Koch and Empire Grew Together (1994 Wichita Eagle Article)

Source: Wichita Eagle 

This past week I stumbled upon a really good article from June 26-27, 1994 about Charles Koch and Koch Industries. The article has some articles I referenced in my three part series (part 1, part 2, part 3) on the Koch brothers. However, the first article was more of a profile of Charles Koch. Bob Cox did a profile of Charles and his family in 1998 for the Wichita Eagle did a profile. The Wichita Eagle recently did a profile in 2012 by Roy Wenzl .

One thing I learned from the 1994 article was how much Charles Koch loves to read. According to the article at least in the 1990’s he spent at least 2 hours every day reading. He reads scholarly books on economics, history, philosophy, and psychology. He even read the Old Testament of the Bible just because he was curious. This is interesting because when Charles was younger he was more interested in parties and playing rugby and actually was expelled in high school for drinking. Koch thought about being a mathematician  scientist, or economist (thank goodness he didn't pick those). An interesting fact is he graduated M.I.T with 2 graduate degrees (chemical engineering and nuclear engineering) by the time he was 24. After all this he considered going to Harvard Business School. William Koch did take some business courses at MIT according to this.

Once Charles started working at Koch Industries he was working 7 days a week. He tended to look at problems as an engineer instead of understanding the importance of people. Everything I have read indicates that he is a workaholic which actually isn't bad as a side effect is becoming a billionaire. Charles didn't seem to understand that people had a life outside work, however Charles' life was work. One meeting in August of 1968 started at 4 P.M. and lasted until midnight. Executives were expected to work on Saturday.

Koch has an interesting management style. Up until this point I have never read anything about how he managed people. Even Charles Koch himself acknowledges that he doesn't try to be a tough boss however he may be insensitive from time to time.People say that while Koch is demanding he is also very fair and doesn't like people who lie. He has a great analytical mind (makes sense he is an engineer), sharp, and seems to know what questions to ask. Koch will actually let employees make the decision at the end of the day (this is part of market based management). One interesting quote from Koch about work is that "True self-respect only comes from real accomplishment, because you can't kid yourself for very long". Another good quote Koch has that could be applied to management is "If you have a proposition or thesis or theory, you're obligated to search just as hard for facts that disprove it as you do for facts that support it".

The relationship between Charles and Liz Koch is interesting too. Apparently the folk tale is that Charles was so busy he had to propose to Liz over the phone. Apparently when they first met Charles was not with the times as he was reading books in economics, philosophy, psychology, and history. There was a charm about Charles that was attractive to Liz however. After 5 years of dating Charles and Liz were married in 1972. What is interesting is that in the 1990's when this story was done the family had no servants or help despite being worth $1-$2 billion (according to my Koch historical net worth page)

Koch also doesn’t like to waste any time. He really uses every minute to add value or learn something. He only lives 15 minutes away from work and listens to books on tape (Dr. Walter E. Williams of George Mason University also does this listening to tapes from Academic Plant). In a 3 week trip to Orient that Koch had planned he didn't spend one minute relaxing. When the Koch family went on a trip to the Summer Olympics in Spain Charles wanted to see 4-5 events a day which wore every one out (kids swore it would be the last trip they would go on). Even on a Sunday afternoon Koch will be watching football games with his work papers out doing both things at the same time.

Charles isn't much of a partier (nor does he need to be running a multi-billion dollar company). David is more outgoing like mother Mary Koch use to hold (don't know if he still does) a New Year's Eve party that held 800 people as of 1993 in Aspen, CO. Even Newsweek said it was a great party to crash. Charles doesn't like to party but he does enjoy good wine.

What is really interesting is how in 1966 Koch Industries had $177 million revenue and in 2012 the company had $110 billion in revenue. This is an annual growth rate in revenue of 15% which is pretty amazing. One reason might be of Market Based Management. Personally I don’t think Charles Koch works for money as so many of the left claim. His house seems quite modest for his net worth. He does have homes in California and Aspen however even though they are only worth a few million dollars each it is very small compared to his net worth of around $31 billion. They didn’t even have servants in the 1990’s despite being worth in the billions. The Koch family does have expensive cars and charter company planes for trips however they are not socialites who party all the time and have fun. They say he is greedy and trying to control democracy by buying politicians. To me Charles Koch preaches about free markets and liberty. Liberals forget that means personal liberty which is for social liberty (legalize drugs, same-sex marriage, etc). People forget this and just label Charles and David Koch as Republicans but they really do have certain libertarian ideas.

Personally I am glad I found this classic article from 1994. It revealed to me that Charles Koch doesn't like wasting time, challenges himself on a daily basis, works his tail off, and really seems like a decent human being. Now if we can just get others to realize his enormous accomplishments we all might be better off. I personally do hope all the Koch brothers publish their own autobiographies so they can tell their own stories in stead of having other people tell it for them. 

