Why the Private Individuals and Organization Are Ahead of the Government in Responding to Coronavirus

For the past couple of weeks coronavirus has been in the news. Back in Dec 2019 China had a number of cases of pneumonia and then within the first week of December 2019 the Chinese government confirmed that these individuals actually had confirmed this was coronavirus. Since then there has been fear, angst, and anxiety around the world regarding how quickly the coronavirus has spread (as a result people are hoarding toilet paper, antibacterial soap, and bottled water acting as if the world will end). While I feel the spread of the coronavirus is awful I believe the federal government has only made the problem worse with excessive regulation and now allowing the decentralization of decisions from private companies, individuals, and organizations to override government power. Some companies have voluntarily told employees to work from home to avoid the spread of the virus while others have even created their own coronavirus schedule. Luckily there are some individuals and private organizations that are helping out.

The first major issue has been the ability to test individuals who have the coronavirus. During the months of January and February 2020 the number of coronavirus cases in China was rapidly increasing however The Centers for Disease Control (CDC) decided to create it's own test rather than use the World Health Organization (WHO). The CDC has issues in terms of having people testing positive (who actually didn't have the disease).  What is insane is the FDA requires the CDC to retest every positive corona virus test run by a public health lab for accuracy (the CDC is also the same organization that predicts 1.7 million in the U.S. will die from coronavirus).  I remember hearing on the news that samples for the coronavirus "had" to be sent to Atlanta first and having the thought "why?-surely there are thousands of other labs in the country that could test for coronavirus". 

Now take the case of a German scientist named Olfert Landt within 10 days after the New Year created a viable test kit for coronavirus. Landt and his team worked 12-14 hours per day (his son works a "part-time 60 hours a week" job) and within the past 2 months the company has created 40,000 test kits. The test kits run about $180 each and he has received orders from all around the world. The company has produced enough test kits to have 4 million individual tests. What is interesting is the test is just a throat/nasal swab and the results can be found within a few hours. The WHO began shipping these tests out February 1, 2020. The CDC created a test was then approved by the FDA on February 4, 2020. However the results of the CDC test were flawed as an ingredient in the CDC test created false results. It wasn't until February 29, 2020 that the FDA allowed hospitals to use their own tests for coronavirus. 

There are even situations were individuals take testing matters into their own hands and the government shuts it down. Dr. Helen Y Chu (she went to Duke for medical school and taught at Harvard Medical School) in Seattle who is both board certified in infectious diseases and internal medicine. The Seattle Flu Study (funding came from the family office of Bill Gates) studied individuals who were both health and sick individuals to try to help the city of Seattle detect the flu earlier, develop new ways to treat, and help the city prevent outbreak. The Seattle Flu Study is constantly taking nasal swabs from residents in the area so had good data on what the general flu looked like. On February 25, 2020 Dr. Chu and her team couldn't wait any longer and decided to take matters into their own hands and began performing their own coronavirus tests. The government from both federal and state levels had told Dr. Chu and her colleagues that no they could not create their own tests for multiple reasons. The first is patients never gave their explicit permission, and the labs were not certified by the FDA because the lab would have to meet Medicare standards-this could take many months before approval. The FDA for example would require the test to be run 5 times on the sample sample to validate it (which is insane since the number of positive cases for coronavirus is so few given the lack of testing due to government mismanagement). The CDC promised kits would be distributed within days (days would turn into weeks). It wasn't like you had Elizabeth Holmes running these tests. The CDC told the Seattle Flu Group creating their own test would not be possible. The CDC and FDA told Dr. Chu to stop testing thousands of samples they had already collected from individuals. During this time 22 people were dying from coronavirus. 

So not just anyone can start a lab (this isn't Breaking Bad). In order to be certified by you first have to comply with The Clinical Laboratory Improvement Act of 1967. Let's not forget the Clinical Laboratory Improvement Amendments of 1988.  The 1988 was passed in response to false negative Pap smear tests. Also let's not forget each state may have their own regulations which may be even more stringent than the federal laws. Under this act any facility that performs testing under the law is considered a lab-even if only a few basic tests are performed and the lab isn't charging. If you want to start a clinical laboratory. Here is the 10 page application you have to fill out to get certificate from Medicare. The certificate is only valid for a 2 year period. Oh and before signing the application you must make sure you comply with Section 353 of the Public Health Service Act you could possibly be imprisoned for up to one year. Let's also remember if someone violates the regulations they could face possibly: criminal penalties, up to a year in prison, a fine of $10,000 per day, and possibly not able to participate in other federal programs. In 1995, inspections showed that 80% of labs had compliance issues. Thankfully Medicare publishes the top 10 deficiencies of labs. Regulations also specify who can work in the lab. For example an individual that performs "high complexity testing" must either be a doctor or have at least a science undergraduate/associates degree with 60 semester hours of sciences (chemistry/biology/etc), complete a training course, have at least 3 months of laboratory training in each specialty in which the individual performs high complexity testing. So if you were a philosophy major don't bother getting near a laboratory. It should be pointed out that the smaller to medium size laboratories are not getting rich either. About 50% of laboratories have a profit margin at 3% or less (meanwhile companies like LabCorp/Quest Diagnostics and other labs are able to generate much higher profit margins because of their scale and size). Medicare recently also increased the fees on these labs by 20%. Now depending on the type of lab (determined by how many tests are performed each lab could be paying up to tends of thousands of dollars for each certificate.  

As I write this 9 different companies are working on a vaccine for the coronavirus. It looks like Gilead Sciences is the furthest along with an IV treatment (remdesivir) currently in a Phase 3 trial (the treatment has already been used on a woman in California who was on the verge of death who improved after taking the drug (it should be pointed out it took the CDC 4 days to just to agree to evaluate the samples (it didn't meet their strict criteria) and then another 3 days for the results to come back. As her health declined her doctors at UC Davis applied for compassionate use (the drug manufacturer has allowed hundreds of patients to try remdesivir) from the FDA which would allow patients that are not part of a clinical trial to test a drug. Also it is believed that the earlier the drug is administered the higher probability there is to help the patient. The government wasting time telling a patient they are too sick to get treatment most likely made the woman worse off than she would have otherwise have been. Also if someone is dying don't they have a right to their own life and what treatments they receive? As I write this a Canadian company has said it has a "vaccine candidate" just 20 days after obtaining the gene of the virus and once they get the green light could produce 2 million doses/month. My question is why can't patients work privately to determine what drugs are best for them? Most likely by the end of the year with all these companies working on vaccines and probably even more will try to enter to create a vaccine (remember it usually takes 10-15 years to create a vaccine). 

Speaking of testing just yesterday the FDA approved a test (as I write this the first approval from the FDA from a private company-the only other approved tests are from the New York Department of Health and the CDC). According to Roche the company can provide millions of tests every month and can test patients 10 times faster than their old system. Speaking of testing as I write this there is a testing capacity of ~27,000 patients per day. It is important there are over 260,000 clinical laboratories in the country. Although hospital labs are only roughly 5% of the labs they perform 55% of all the lab testing. Innovators and entrepreneurs have came into the market and are offering different ways to diagnose coronavirus. One small biotech company called Aytu Bioscience in Denver will be able to test for the virus with just a small drop of blood within 10 minutes! This blood test has already been used in China for the past 6 weeks (however the company needs to get emergency approval from the FDA). There has even been some innovation with setting up drive through coronavirus testing. Speaking of Colorado another company has devised a UV light that kills 99.9% of bacteria and viruses (however it is not known if it can kill the coronavirus but the companies believes it can). Entrepreneurs, companies, and organizations are much better at quickly adapting to solve problems (even in national pandemics) then government entities given the incentives at stake. The market would develop a coronavirus test that could be ordered off Amazon Prime or have someone pick up at Wal-Mart/Target/CVS. 

Many people have talked about how the hospitals will be overburdened with the coronavirus as a result of many people possibly needing to be hospitalized. One big issue is that certain states have are certificate of need (CON) laws that prevent just anyone from opening a hospital or medical facility without first getting approval from the state. There are currently 36 states that have CON laws. A study showed that having these laws actually reduces the number of hospital beds to patients (beds that could be taking care of patients with coronavirus). In some states this can add up to 10,000-20,000 hospital beds for some states. Now when you aggregate all the states that have these laws you are looking at many thousands of people who wouldn't be able to access healthcare because of regulation.

