who postulated that "even well-intentioned state actions ended up causing far more human suffering than the market-based ills that they were meant to correct." Koch's research into free-market strategies and his opinions along those lines ultimately codified into an overall approach to life that became the heart of MBM. He began teaching MBM to his managers, ultimately opening the Market-Based Management Institute in 2005 which seeks to disseminate MBMs tenants to other business leaders.

Tony Woodlief, President of the Market-Based Management Institute, explained in a 2019 interview:

[W]hat [Charles Koch] observed years ago is that, just like you have prosperous societies that have features about them that make them different from very poor countries, you have companies that have a way of managing themselves that makes them very different from companies that aren't as successful. So the basic idea behind market-based management is that, just as you see in a market — entrepreneurs flourishing and developing new products that we all can use and appreciate — you want to have that same entrepreneurial impulse inside your business. So you create the right incentives and a clear vision and measurement and those sorts of things to get entrepreneurial behavior in your company.

He goes on to state that in companies that follow MBM principles employees are rewarded for the value they bring to the company, not the time they put in. He summarized:

[I]t puts a lot of responsibility on individual employees to start using their own brains and making decisions and being held accountable for them. And it puts a lot of responsibility on managers to coach and lead rather than have a formula for how you pay people, make all the decisions yourself, do things the way you've always done them. So there is more opportunity for action but there is also more opportunity for failure.

According to the Charles Koch Institute's website, "Market-Based Management is the business philosophy and framework developed by Charles Koch that we apply to innovate, improve and transform ourselves in order to create greater value. Our MBM Guiding Principles define who we are as an organization. We live by them daily, as they are essential to the creation of virtuous cycles of mutual benefit." The business philosophy has evolved since its inception in the 1980s, and today it's summarized by eight principles:

1. Integrity - Have the courage to always act with integrity.
2. Stewardship & Compliance - Act with proper regard for the rights of others. Put safety first. Drive environmental excellence and comply with all laws and regulations. Stop, think and ask.
3. Principled Entrepreneurship™ - Practice a philosophy of mutual benefit. Create superior value for the company by doing so for our customers and society. Help make Koch the preferred partner of customers, employees, suppliers, communities and other important constituencies.
4. Transformation - Transform yourself and the company. Seek, develop and utilize the visions, strategies, methods and products that will enable us to create the greatest value.
5. Knowledge - Acquire the best knowledge from any and all sources that will enable you to improve your performance. Share your knowledge proactively. Provide and solicit challenge consistently and respectfully.
6. Humility - Be humble, intellectually honest and deal with reality constructively. Develop an accurate sense of self-worth based on your strengths, limitations and contributions. Hold yourself and others accountable to these standards.
7. Respect - Treat everyone with honesty, dignity, respect and sensitivity. Embrace different perspectives, experiences, aptitudes, knowledge and skills in order to leverage the power of diversity.
8. Self-Actualization - Be a lifelong learner and realize your potential, which is essential for fulfillment. As you become increasingly self-actualized you will better deal with reality, face the unknown, creatively solve problems and help others succeed.

Charles Koch's complete philosophy can be found in his book on the subject, The Science of Success, published by John Wiley & Sons in 2007.

Although MDM seems to have great core values, many believe that in practice the principles often lead to high-stress, cut-throat work environments. At Koch Industries, for example, it's resulted in individual managers cutting corners to generate higher profits. Leonard opens his book with an instance where even the lowest-level employees, who collected crude oil for transport from tanks owned by other entities, were systematically encouraged to under-report their load, thereby cheating various parties of millions of dollars and improving their division's bottom line. Some business units have also skirted environmental laws to improve profits, and others have cut staff to such bare-bones levels that they have arguably created unsafe, if not lethal, working conditions.

Filed under Society and Politics

This "beyond the book article" relates to Kochland. It originally ran in September 2019 and has been updated for the October 2020 paperback edition. Go to magazine.