The Koch Brothers are in no shortage of controversy. Over the years, they’ve become political boogeymen which has vastly overshadowed their business careers. But politics aside, no one can deny that they’ve built an incredible multi-generational business. Koch Industries generates over $110bn revenue, employs over 120,000 people, and is the second-largest privately held company in the US.
I recently read the book Sons of Wichita, by Daniel Schulman, a detailed account of the Koch family including both personal and business affairs. It’s a fascinating story that starts off with Fred C. Koch starting and growing a successful oil refining business.
Fred’s son, Charles, takes over the business after Fred’s unexpected & early death. Charles, only 32 when he took over the reins, grew the business from $250m in revenue to the $110bn a year behemoth that it is today. He also expanded the company beyond oil refining to just about every commodity imaginable.
The book reveals some pretty key insights into how the Koch family built generational wealth. These are some lessons that anyone looking to build a generational company can learn from.
Lesson #1 – Tight control and ownership of Koch Industries
It’s an understatement to say that it’s incredibly hard to keep a $110bn/year company private. The Koch family has gone to extra lengths to keep tight control of Koch Industries.
Charles famously said:
Koch Industries would go public literally over my dead body.
Staying private and having full control over a company has it’s obvious advantages – you own more of the pie.
But there was another reason why Charles wanted to keep the company private: the ability to make rapid decisions. He considered it a competitive advantage.
Publicly traded conglomerates had to get board approval for all major decisions. They did not have the ability to move anywhere near as fast as the Koch Industries. Charles often won competitive bids and projects because he could act quickly and didn’t need outside approvals.
Not answering to anyone, also allowed him to execute his long term vision for all Koch businesses.
Lesson #2 – Long-term view
When investors or entrepreneurs think of “long-term” they think 5, 10, or even 20 years. But building a multi-generational company requires a different mindset. For the Koch family, “long-term” means forever.
This mindset was deeply embedded within the family. It was obvious at a young age that Charles would take over the family business. His father, Fred, started involving him in all business matters very early. He groomed Charles so well to become his successor, that he was able to take over and execute his vision without a hitch after his early death.
Having a long-term view served as another huge competitive advantage. Koch Industries peers had a myopic view since they had to impress shareholders with quarterly results.
In contrast, Charles didn’t care about quarterly profits or making a quick buck. He was focused on creating sustainable profits over the long-term.
Lesson #3 – Modest but steady growth
Koch Industries never chased the next big thing or invested in the latest breakthrough technologies. Instead, Charles chose to stick to his (or to the Koch’s family) core competencies; buying raw materials, converting them into something valuable, and selling it wholesale.
Over his tenure Koch Industries compounded at around 18% per year. He understood that his business would grow modestly, and he was fine with that because he understood the power of compound growth over a long time period.
Lesson #4 – Focus on profit
Profit is the north star at Koch Industries. Every employee, down to the line workers, knew the profitability of their division. He also aligned incentives and paid out bonuses in relation to profit.
Charles was incredible at finding and investing in profitable business opportunities. Profitability was necessary at Koch Industries since they had no outside investors; profits fuelled their growth.
Lesson #5 – Reinvest
The Koch family didn’t wildly spend their hard-earned profits on themselves. Instead, they heavily reinvested almost all profits back into the business. In fact, most years, Koch Industries paid out a dividend of just 6% of their profits to shareholders (mostly family members).
This is what ended up creating a rift between the Koch Brothers. Charles and David wanted to realize their long term view by reinvesting as much as they could back into the business. However, Bill and Fred wanted to cash-out by selling the company or taking it public so they could enjoy their wealth.
Lesson #6 – Market-based management
Market-based management is a term that Charles coined. It stems from his libertarian philosophies, in that his company should operate like a free-market economy with little administrative intervention. Divisions were run as separate businesses with their own P&L, and the managers made decisions on their own accord.
Koch Industries, despite its size, was a fairly flat organization. Decision-making was very decentralized, Charles didn’t get in the way of his employees making key decisions.
Koch Industries didn’t care about credentials either, they hired and promoted based on merit. Employees rise through the ranks based on the value they add. In fact, they had high-school educated farm boys from Oklahoma running multi-million dollar divisions. Charles hired, trained, aligned incentives, and then moved out of the way and let his employees operate as they wish.
Lesson #7 – Generational wealth comes at a cost
It’s hard to talk about the Koch family without bringing up the negative.
- Relentless focus on profits led to the neglect of safety and environmental protocols. This has resulted in disastrous oil spills, workplace injuries, and even deaths.
- Heavy reinvesting of all profits led to bitter lawsuits and family breaking up. There was a 20-year legal battle between the Koch brothers which tore apart the family.
The costs of creating generational wealth may not be as obvious to some people, but after reading Sons of Wichita, it was hard to avoid. Though non-monetary, the Koch family’s pursuit of wealth took a toll on them and their surroundings.
Final thoughts
Sons of Wichita does a fantastic job telling the story of the Koch Brothers. The author takes both the good and the bad to give you a neutral view of the entrepreneurial family.
It may be an unpopular opinion, but I am impressed with what Charles has done with Koch Industries. Especially considering how hard it is to create a multi-generational business, and how often we see heirs squander the fortune created by their parents.
I don’t condone the negative behavior, the controversies, or their political views. I do however appreciate the Koch’s family’s ability to truly think long term and make shrewd business moves.
This book is a must read to anyone looking to grow their business and build generational wealth.
Hi there! I’m Jay Vasantharajah, Toronto-based entrepreneur and investor.
This is my personal blog where I share my experiences building businesses, making investments, managing personal finances, and traveling the world.
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