It is important to note much of the advancement in fighting the coronvirus has come from private individuals and organizations. Scientists from around the world were the first to sequence the genome of the coronavirus and put it online for others to study. A German company created a testing kit that is now being used around the world (while the CDC couldn't even get an accurate test out and could only produce it in limited quantities. Compare this to the power of Roche, LabCorp, Quest Diagnostics who were ready to step in with their tests (these companies can run substantially higher number of tests and more accurate than the CDC testing), however were blocked by the FDA and the CDC. The many weeks of delay from the FDA and CDC could have allowed individuals to get tested for the virus and given them the knowledge to know whether or not they poses a risk to others. The U.S. government knew for many months of the coronavirus and it looks like finally this coming week will have enough tests for people. Also you may have many people worrying if they have the disease which may cause them anxiety and panic for the fear of not knowing. I have no doubt that a private company or organization will find a vaccine for this virus. The real heroes are those individuals who are working day and night trying to advance the understanding, treatment, and hopefully cure for the coronavirus. The coronavirus like many other things has taught us that viruses move much faster than government bureaucracy and red tape. The collective efforts of Gilead, Roche, Olfert Landt, Dr. Helen Chu and Aytu Bioscience have done more to help individuals around than the FDA or CDC could ever dream of. 

Free Market Solution for Medicaid: Turn It Into An Health Savings Account

After my post on how to transform Medicare into more of a free market system I thought about what if the same idea was applied to Medicaid. Medicaid currently provides benefits to 74 million low income and disabled people. Medicaid in 2017 spent $582 billion. This would mean on average Medicaid spent $7,800 per Medicaid beneficiary. Each state administers Medicaid but the actual funding comes from the federal government (i.e. taxpayers). Medicaid spending is used for hospital care, physician services, prescription drugs, and nursing homes. In a previous post years ago I pointed out how to the government makes it extremely difficult and expensive to open a nursing home (there were more nursing homes in 2010 than 1995 despite a dramatic increase in the number of people requiring these services). One major issue with Medicaid is the improper payments for turn out to be about 12% of it's budget or $139 billion (even Wells Fargo with all it's issues doesn't have a improper payment rate close to this). What if individuals were allowed the freedom to spend Medicaid dollars as they see fit?

A solution that would offer Medicaid beneficiaries a health savings account (HSA) that would allow individuals  more options, better quality care, and reduce the burden on taxpayers and greatly improve efficiency. The basic idea of an HSA account is that money is contributed and the growth is tax free and if distributions are taken to cover medical expenses the growth in the account is not taxed. These accounts over a variety of investment options that allow individuals to invest the monies as they see fit. The idea is allow contributions to grow over time and then to use the monies inside of the HSA for medical expenses as they come up. It is important to know that each states have their own rules regarding Medicaid (so not only would the states have to approve this plan but the federal government would have to approve it as well).

Current legislation only allows individuals with high deductible insurance plans to have HSA plans. This current legislation would have to be repealed to allow anyone to have a health savings plan (which wouldn't be a bad thing). The state government every year would deposit monies spent on Medicaid into the HSA plan for Medicaid beneficiaries and allow Medicaid beneficiaries to use the funds for health insurance or health expenses (I prefer the money being deposited into the account over vouchers so Medicaid beneficiaries don't have to go through a middle person or agency). If money is taken out from an HSA for non-medical expenses the penalty is to pay both the income tax and a 20% penalty (for Medicaid beneficiaries I would be okay increasing this penalty to 50%-75% ) as an incentive not to withdraw monies. Any penalties would be just be additional government revenue.

As Medicaid is run by each state there are financial requirements in terms of how an individual can qualify. However, if an individual Medicaid beneficiary was able to use $7,800 of benefits every year that would allow them to have power in the market place and make choices in terms of what health care they wanted and allow them choices in deciding what doctors to use, what prescriptions to purchase, and what treatments they would like. Also with 50 different states there could be experimentation which plans and see which plans worked and which ones didn't. The $7,800 could be the maximum amount of benefits allowed with it being phased out based off income. For example someone without any income would get all the benefits however someone that earns $15,000 would get a reduced amount of the $7,800 (this would help in rein in the cost of Medicaid). Now when you run the math if there was a family of 3 is on Medicaid this would be over $23,000 of health benefits annually that could be used (I am not opposed to a family maximum limit either). Not only could the health benefits be used for the current year but could be saved and invested for future years if Medicaid established HSA for beneficiaries. Allowing individuals to invest the monies in their HSA accounts would over time allow the account to grow in value which would allow individuals to save for their future medical costs (and have individuals learn about deferred gratification). In addition to this, if the monies were invested in either the stock market/bond market it would provide a boost in giving corporations capital (possibly hundreds of billions of dollars) which would give the economy a major boost.

In addition to this, if Medicaid beneficiaries could use the funds in the Medicaid HSA account to bid on medical services it would create even more competition. Medibid is an online platform that allows individuals seeking medical services to bid on medical procedures and services online. Recently the platform had over 265,000 paid subscribers (83 employer groups are included in this number too). The online provider features "all in prices" for medical services and you don't have to worry about separate bills from different providers. Patients are able to see the ratings a particular doctor has and the number of those procedures the doctor has performed (Medicaid doesn't even have this type of information). As a result patients are provided transparency in terms of quality and price. Medibid users are saving 70% on MRI scans, 63% on CT scans, 53% on colonoscopies, and 35% on ultrasounds. Now if Medicaid patients were able to use Medibid they would be able to shop around and Medicaid would actually be savings tens of billions of dollars a year. An interesting point is if you the 74 million people on Medicaid shopping online for medical procedures there is no doubt the price would decrease even further and induce more doctors to want to offer their services.

Medicaid doesn't even provide quality care to its beneficiaries. What is fascinating is that patients on Medicaid are 13% more likely to die than patients who didn't even have insurance and 93% more likely to die than patients with private insurance. Shouldn't we allow low income individuals the freedom to make choices so they don't die? The funds in the health savings account could be used by Medicaid patients to enroll a direct primary care program. Direct primary care is not health insurance however allows patients to pay to directly contact their doctor 24/7 if that have any issues. The fee covers clinical and lab services and sometimes doctors can get prescription drugs at a cheaper price. The cost of direct primary care can range start at $50/month. If a Medicaid beneficiary thought $600 was worth it they could use their HSA to purchase direct primary care services.

Medicaid has a low reimbursement rate. It should be noted that Medicaid pays about 61% of what Medicare pays. Of course doctors would be weary to accept Medicaid patients. In addition to getting paid less doctors have to worry about filling out more complicated forms.  Not only do doctors receive less for their work but in addition have to fill out more complicated paperwork. Doctors would receive payments direct from these Medicaid HSA accounts and not have to worry about billing or reimbursements from the government. Given that reimbursements from Medicaid can take doctors up to 2 months to get paid doctors wouldn't have to worry about the timing of payment.

The cost of health insurance premiums has exponentially increased. In 2008, the average monthly premium for an individual cost is $159/month and then by 2017 the premium would be $393/month which is a 147% increase. As of 2018 the monthly cost for a family health plan cost was $1,168. Obviously the large increase was due to the passage of Obamacare which mandated coverage and required insurance policies to cover "essential benefits". In in this post  I explored 10 ways in which the cost for healthcare costs could dramatically be decreased. If Obamacare was repealed and these reforms were in place health insurance could be a fraction of the cost (and more like the rates from 2008) and allow many more individuals (including those on Medicaid) to afford a decent health insurance policy and allow them to get more bang for their buck out of the $7,800 provided by Medicaid. If there was massive insurance deregulation and the premium per individual was only $159/month (2008 figure however with massive deregulation it be even less) it would say over 1 year an individual would pay close to $2,000 a year in premiums.

The $7,800 amount per person is already being spent by taxpayers on Medicaid beneficiaries. Why not allow Medicaid recipients and families decide how they will spend their healthcare money to allow for greater efficiency, more access, and allow individuals to take control of their health/financial futures.