Steve Jobs: Why I Never Owned Apple Stock

Just a few hours ago Steve Jobs resigned as CEO of Apple. I have never invested in Apple because of this reason (also the company hasn’t had a long history of paying out dividends). At any rate, tomorrow the market will decide how much this will affect the value of Apple through their stock price. Jobs is leaving a company that is worth $349 billion in market value. Time will tell whether this increases or not.

People are asking why Jobs is not running the day to day operations of the company and I think the answer is pretty obvious. Steve Jobs has had significant health issues over the years. Usually CEOs are very reluctant to give up the reigns of their company. One can only speculate the health issues Steve Jobs is going through. I honesty wonder how long Jobs will be alive given he has pancreatic cancer which is usually a death sentence.

I find it a little bizarre that people act as if Steve Jobs as some saint. If anyone did any type of research they would realize he heavily micromanages his employees and somewhat of an egomaniac. However despite this, I would say that we all have benefitted from this. Steve Jobs takes only $1 salary which is of course symbolic. If you look at the actual amount Steve Jobs makes in just stock options it is over $14 million which is well above the average of $8 million paid to a CEO of any S&P 500 company. Jobs also did get a $90 million Gulfstream V jet in 1999 as a bonus. So if you include all the perks and extra that jobs get it is well over $1. The problem I have is people actually might believe that Jobs is living off very little and not greedy. I don’t believe a CEO or owner of a company wakes up to just make money. The main reason I believe a CEO or owner gets up is to create something new, to solve problems, or to more importantly make progress. Money of course does give people an incentive. Steve Jobs has made many people better off including himself. However, people are now saying Jobs is the best CEO of all time. I enjoy when people make statements but have no data or evidence to back it up. If you look at the performance of Apple stock and compare it to Oracle or even Microsoft since the 1980s, Apple has underperformed both stocks. A CEO’s job is to create value. So Steve Jobs may have taken his $1 symbolic pay, but compared to other companies Steve Jobs is not increasing shareholder value at the same rate as other companies within the same industry.

Part of the reason I never owned Apple is because of Steve Jobs. If Steve Jobs ever left or walked away it would be hard and maybe even difficult to recreate what he brought to the company. Warren Buffet points out that you shouldn’t need a rock star to run a business. Only time will tell if Jobs leaving will make a large impact.

Apple: Most Valuable Company?

As of today Apple is now the “most valuable company”. Apple now has a market capitalization of $337.2 billion surpassing ExxonMobil with a market cap of $330.8 billion. I put most valuable company is quotation markets because the market can misprice things. The technology bust of 1999-2000 and the financial crisis are just recent episodes of this. The sector weightings of both technology and financial companies during this period became very high. The weightings became high creating bubbles within certain sectors that eventually went bust.

Apple is known for producing computers and electronic devices that consumers use around the world. The iPhone I would say has been the biggest hit for Apple in recent years. The iPad also seems to be very popular as well. Even though Apple has had successes they have also had failures. One failure that sticks out in my mind is the Lisa computer that was developed in the early 1980’s. The computer would be over $21,000 in current dollars yet lacked the computing power of any modern day cell phone. Another flop I remember was the Apple Newton which is what use to be called a personal digital assistant (PDA). Basically the device allowed you to set your calendar and organize contact information.

One problem that I think few people realize about Apple’s success is solely based on Steve Jobs. The biggest worry is the health of Steve Jobs. In 2004, he had a rare form of pancreatic cancer. In 2009, he had a liver transplant. The five year survival rate for liver transplant is between 75-90%. I honestly would be shocked if Jobs lived a long live. Being CEO is hard on perfectly healthy people and would be even harder on people with health issues. Jobs seems to be the superstar for Apple and if he were to leave it would cause great uncertainty for Apple. Jobs himself has created over 230 patents.

What is perhaps the most interesting is how the media and even some people think of Jobs somewhat of a hip entrepreneur who is earth loving and kind. I don’t think people understand the type of personality Steve Jobs really has. Steve Jobs is intense and demanding. From what has been written about Jobs he is obsessed with making something people will enjoy. It wouldn’t be hard to classify Jobs as a perfectionist. There was a movie years about a decade ago called “Pirates of Silicon Valley” that shed light on the type of personality Jobs may have had during the early days of Apple. Whatever his personality may be Jobs has made everyone else better off including himself. Steve Jobs got rich by figuring out what consumers trying to perfect exactly what consumers wanted. As a result Jobs has a net worth today of $8.3 billion.

Jobs created a company that very consumer eccentric. Apple figures out what consumers really wanted. People complain that Apple products are more expensive, but there are always alternatives. Being paranoid and a perfectionist are not classified as desirable traits yet in the case of Steve Jobs millions of people have benefitted.