One state that has attempted to try a Medicaid HSA program is Indiana. In Indiana Medicaid members "HIP POWER account holders" get a $2,500 deductible health plan. The state contributes $1,100 per adult per year to pay medical costs. Participants pay up to 5% of the family gross income (this can be between $0 to $105/month (depending on the family size). Also it is important to note that roughly 1/3 of beneficiaries pay nothing). Employees were less likely to use high-cost emergency rooms and most likely to use generic brand name generics. This resulted 35% lower health-spending and individuals were going in for mammograms, check ups, and other preventive care at the same rate as traditional insurance plans. Members contribute 2% of their income (members own their contributions and if they leave the program are refunded the pro-rata share). What is interesting is that 70% of members make contributions (only 5% of the members left the program due to affordability). The interesting thing is about 80% of members are satisfied.

The example of a Medicaid like plan rolled out nation wide would do wonders to help Medicaid beneficiaries. If roughly $7,800 is spent on each Medicaid beneficiary and you had individuals pay a small portion of their income to get access to Medicaid HSA plan (with a deductible of a few thousand dollars) this would save the government lots of money, allow patients greater access to their healthcare decisions, would allow doctors to get paid quicker and more efficiently and if patients had health savings accounts it would dramatically reduce the current Medicaid fraud (save over $100 billion on this alone). Adding Medibid to Medicaid in the base case would save Medicaid billions of dollars a year. Most importantly Medicaid beneficiaries would have the same power that all other individuals have in the market place to decide who provides them medical care. Often times patients can't go to a doctor because they don't accept Medicaid. Of course too I wouldn't have state/local governments administering the HSA accounts either (you could have companies like ADP, Fidelity, Paychex bid on these projects-which would add additional revenue for the states)

A change like this to Medicaid would be a much needed improvement over the current system and be beneficial to Medicaid beneficiaries, doctors, and taxpayers. Of course politically this would be hard to pass given that politicians like to run other peoples lives.

Kochland: My Lengthy Review and Other Comments

Christopher Leonard back in August 2019 published Kochland after many years of research. The story starts out with Charles Koch in the early 1980's meeting with Morgan Stanley investment bankers to try to talk Koch Industries into going public (and Charles Koch would personally earn $20 million). Of course Charles would understand that if he reinvested the profits back into the company he could grow the company to a point beyond on his wildest dreams (as I write this Charles Koch has a net worth over $42 billion) so it looks like he was wise to pass on that deal from Morgan Stanley.

What is clear is that Mr. Leonard spent a considerable amount of time researching this book and doing honest to goodness journalistic reporting for this book by interviewing many individuals. Even though I have read many books it bothers me when people don't actually do the research and it feels like someone just slabbed something together in a few months. In fact it took 8 years to write Kochland and the author interviewed people for hundreds of hours to get a complete view of Koch Industries. Also I like how the author does each chapter chronically (although at certain points of the book I wished he would pin down the time line of specific events). The book goes back and forth between the political commentary and telling the business story of Koch Industries. Actually, there could be two separate books (one for the political side and one for the business side).

Overall, he gives of Koch Industries a fair assessment of both the positive and negative things the company has done throughout their long tenure. Chris does an extremely great job of taking very complicated subjects and boiling them down to their essence (especially when talking about energy trading and oil markets in general). You can see in his writing that although Chris doesn't agree with what Koch Industries stands for politically however he does admire the company for how they operate their business (focusing on the long term, very analytical, and continuing trying to drive improvement). He gives more meat to the Koch business side instead of just covering the political side. The one thing I don't fault the author for for is Koch Industries not giving more access to Charles Koch. Koch Industries also was aware of the type of reporting from Mr. Leonard as he wrote a piece about Koch for Fortune many years ago. Much of the story around Charles Koch had to be told through secondary sources.

The book tells the story of many interesting characters that worked at Koch Industries over the years. Leonard in the book tells the story of Benard Paulson who busted up the union at Pine Bend (he was hired by Charles Koch to do this). I actually had blogged about Paulson but it was along the lines of him being denied a proposal from the Koch board of directors for trying to rapidly expand the Pine Bend refinery). In the book, Paulson scheduled the union boss to come to work on Easter Sunday. When the union boss didn't show up for work he was fired which started a war between Koch and the union. Leonard goes into great detail about this war as Paulson could find non union members and even members outside the state to come into the Pine Bend refinery to perform the work of the striking union members. Paulson would end of getting a death threat for what he was trying to pull off and sets the narrative between Koch and the unions. What is interesting is Pine Bend refinery generated almost $61 million in after-tax profit (22% of all the profit for Koch Industries in 1981). J Howard Marshall who owned an interest in Pine Bend Refinery would swap his interest for Koch Industries stock and go on to say it would be the best deal he ever did.

Charles Koch comes across in the book as bright, workaholic (Koch would work on weekends and ask employees to come on by down to the office on Sunday afternoon) analytical, but also calm cool and collected even during stressful times. Also it should be pointed out he doesn't pound his fist on the table or demean employees. Steve Feilmeir explains how Charles is calm said in this video "if Charles wigs out it will be behind closed doors and not necessarily in front of anyone". Charles however can ask the key questions to penetrate nonsense to get to the heart of the matter. During the financial crisis when the trading arm for Koch was losing lots of money the trading team was summoned to the Wichita headquarters for a meeting with Charles Koch to decided whether the team would get additional trading capabilities or shut down. Charles asked the trading team if these trading errors were the result of hubris or greed (he remained patient and collected when asking these questions) and if the team could take responsibility for the trades they did make and what would change.

What is interesting is that in 1968 while Charles Koch, Stuart Varner, and a new Koch employee were on the company private plane (I was honestly surprised the company had a private plane this early in their history-the current corporate jet fleet of Koch Industries can be seen here) trying to decide what to call the company (the name at the time was Wood River Oil and Refining Group) the new employee suggested Koch Industries and Charles Koch wasn't wild about it. According to Leonard, in 1961, when Charles was joined Koch Industries the company earned $3.5 million, paid out $150,000 in dividends to shareholders, and only had 300 employees. Using their strategy of plowing 90% of the earnings back into the company by 1981 had the company earned $300 million and paying out $27.5 million of dividends to shareholders (this included Bill Koch at the time) and 7,000 employees. With the continued path of success Koch continued to grow by leaps and bounds. Recently in 2019 the company has $130 billion in revenue and 140,000 employees worldwide, and I estimate $17 billion of pre-tax earnings, and I estimate $900 million in dividends to shareholders. So from 1961-2019 Koch Industries on a compound annual rate increased their earnings by 16%/year (according to my estimates), dividends to shareholders by 16% (my estimation), and employees by 11% compounded annually. Personally I am not aware of many companies in corporate history that have been able to have on average double digit rate of earnings, dividends, for close to six decades!

I feel as if the author left out a few interesting topics that could have been explored further. The first is the Marshall family dynamic and their ownership of Koch Industries. J Howard Marshall II had a large impact on Koch Industries was a 16% shareholder of Koch Industries. Although, J Howard Marshall II was not actively his partnership with Charles Koch led to the company's tremendous growth over many decades. As a passive shareholder J Howard Marshall during the mid 1990's was earning $8 million per year and using the monies to fund his lifestyle, pay down debt (he used Koch Industries stock as collateral), and most importantly shower his favorite lady friends with gifts (including Anna Nicole Smith). Also the battle with Elaine Marshall, Preston Marshall, and E. Pierce Marshall Jr. would definitely add some color to the book.

Also another topic that wasn't covered enough was David Koch and his contributions to Koch Industries. Although, David was an executive vice president at Koch Industries he had a large role in the growth of the company. Even though David didn't live in Wichita he had control of a Koch Division (Koch Chemical Technology which just recently was changed to Koch Engineering Solutions. David was at the Koch division for 48 years and during that time period the subsidiary purchased 50 businesses which helped grow the division by 1,000 fold while growing the number of employees from almost nothing to 5,000 employees. In addition to this I think few are aware that David ran a subsidiary of Koch Industries that actually purified water (David would nerd out on water desalination technology).

Koch Industries is always looking at better ways of doing things-only if it makes sense. The company looks at the return on investment to evaluate projects (Koch Industries Chief Financial Officer Steve Feilmeier has said the company tries to target a rate of return between 12%-15% depending on the risk of the project). The company in general never chased sales, fads, and was weary of debt. Leonard covers the Georgia Pacific deal pretty well, however I wish the ABKO deal was included in the book (I covered this here)-which involved Chrysler dealerships). Koch only put down a fraction of the money required (10%) and was able to earn a good return. I am sure that there are many more deals like this in the Koch history but overall Leonard gives a good example

Leonard rehashes the boardroom battle for Koch Industries with the focus between Charles and Bill and unearths new details including Bill Koch constantly writing memos to Charles (6-10 memos in the month of June 1980). David Koch would say that his twin brother Bill was always writing letters and always asking for additional studies. Charles explained to his younger brother Bill that spending countless hours on additional studies and having to go through several layers of committees/reviews/bureaucracy was not the way to run an organization. Bill who had complained about the dividend policy of Koch Industries didn't agree with Charles that the earnings should be plowed back into the company. In the short run as a shareholder Bill wouldn't have large dividends but with the power of compounding growth over time the shareholders would be better off Ultimately, Bill and oldest Koch brother Frederick would be bought out and in the long run if they had stayed Koch shareholders their net worth and annual dividends would be a large multiple of what they are today as I wrote here.

Even though Leonard discusses the successes that Koch had it also spends time on the failures as well (there is a whole chapter dedicated to the Purina Mills debacle). During the 1990's was a time of massive growth for Koch Industries. However, during this time Koch appeared to be growing just to be growing. The company didn't do any due diligence on Purina Mills which Charles Koch admits in this video.

Overall, the book gives a well researched, full, and full of good stories told throughout the history of Koch Industries. Although, the book comes in at over 700 pages it provides a plethora of information that even people who are familiar with Koch Industries will find interest. It appears the past 10 years have resulted an explosion of books on Koch Industries (Dark Money, Sons of Wichita, Kochland, even Good Profit from Charles Koch himself). In addition to all this, Leonard reveals that Charles Koch is working on another book (I first heard about this a number of years ago when Charles Koch was interviewed on the Bill Bennett radio show). The idea is to apply Koch's management style philosophy to society and this is a "passion project" for Charles. Hopefully the book will be published soon so a review can be written about it. Kochland should stand up the test of time given it's well researched slant and good storytelling approach.

How David Koch Made The World A Better Place (With Less Pollution) and The Left Cheers His Death: At Least Get Your Facts Straight

With news of David Koch passing yesterday it seems as if some people on social media and elsewhere are cheering the fact that David Koch passed away. My own view is that social media has allowed a small percentage of individuals write awful, vile, and hateful things (I don't think this should be regulated though as I believe in the first amendment of free speech). These types of things in my view have led us to a more uncivil society. Years ago even when someone passed away bitter political rivals would recognize the passing of that individual and offer condolences to the remaining family members. These days it seems as if you dislike someone and their political views you need to at least do the equivalent of give them the middle finger with an f* you so everyone knows how you really feel.

Actress Bette Midler first incorrectly retweeted that Charles Koch had passed when in reality younger brother David Koch had passed. Actor Ron Perlman was wishing for a "speedy reunion of the Koch Brothers" (his post has since been removed). Actress Alyssa Milano said "celebrating a man's death while fighting to abolish the death penalty is a bad look for democrats/human". Actually I can't even find any evidence to remotely support this. As I type this 16,000 individuals have retweeted Ms. Milano's comment. Comedian Michael Ian Black who said on Twitter "in lieu of flowers, the family of David Koch requests that mourners simply purchase a Republican politician". Actor George Takei mentioned that "you have all the money in world but it can't change the ending. Do good in the world with your time on it. That is all I will say". It is interesting how people that didn't know Mr. Koch made such statements. If they even bothered looking at the actual evidence or data they clearly would realize what they said is not inaccurate but factually incorrect.

Comedian Bill Maher said on his show Real Time last evening that he was glad David Koch passed away and hope the end was "painful" for him. In his comments Maher mentioned that Koch passed away "yesterday" which is factually incorrect as Maher's show is live on Friday night and David Koch passed away Friday morning. I have watched Bill Maher for years and although I don't agree with him politically he does make some good points at times. Also what is ironic is that Bill Maher used to consider himself a libertarian at one point and would favor many of the same thing David Koch favors (legalizing drugs, legalizing gay marriage, a non interventionist foreign policy, criminal justice reform). Maher over the years has invited people with all types of political views on his show and usually is one of the few progressives that do. You would think Mr. Maher would be more tolerant than he was.

It should be pointed out that for years David and Julia Koch have attended many social functions with people in Hollywood and a different spectrum of the political aisle then they are. There are photos of Julia Koch with Naomi Watts, Glenn Close, Sarah Jessica Parker, even chef Emeril Lagasse. So even though David and Julia Koch may hold different viewpoints than some there are other actors/actresses that still have gotten along with them despite possible political differences.

David Koch believes that global warming would actually be "good for the earth" since "A far greater land area will be available to produce food". He goes on to say that "lengthened growing seasons in the northern hemisphere will make up for any trauma caused by slow migration of people away from disappearing coastlines...the earth will be able to support enormously more people because a far greater land area area will be available to produce food". Brother Charles Koch when asked about climate change in a 2017 interview by Stephen Dubner points out that despite all the projections of disaster there has not been the catastrophe that people have predicted on climate change. Charles is open to idea that if there is a risk what is the best way to fix it. To Charles "the answer is innovation, these policies that has U.S. government has, others have proposed or promulgated have just been symbolic. They have essentially made no difference. The EPA has said this". I would say that Charles and David Koch most likely are willing to accept that there is climate change but they would probably ask what is the cost and benefit for taking action today? They I believe would both be in favor of free market solutions to reducing pollution (trying to create efficiencies to reduce the amount of resources used thus reducing pollution or using technology

It should be pointed (as I did in this post) out that the world wouldn't be as clean if Koch Industries didn't exist. Between 1997-2012 Flint Hills Resources (a subsidiary of Koch Industries) reduced its emissions by 76% and their emissions were 38% lower than peer refiners for 2012. The Flint Hills Resources refinery in Rosemont, Minnesota from 1997-2006 decreased emissions of carbon monoxide, nitrogen oxide, and sulfur dioxide by 53%. Lastly Koch between 1995-2000 was able to reduce their pipeline leaks by 92% (it should be pointed out that in 1996 teenagers Danielle Smalley and Jason Stone passed away from a pipeline that Koch owned that was passing liquid butane through the pipeline-although this was a very unfortunate incident Koch would spend millions of dollars upgrading their pipelines with software, fiber optics cables, and a power supply that was uninterrupted). Koch generally reinvests 90% of their profits back into the business to make their processes and systems more efficient which in turn leads to less waste/pollution. Although, Koch hasn't been perfect on their environmental record they consistently have been improving the safety and efficiency of their equipment and reducing pollution with the use of technology.

Maher seems to focus on the environment issues though but Mr. Koch has done more to to help the environment that Mr. Maher (his only contribution to the environment has been smoking pot). For instance Koch produces toilet paper (cleaner in the backside), paper towels (cleans up messes humans create, Koch Industries sells pollution control equipment to reduce pollutants. In fact David Koch as far back as 1980 he would divide his weekends by either skiing or studying pollution control designs in the office. Most importantly Koch Industries has a division that David Koch was in charge of called Koch Chemical Technology which has it's own subsidiary called Koch Membrane that develops and helps companies and municipals filtrate and purify water. Koch would create advanced systems that could take dirty polluted water with iron, bacteria, silt and turn it into colorless, crystal-clear drinking water. Koch even developed products that desalinize water (remove the saltine from water) and then turn it into water that is consumable by humans or can be use by farmers for irrigation. David was so passionate about water desalination there is an article where he discusses the merits of a new product Koch develops a large diameter membrane that is integrated and smaller than existing systems that will help companies purify water at a reduced cost.