Inside Pfizer: The Downfall of Jeff Kindler

 

Fortune came out with a great article (one of the best I have read in a while) about the inner workings of Pfizer. The article is the cover on Fortune magazine and entitled “Inside Pfizer’s palace coup”. What is really interesting is Fortune spent 4 months and interviewed 102 people who worked at Pfizer. The story starts off with Jeff Kindler the former CEO of Pfizer trying to convince the board of directors for Pfizer to retain his job. Kindler was CEO from 2006-2010.

During Kindler’s tenure the stock price of Pfizer went from $49 to $17 a share. The article talks about how smart Kindler is graduating with high honors from Harvard Law School and all of his prestigious positions before joining Pfizer. Kindler’s management style was aggressive and blunt. He often left angry voicemails late at night to other employees. From reading the article you get the sense that Kindler really didn’t trust anyone at Pfizer except himself. The HR department at Pfizer also seems dysfunctional. Mary McLeod was the head of human resources and was fired from Schwab for trying to remove rivals and claiming she had had the CEO under her thumb. She no longer works at Pfizer and due to poor rankings from her subordinates.

When Kindler took over there were two promising drugs Pfizer had. One drug was intended to increase good cholesterol, but this flopped when there was an increase in deaths compared to the control group. Another drug was Exubera which would allow diabetes patients to inhale their insulin through an inhaler. Between these two drugs Pfizer spent over $2 billion dollars and many years developing drugs that didn’t pan out. The average cost per drug approved for Pfizer between 2000 and 2008 was $6.7 billion. I really don’t blame Pfizer for this since the FDA puts burdensome regulations on drugs companies. Kindler tried to drastically cut research and development costs, however two people on the board who were doctors told him no. A drug CEO trying to cut research and development doesn’t make any sense since that is where nearly all their profit comes from.

Before Kindler took over the CEO was Henry McKinnell who ran Pfizer from 2001-2006. McKinnell had a strategy of putting more funding into research and development since drug companies are in the business of innovating. One problem with McKinnell is he was not in the office much. He was off funding charities in Africa and wrote a book about health care reform. McKinnell was ultimately fired because the stock price for Pfizer was down 46% since he had taken over. I am surprised McKinnell couldn’t create shareholder value considering he had a PhD in finance from Stanford.

At the end of the day the CEO takes responsibility for the performance of the company. However, I would argue though that the FDA has more control over the profitability of drug companies than any CEO. The FDA can reject a drug or ask for more clinical data which makes the company either write off their research and development costs or spend more on clinical research to try to get the drug approved.

I am becoming more skeptical that IQ, background, or educational credentials really tells you much about whether someone can run a business. Some people can be very bright but not practical or have business sense. People in business are paid for what they can bring to the future of the company not what they have done in the past.

Market Based Management

Since I have been interested in the Koch family and Koch Industries I recently finished “Market Based Management” by Charles Koch. I was somewhat disappointed to learn that his is really the only book published by any Koch. I would love for Charles Koch and his brother to come out with autobiographies since they are both getting up in age. Also another reason to write an autobiography is not to allow historians to revise history. The first chapter was a mini biography about Koch Industries and Charles but nothing like a true autobiography Market Based Management MBM uses the principles of different fields in order to run a business or organization in a more effective way. The book points out that some of it is common sense and it is but if so many people don’t use common sense isn’t it really uncommon knowledge. Anyone familiar with economics and business would be very familiar with the terms in the book. The book talks about vision, knowledge processes, decision rights, and incentives. People would think that a company like Koch Industries is a command and control organization where Charles Koch delivers orders to his employees. This is the furthest thing from the truth. Employees are given power to look for ways to improve things. Most companies don’t really encourage this because they have bureaucratic layers of only allowing certain people to do certain work. Employees at Koch are rewarded for improving things or creating value. Charles Koch is the first to admit that Koch Industries has had some failures in their business. In the back of the book is a list of business that Koch no longer operates.

MBM seems to be more capitalist oriented than traditional management systems. Having employees understand the big picture along with how they can create value is important. Some employees just see themselves as doing tasks, but don’t really understand how they are impacting the company, shareholders, and the reputation of the company.

Koch is a private company. This means they don’t have to disclose quarterly or annual earnings. One positive to this is that that Koch doesn’t have to comply with burdensome requirements in terms of compliance or requirements that public companies have to comply with. I am somewhat surprised other companies in the investment have not gone from public to private due to the burdensome regulations and rules involved. The only negative downside is that if the company was public individual investors could invest money in the company which would give Koch capital to purchase equipment, invest in new projects, or improve existing plants. Charles Koch has one son named Chase Koch who I have a feeling might take over once Charles passes. The company started with Fred Koch and so far has stayed in the family. It will be interesting to see what happens in the coming years with the company and whether they stick to market based management.