Mr. David Koch contributed his time, energy, and resources to different medical institutions over the years (around $400 million between 1998-2012). This doesn't even include the $150 million he gave in 2015 to Memorial Sloan Kettering through the David H Koch Charitable Foundation. He gave to institutions like Memorial Sloan Kettering, New York Presbyterian Hospital, MD Anderson Cancer Center. I might add that these gifts were never focused on only improving the health for just conservatives but the funds were used to improve the quality of life of many different people: from different backgrounds, races, and socioeconomic classes. He also gave $100 million to the New York State Theater which again benefited many different people. Also he gave $65 million to the New York Met in 2014. People forget that Mr. Koch chose to gave this money and could have decided to give away nothing.

It has been known for many years that Mr. Koch has given to organizations that are "right-winged". Often times people mention something is "Koch-funded" and associate whatever views the organization has to whatever Mr. Koch believes. It would be almost impossible for David Koch to hold the exact same view for every organization he supports. At his core he is a libertarian and simply believes that people should left alone, the size and scope of government should be limited to allow people to maximize peace and prosperity and allow individuals to realize their full potential. To me this doesn't sound as harmful as liberals make Mr. Koch out to be.

Despite how people may feel about his political views David Koch has in fact made the world a better place. He ran a division of Koch Industries that turned bacteria and dirty water into clean drinkable water for people all over the world. For many years David Koch studied pollution control designs and he oversaw a division of Koch Industries that created equipment to reduce emissions and pollution on refineries. He contributed hundreds of millions of dollars to medical causes and cancer research centers that greatly enhanced prostate cancer for future individuals. He gave generously to the arts, sciences, and museums that many patrons in New York City benefited from in the past and many many more patrons will still continue to benefit from in the future. Before liberals say awful and vile things they should first have studied what David Koch did with his life before making statements.

The Life and Passing of David Koch and What Is Next for Koch Industries?

Today (Friday August 23, 2019) it was announced that David Koch passed away at the age of 79 (I saw this first reported by CNBC earlier this morning). David formally retired from Koch Industries last July as he was suffering from health issues. David Koch had been suffering from prostate cancer since 1992. In 1993, after finally entering remissions from Sloan Kettering David decided to celebrate and have a $100,000 fireworks display with an orchestra champagne soiree at his Southampton place. For years David was taking the drug Zytiga for his advanced prostate cancer. Koch explained here how the drug turned his prostate cancer into a more manageable disease.

David started working for Koch Industries as a technical services manager in 1970 and founded the New York office and was only earning $16,000 per year when he started working. He then was promoted to run Koch Engineering in 1979. His last position before he retired from Koch Industries was as an Executive Vice President of Koch Industries were he oversaw the Chemical Technology Group. During David's 48 year tenure the subsidy of Koch Industries purchased more than 50 businesses and during his tenure grew the company by 1,000 fold. The success paid off over time though with the growth of Koch Industries (who had a history of reinvested 90% of their profits back into the business). In 1979 as I covered in this post David was earning a $250,000 salary, a $850,000 bonus, and a $3 million dividend which David would testify in the Koch vs. Koch trial that he thought it was "way more than we deserved". He believed that one of the most important lessons he learned in life was how to be successful. David believed "if you have an undertaking you must prepare thoroughly. Success requires dedicated work, and it is not just a brief spurt. It's a continuous way of life, day after day, week after week, year after year" he would remark back in 1999.

Nearly every week David would fly from New York to Boston and spend 2 days with Koch Membrane Group (in 2008 the company had sales of $110 million). The subsidy of Koch Industries that started with essentially 0 employees now has 5,000 employees. One of the areas that Koch Membrane focused on was turning dirty undrinkable water that might have been left over from a refinery and converting it into drinkable or reusable water. So yes David Koch literally made the world a cleaner place. If you don't believe me read this article where David Koch nerds out on water filtration systems and discusses technology will not only purify water but will do it at a reduced cost.

David was known for working long hours and get to the office starting around 9 A.M. and then stay until 7 P.M. (with 12 hour days not being unusual for him. He also served on 21 different boards (which would be a full time job in itself) and spent about 1/3 of his time on charitable organizations.

During his life Koch was very charitably inclined. He had given away $1.3 billion to charity before he passed away to medical institutions, the arts, cancer research centers, and to the sciences as well. Koch has been an individual who always have been giving away his money as this 1999 MIT article shows he gave away half of his income every year. He personally insured thousands of individuals got the best medical care possible and wanted to make sure people he cared only got the best. Even liberal Lawrence O'Donnell on MSNBC thanked David Koch on air for his generosity.

In his younger days David was quite a bachelor and often times would have up to 3 dates per day as I covered in this post. David always enjoyed having lots of beautiful women around him. His pal John Damgard who was his high school classmate said back in those days David "could afford to pick up the check even in those days, he was 6'5, wore pretty good looking suites, and was interesting". David use to joke that "if you have spent as many years as I did begging girls for favors, you'd have bad knees too".

In  January 1991 friends had set up David and Julia Flesher on a blind date and took her to Le Club on the East Side of New York, and then afterwords they both shook hands and Julia recalled saying "I'm glad I met that man because now I know I never want to go out with him". David would recall that in his younger days "when I was a bachelor I with a different girl every week, people didn't think I was quite legitimate". However, in July 1991 when they ran into each other at a party David introduced himself and Julia had pointed out that they had gone out before. David pulling out his trusty black book said "Oh my God" and she was correct. When David was diagnosed with prostate cancer Julia stuck by him but gave him two options. Either David could be a live husband or a dead bachelor". The couple married on May 26, 1996 at David Koch's home in Southampton Long Island when David was 56 years old and Julia was 33 years old.

On February 1, 1991 David brushed with death as he was aboard an USAir Flight when it collided with a SkyWest plane upon trying to land. David was the only survivor in first class and 35 people passed away on the flight. After this close call with death David dedicated the rest of his life to philanthropy. David would write about the experience and this was published in the New York Times back on March 7, 1991.

He ran for the libertarian party in 1980 as the vice presidential candidate (with Ed Clark on as the front runner) and received 1.1% of the total nationwide vote. Koch personally gave $1 million of his own money to the libertarian party (which I estimated to be around 12.5% of his total income) in 1980. During the 1980 campaign David would go across the country visiting different cities and states to get the word out. The Clark/Koch campaign didn't take limos, slept in private homes, and flew commercial airlines (David would sit in first class 11 years later when he was in a terrible plane crash).  While on the country tour Koch complained when a staffer was driving David around the staffer insisted they drive under the 55 mph speed limit. David was fully aware that the libertarians would not win the nomination however wanted to influence the thinking of Americans in terms of being more open to free markets and individual choice within our own private lives.

For fun David enjoyed taking a private jet with close friends and visiting Africa, the Himalayas, and the Amazon jungle, and would enjoy reading but would say "I'm so darned busy with my business that I don't get to read nearly enough". He would also had a 6 day $100,000 Alaska cruise where he rented a minesweeper that was converted into an excursion ship, and he would charter three helicopter before getting onto the boat. I covered David Koch's lifestyle and homes in this post.

Now that David Koch has passed Koch Industries loses one of its largest shareholders. I estimated that Koch Industries after taxes earns roughly $13 billion per year, which would mean David Koch pulls in close to $400 million per year in dividends. Koch CFO Steve Feilmeir estimated that Koch Industries was worth $12 million when Charles Koch took in over and  grew 7500 times which would put the net worth of Koch Industries at $90 billion and say David Koch is worth close to $40 billion.

In terms of what happens next with Koch Industries should be interesting. David Koch in this 2014 article mentions that "almost all our money is in Koch Industries. Once we pass, our children will acquire the stock". David leaves behind 3 children (David Jr roughly 20, Mary Julia roughly 17, and John Mark roughly 12) who appear they will now be the shareholders of Koch Industries. Of course minors can't posses property or any interest until they reach the age of majority (age of 18 in New York). Even if they were of legal age there would be no rational reason for them to have an interest in the company given they haven't work in the company yet and they are of yet of age to be making decisions shareholders should be making. It is possible that a trustee is named to make decisions for them until they reach a certain age.

Years ago an insurance agent Michael Brown had planned to met with Charles and David Koch to sell them a policy (Brown was unable to make the meeting and lost a $8 million commission as a result). Insurance policies can be used to save on estate taxes. Often times the insurance policy is purchased and placed into an irrevocable life insurance trust and the assets aren't counted as part of the estate put can provide liquidity.

The executor of David Koch's estate has 6 months to pay estate taxes under normal rules however under IRS code section 6166 the Koch family could have up to 14 years to pay estate taxes! Also it is worth pointing out that in addition to federal estate taxes New York state also imposes their own state estate taxes which are about 16% which would add $6 billion to the coffers of New York (assuming no planning has already been done).

David Koch could also gift his shares to a charitable foundation and receive a federal estate charitable deduction and then have the charity sell back his shares to Koch Industries and the charity would get cash as a result. Although, one issue with this would be Koch Industries plows back 90% of their earnings into the company and this would take Koch Industries many years to pay back the charity unless there was planning done ahead of time.

What happens with David's shares of Koch Industries may not be known for years if ever. My prediction though would be his shares are gifted to charity, along with using insurance, and other advanced estate planning concepts to reduce the taxable amount of his estate.

To me David Koch is an American hero who worked hard all his life and helped grow a division of Koch Industries that started out with nothing, gave part of his fortune and advance knowledge for cancer research, tried to get the word out on libertarian principals, wanted to see a society that let individuals make their own decisions when it came to their own pocketbook or the bedroom. David wanted to be remembered as someone "who did his best to make the world a better place and he hopes his wealth will help people long after he passes".

How the SEC Made A Mistake/Overreach In the Mark Robare Case

Since I am in the investment world I find it interesting when the SEC brings forth a case against a financial advisor. The overwhelming majority of the time the financial advisor/investment advisor has stole money, lied to clients, or just outright over promised something to clients like a "guaranteed 12% return per year". Back in May 2019 the D.C. Court of Appeals in the Robare Group, Ltd. vs SEC held the SEC decision that if a financial advisor professional claims there "may" be a conflict of interest would violate the Investment Advisers Act of 1940 (specifically Section 206 (2) which covers prohibited transactions by Investment Advisers) and the SEC claims Robare violated this.

Mark Robare is the president and CEO of Robare Asset Management and from the company's last regulatory filing managed $175 million for clients (as of December 31, 2018). The company grew assets and clients over time. In the early 2000's the company had 150 client households and in recent times had 300 client households. The company worked with retired current oil and gas executives who were approaching or entering retirement. The average account balance of was between $500,000 to $800,000.

The firm also did very little advertising and added clients by referrals from existing (and I might add satisfied clients). In fact the firm had a 97% retention rate over a 10 year rolling period among clients which shows how happy clients were. Clients of the firm were invited to meet with their advisors at least once a year (however some clients visited with their advisor more frequently).

Robare had been practicing financial planning for clients in the Houston area since 1977 (32 years of experience), was a Chartered Financial Consultant (CHFC), a Certified Financial Planner (CFP), and Chartered Life Underwriter (CLU) it should be noted that having all these designations is not typical. In addition to this Robare passed 7 different exams in the investment industry. Clearly, Robare had experience in the investment/financial planning world. Prior to this allegation from the SEC Robare according to his BrokerCheck record never had any type of infraction brought either from a client or any regulatory authority. 

In 2004, Robare entered into revenue sharing agreement with Fidelity Investments (their custodian who would actually hold the securities of clients and provide support for trading and back office needs). Revenue sharing agreements work by allowing financial advisors to invest in different funds for their clients and then the financial advisor gets revenue for investing in those funds (similar to a commission-just like real estate brokers, car sales people, salespeople, and other professions). Robare as part of their financial planning for clients would recommend mutual funds for clients to invest in. Robare created model portfolios of various mutual that didn't contain any transaction fees. Some funds do have transaction fees and many times clients have to pay the transaction fees (there are advisors that do recommend these products). There were some funds that weren't associated with Fidelity that were no transaction fee. For recommending the funds that weren't associated with Fidelity nor had any transaction fee Robare would receive between 2-12 basis points (a basis point is 1/100 of a 1%). However, Robare had to pay Triad (an outside firm) a 10% fee (so the amount Robare would receive was actually 1.8%-11 basis points). So for example if a client invested $100,000 Robare would only earn a whopping $18-$110! Between September 2005 and September 2013 Robare earned $400,000 under the revenue sharing arrangement (which would be around 2.5% of the firm's revenue). It appears on the surface that given the lack of revenue generated from the revenue sharing agreement someone could conclude that these funds didn't change the recommendations from Robare. It is important to note Robare was never recommending the funds based off the fee he would receive. During the financial crisis in 2008 Robare and his firm actually moved money of clients into funds that didn't have commissions to save clients money.

In 2004 when Robare was exploring the revenue sharing agreement they asked Fidelity (their broker/dealer and custodian) if their clients would incur any additional fees and Robare was told no and that the fees would come from the mutual funds on the Fidelity platform (mutual funds will pay custodians like Schwab, TD Ameritrade, and Fidelity in order to get more access to financial advisors). When Robare entered the agreement with Fidelity however it wasn't even clear which funds were eligible for revenue sharing nor was Robare ever given a list of funds that were eligible for revenue sharing. Also given their agreement with Fidelity the advisors attested it wasn't even clear that they knew what funds paid what revenue sharing fees as the amounts would constantly change. Even when Robare asked Fidelity for a spreadsheet of the list of funds and the fees they paid he would testify it was "virtually unintelligible" and "too difficult" to determine what the fees were.

Robare in their 2005 ADV Part II (advisors must provide this to clients at least 48 hours before entering an agreement/contract) which can be found here it is added that that representatives of the firm "may receive selling compensation from such broker-dealer". It should further be pointed out that in their 2003 ADV (even before they entered the revenue sharing agreement) stated that representatives of the Robare sold products for sales commissions. Clearly Robare disclosed that some of the products they sell have sales commissions. Also clients are given this disclosure before they even enter the relationship with Robare they could question or ask Robare how this arrangement worked. Of course with the SEC no amount of disclosure can ever be enough. The SEC would bring their complaint against Robare in 2014 (10 years after Robare entered into the revenue sharing agreement!). In 2016 the SEC ordered Robare to pay a civil penalty of $150,000. 

Now you might ask who was doing the compliance work for Robare? Robare had hired multiple compliance advisors to help him and his firm with complying the with Form ADV. What is ironic is even when Robare was audited for their Form ADV in 2008 the SEC didn't have any concerns (the SEC would letter testify that this was the best result a firm could receive). It should also be pointed out that Robare hired multiple different compliance firms who never found any issues with the Form ADV as well (and any changes the compliance firms recommended were implemented by Robare).

What is even more ridiculous is that clients before they even opened an account with Robare were told 7 times (page 36 if you want to see all the instances) of the possible conflicts of interest. I wonder if telling clients another 7 times would have changed anything. Triad who Robare initially used for the revenue sharing agreement even audited the ADV of Robare and didn't see any issues with it. Even the SEC testified that the firms should not include every possible conflict of interest since "it should be made understandable to the client". 

Now let's get to the heart of what the SEC alleges. The SEC claims Section 206 (2) of the Investment Advisors Act of 1940 was violated by Robare. The Investment Advisors Act of 1940 under Section 206(1) and (2) say that "it is unlawful for any investment adviser..to employ any device, scheme, or artifice to defraud any client or prospective client or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client". Clearly Robare was never trying to defraud his clients. In fact he often was looking out for their best interest by ensuring the funds clients purchased didn't have any transaction fees and the amount of revenue earned from the commissions were such a small amount of the overall business that no one could claim this was an influential factor. What did Robare tell clients that was factually untrue? 

Clearly, the SEC overstepped in the Robare case as the company clearly never deceived clients. Looking back even before Robare entered their revenue sharing agreements they always disclosed they may receive commissions  Also clients were informed of this in the forms they received and signed prior to entering a relationship with Robare. Furthermore, none of the 300 clients ever complained about this arrangement! Also even if Robare had disclosed more it wouldn't be beneficial to clients as Robare didn't even know what commissions they were receiving from Fidelity (as Robare asked Fidelity what the commissions were and didn't get a clear answer). The firm during the 2007-2008 financial crises  moved funds for clients into funds that didn't provide a commission to Robare showing the firm was trying to do the right thing for clients. I would even have more sympathy if a client filled a complaint but there is no evidence that a client ever brought forth a compliant.

Mark Robare has been in the industry over 30 years, was knowledgeable amount financial planning and investments, never had a disciplinary action in his whole career, had a 97% client retention rate, and even a judge found Robare and his partner Jack Jones to be "honest and committed to meeting their disclosure requirements. Robare and his firm communicated to clients 7 times that the firm may have a conflict of interest, the firm covered they may have a conflict of interest even before they switched over to a revenue sharing agreement, and even Robare didn't understand the degree to which they were receiving revenue sharing fees from Fidelity. Even if Robare knew what fees they were receiving from different funds under the revenue sharing they wouldn't be able to place it in their ADV as the SEC testified the ADV has to be "digestible" and easy to understand for clients.

As a consequence of what the SEC deemed as deceiving clients for not fully disclosing conflicts of interests Robare will have a disciplinary action on his record that potential clients could find under BrokerCheck or by Googling his name. Not only would the firm loose future clients but may have existing clients start to doubt whether or not they should work with the firm (according to Robare the firm hasn't lost any clients). To add further insult to injury Mark Robare and his firm has faced legal bills that run $700,000. It is quite obvious that the SEC is trying to penalize someone for a problem that never existed or was brought forth by a client.

John Rockefeller Standard Oil Historical Earnings and Dividends vs. Charles Koch: Comparisons, Differences, and Who Was a Better CEO?

Recently I stumbled across a fascinating historical analysis of Standard Oil in terms of the historical dividends and earnings between 1882-1926. It is important to point out that John Rockefeller retired at the age of 57 years old in 1896 and would spend the next 40 years of his life in retirement. Given I have covered Charles Koch and Koch Industries for many years I thought it would be good to compare the two CEO's given: they both are in the oil and gas business (however these days Koch Industries is much more diversified than in the past), they both have been vilified, and they both have a good long term track record of running successful businesses. What is interesting is how in some ways these men are similar and how they have their differences despite between in similar industries and two of the wealthiest men of their eras.

Charles Koch was in his early 30's when he became the CEO and John Rockefeller created Standard Oil before he was the age of 30. Even though Charles had inherited Koch Industries it should be pointed out that Charles was in charge of the engineering division which had $2 million in sales but was just breaking even and the refining business earned $1.8 million on $68 million of revenue (a little under 3% profit margin). Rockefeller who started out as an assistant bookkeeper was known in his younger days for knocking on the doors at the age of 15 of businesses in Cleveland for 6 days a week for 6 weeks until one business made him a job offer. The first year Rockefeller went into business for himself he had revenue of $450,000 and a profit was $4,400 (profit margin of less than 1%). It is interesting that both had businesses early on that were low profit margin businesses.

Rockefeller even though he would work hard  According to biographer Ron Chernow Rockefeller was a "classic workaholic". Although Rockefeller worked very hard he would nap daily after lunch and after dinner doze off in his lounge chair and would spend 3-4 afternoons during the week at home (gardening and enjoying the outdoors). John Rockefeller felt it was better and more efficient to work hard but then to have down time to recoup to improve his productivity (sounds like a work life balance to me). In his younger days Charles was a workaholic who in August 1968 called a meeting at 4 P.M. on a Sunday that ran until midnight and it was expected that executives to work Saturday mornings (when Charles Koch had children he would always "have lunch at Wendy's). Charles would put in 12 hour days at Koch Industries and then work from home some more. Charles according to his wife Liz plays golf 2 times a week but also gets to the office around 7 A.M. and also works until 6 P.M. (he works this late even when he isn't into Wichita). It appears that Charles Koch would be hardcore in his working habits compared to Rockefeller. Also it is important to note that Charles Koch who is 83 years old is still working. Rockefeller retired at the age of 57 years old and had a 40 year retirement. I wonder if Charles would call John a slacker for having so many years of his life in leisure.

Rockefeller was always obsessed with business efficiency. He would study a process and always see if things could be improved to make products cheaper and more efficient. Given the size of standard oil if there could even be a small incremental improvement it could ripple through the organization and lead to massive cost savings. One example of this was when Rockefeller visited a plant that made kerosene and asked a worker if the cans could be sealed with less solder. At the time 40 drops of solder were being used and Rockefeller questioned if fewer drops could have been used. The worker tested 38 drops but that led to leaks in the cans so 39 drops of solder were used and that didn't result in any leaks. Rockefeller in retirement said that small change in the first year saved $2,500 and the company increased their exports of kerosene which ended up saving the company over time hundreds of thousands of dollars. Every cost at Standard Oil was computed to several decimal places (Charles Koch would find this type of analysis useless as he writes in Good Profit "when measuring, accuracy should always be emphasized over precision. As we use the terms, accuracy is the degree of correctness that creates value. Precision goes beyond that, to near perfection. Perfection, thus, is the enemy of progress".

The hard work from both Koch and Rockefeller would be seen in the results of their businesses. Over a 25 year period from 1882-1906 Standard Oil increased earnings on average 11% per year and their dividends 11% per year. It should be pointed out that John Rockefeller retired in 1896 (however the earnings and dividends didn't drastically change after Rockefeller left). Charles Koch continuously grew Koch Industries as he invested 90% of the earnings back into the company. The annual growth rate of the Koch Industries from when Charles took until the present I calculated was about 21%/year. Koch Chief Financial Officer Steve Feilmeier said in this video that Charles Koch took over Koch Industries when the company had a net worth of $12 million back in 1966 and increased the amount by 7500 times. This would say that Koch Industries is worth $90 billion today and the annual compound rate over the past half a century has been 19% per year which would say that Charles Koch had a higher rate of growth than John Rockefeller over an extended period of time. However, it is important to remember that John Rockefeller started Standard Oil from almost nothing. Koch Industries paid out a lower percentage of their dividends than Standard Oil did. Between 1882 and 1906 Standard Oil paid out about 65% of their net earnings as dividends. Koch Industries would pay a fraction of their net earnings as dividends as the company only paid between 6%-7% of their net earnings as dividends which would allow Koch Industries to reinvest 90% of the earnings back into the company.

The hard work and reinvestment paid off personally for both Koch and Rockefeller. Currently it is estimated that Charles Koch is worth $45 billion. The net worth of John Rockefeller adjusted for inflation today would be $395 billion today. It was said that Rockefeller had a net worth that would be equal to 2% of the national GDP. In the 1890's Rockefeller was receiving $3 million per year in dividends which would be close to $80 million per year (in 2018 dollars). In 1918 it was estimated Rockefeller had taxable income of $33 million (or about $555 million in current 2018 dollars) with a fortune of $800 million (or a dividend yield of around 4%). I calculated in this post Charles Koch earns roughly $377 million per year in dividends from Koch Industries which would say the dividend yield on the stock is only 1%. Koch traded a lower dividend yield for a higher growth rate.

Charles still maintains the same home in Wichita (built in 1974) and has a 5 bedroom, 6,000 square foot home (with a caretaker apartment) in Aspen and a home in Indian Wells, California. John Rockefeller had a home in New York City, an estate in Lakewood, New Jersey, and estate called Kykuit, a home set on 3,000 acres of Tarrytown, New York, and a winter home in Ormond Beach, Florida. Rockefeller had two passions God and golf (he played golf every day). He tended to sometimes show Rainman like tendencies doing the same things the same time everyday. John Rockefeller would spend his time working, with family, charity work in his later years, exercising, and gardening. Charles on the other hand still enjoys reading, he does his 90 minute workout (30 minutes on the elliptical, 30 minutes of weight lifting, and 30 minutes of Pilates)

Charles doesn't like to waste any time. Nancy Pfotenhauer once said that if Charles is in the elevator with you he will take the time to make it a learning opportunity. Also when Charles would drive himself to work he would listen to books on tape for his 10-15 minute commute as Charles says "there is so much to learn". Charles was also a voracious reader and at least in the 1990's would spend 2 hours a day reading of economics, philosophy, psychology (he would read Tom Clancy novels for fun).

Charles Koch would be a master negotiator and was said to even negotiate the hyphen on a 50-50 deal. John Rockefeller would always look at the numbers of the business to see how the company was doing (Rockefeller had an accounting background as a bookkeeper). He made sure the company kept track of all the costs for everything it did and could account for all the financial statements. Charles probably wouldn't be as focused on the precision of the numbers but when Charles Koch does deals he looks at the bottom line and looks at the numbers and doesn't get emotional according to Koch Industries Chief Financial Officer Steve Feilmeier.

In terms of management Rockefeller valued employees who were honest, intelligent, hard working, and efficient. In meetings he often would poll other employees first before making a decision and
would make a compromise to maintain cohesion. Also even when employees or others could get angry at Rockefeller he kept calm and didn't yell or loose his cool. Decisions however had to meet unanimous approval before proceeding. It has been said that Charles Koch as a boss can be fair, but demanding, but will give Koch employees the ability to make decisions (and reap the benefits/consequences of those decisions). One of the biggest things with Charles Koch is integrity. Once Richard Fink had someone call for him at Koch Industries and wasn't honest about the reason he could take the call. Charles Koch had a discussion with Fink on the important of being honest no matter how small the lie is.

Charles almost had a nervous breakdown in the 1970's when the company unfortunately had lost a substantial amount of money on oil tankers-it was estimated to be $500 million (Charles would have to fly back and forth between London to renegotiate the debt). John Rockefeller at the age of 55 was on the verge of a nervous breakdown and had to seek medical attention. Rockefeller who was working hard and also getting more involved. Rockefeller's physician Dr. Hamilton Biggar said that "a little more would have killed him". At the time Rockefeller was under a lot of stress (getting some 50,000 "begging letters") and suffered from insomnia. The doctor told John Rockefeller to relax, exercise, and watch his diet. As a hobby John D picked up golf to relax. Breakdowns seemed to run in the Rockefeller family as John Rockefeller Jr. suffered similar issues. His son joined Standard Oil at the age of 26 with the intent of working at the company his whole life. Even before going to work he wrote a letter to his mother stating he didn't have very much confidence in his abilities but was ready to work hard. However, over time John Jr. became disenchanted with the work and the controversies surrounding Standard Oil and at the age of 36 (only after 10 years) left Standard Oil and took took off 6 months to recoup (John Jr. had a history of breakdowns from the time he was 13 years old) to get more involved with philanthropic efforts.

At the end of the day even though Charles Koch and John Rockefeller created wildly successful business in the oil and gas industry that did have some similarities and some differences. Both started with businesses that were large margin businesses. Charles was much more hard driving then John D. was. Even though both have been called tyrants in reality they delegated tasks and never commanded to their workers what should or shouldn't be done. Both almost had mental breakdowns during their tenures of running large enterprises. Both were interested in improving processes to better improve the companies they worked for. Both valued integrity and honesty. Rockefeller had a history of reinvesting earnings back into the company to grow the company, however Koch religiously invested 90% of the annual earnings back into the company. Standard Oil would on average invest 35% of their earnings back into the business. However, adjusted for inflation John Rockefeller had a larger net worth than Koch and more annual dividends. It is hard to compare both head on given they were of different eras and no one could answer how John Rockefeller would do in modern times. Both were brilliant in their methods for running, growing, and preserving their businesses over an extended long period of time. Truly Charles Koch and John D. Rockefeller stand out as two of the best businessman of all time and the ways they ran their respective companies could be learned by modern business people.

Sandy Springs Georgia A Model of a Privately Run City-Will Others Follow?

Something that I recently read about was Sandy Springs, Georgia. Sandy Springs, Georgia is a city in Fulton County, Georgia (about 15 miles north of Atlanta). What is unique about Sandy Springs is the city has for the most part privatized itself which has to led to more efficiency, lower costs, and higher satisfaction from residents, and the city doesn't have to worry about any unfunded pension liabilities, and hasn't had to increase taxes as a result.

Back in December 1, 2005 the city of Sandy Springs was incorporated. Before the city was incorporated a study from the University of Georgia said that 828 employees would be needed. The city has 271 public employees and 200 contractors for a total of 471 employees (about a 43% reduction from what was estimated). All other functions (except for the police and fire department) are outsourced. Despite the few number of city staff workers the town runs very efficiently. The town doesn't have any backlogs for permit requests, offers a 24/7 service hotline (most cities don't even have a line of communication with residents). The 911 is operated by a private company that is based in New Jersey. The outsourced companies also outsourced human resource, finance, accounting, information technology, permitting, trash collection, motor vehicles, back office operations for: police, fire departments, courts, parks and recreation. In June 2005 the city had to find vendors that could support public services. In just six months the city got the contracts it needed. The beauty of the contracts was the city could dictate the types of benefits/services they wanted which would also dictate the price as well. The city had written in their contracts that problems would be responded to within a 48 hour period and someone had to answer 7 days a week 24 hours a day.

For instance for potholes there was a number residents could call and talk to a live person 24/7 (in the contract the city can dictate how many rings are necessary). If there is an emergency the city will respond within 2 hours. The city pays for two people to operate road maintenance trucks 5 days/week but then tweaked the contract to just 9 days and as a result saved $50,000 (the beauty about about markets is tweaking things as conditions change).

When Sandy Springs started to outsource the city saved about $20 million/year (or a 40% reduction of their budget). The city doesn't even have a city hall and rents regular office space like regular businesses do. With all the savings from outsourcing the city was able to save $35 million as a reserve. Sandy Springs had a surplus $45 million during the recession. The city also is in quite good financial good shape, no loans, and no unfunded liabilities for the pensions and other benefits. In 2011 Sandy Springs looked to other providers beside CH2M and as a result saved the city $7 million by dividing the contracts between 6 contractors.

The city has been so efficient that it has been able to set aside monies to actually improve the infrastructure of the city. The savings has led the city to make $72 million in capital improvements since it was incorporated. With the savings the city has repaved 147 miles of streets, worked on 874 storm water projects, and built 32 miles of sidewalk. What is quite interesting is that after the changes were made the lowest vote that any politician in Sandy Springs received was 84%. Clearly, the residents appreciate the service for their taxpayer dollars.

The city of Sandy Springs, Georgia offers hope to other cities who may be wasting billions of taxpayer dollars, hiring more people than necessary, and ultimately not providing the residents of the city the best service (assuming they even offer this in some areas). 

Take the case of the largest city in the United States (New York City). If even a fraction of the changes were made in New York City the city could run much more efficiently using fewer tax payer dollars too. For instance New York City employees with 325,000 employees. The city spends $92.2 billion per year. Recently, just the future health care costs for New York City has an unfunded liability of $98 billion. It is estimated that the New York City pension liabilities is $142 billion and continuing to grow everyday as no changes are in the near foreseeable future. You throw on top of all this a $100 billion of unfunded medical liabilities (NYC employees qualify for free healthcare after 10 years of service). Now let's say New York City started to contract out some of the services like Sandy Springs Georgia (assume for just the moment) did they would be savings billions of dollars per year meanwhile improving the satisfaction of New York City residents. Assume the city could conservatively save 20% per year. Using a budget of $92.2 billion per year the city would save about $18 billion per year which adds up to some serious money. The city could use a portion of the savings to pay down the unsustainable unfunded liabilities, pay down debt, and or use a portion to reinvest back into the city. The number of employees the city would most likely be cut in half and the best and most important feature is New Yorkers would be able to get better service, faster and more efficient service from their local government. 

Of course the political reality of this happening in NYC or elsewhere is very low. Given the political power to make a change let alone a drastic change like this wouldn't be easy. Also many individuals, groups, and unions have a vested interest in making sure certain things don't change since their livelihood depends on it. The only practical feasible way it could work is if certain portions were outsourced (I would be curious to see what people would say when they have a response to a pothole within 48 hours). 

In the end the idea of Sandy Springs, Georgia is fascinating story of outsourcing government services that reduces the cost, improves the efficiency, and most importantly increases resident satisfaction. It should be pointed out that Sandy Springs is a smaller city (100,000 people) so it would be hard to replicate in larger cities. However, if other smaller city starting adopting these strategies it could catch on. Oliver Porter who was a big influence for Sandy Springs published a how to book of how to book (which gives a step by step direction of how to make the changes). Hopefully this idea will be spread and shared to others as local governments are in need of reducing costs and improving customer service.