The philosophy at the heart of the Koch brothers' massive business empire

Is Market-Based Management a real thing?

This question dogged me for several years as I reported a book about Koch Industries. There is no question that Koch Industries is successful. The company’s annual sales are larger than that of Facebook, Goldman Sachs and U.S. Steel, combined. Koch makes the kind of products that people can’t live without — gasoline, fertilizer, clothing, building materials — and it makes stunning profits doing so. Charles and David Koch, who own most of the company, have a combined net worth that is greater than that of Bill Gates or Warren Buffett.

What isn’t obvious about Koch Industries is the reason for all this success. How did the Koch brothers get so rich? After all, they didn’t invent something like the iPad or the Tesla. And barely anyone can name what products they sell.

When I met Charles Koch in 2015, he told me the same thing that he tells everyone who will listen. Koch Industries is so successful because of its culture, which has been spelled out in a remarkably detailed and well-codified philosophy called “Market-Based Management,” or MBM for short. You want the secret for Koch’s success? Then understand MBM, Charles Koch argues. You want to replicate Koch Industries’ success? Then practice MBM.

Former Koch Industries executives and employees have described MBM to me as “cult-like” — their word, not mine. It’s easy to see why. Charles Koch himself has written that practicing MBM requires “total conversion.” You either practice MBM 100% of the time, or you’re doing it wrong. When a new hire joins Koch, he or she will go to a classroom in the basement of the company’s headquarters in Wichita, Kansas, where they attend a multi-day seminar on MBM. They will watch a video presentation of Charles Koch talking about the philosophy. They will break into small groups to do simulation exercises. They will be taught an entirely new vocabulary and set of operating principles. When the seminar is over, they will go to their desks and pass by cubicles where the “10 Guiding Principles” of MBM are taped to the wall. When they go to the breakroom, they will grab disposable coffee cups that have the principles printed on the sides.

But is any of this real? Is MBM really the blueprint for creating a prosperous company, a prosperous society and even a prosperous personal life, as Charles Koch claims it is? Or is it baloney?

Plenty of critics point out that MBM seems like nothing more than a collection of empty slogans. Ed Crane, the former head of Koch-funded think tank the Cato Institute, refused to teach MBM to Cato’s members, according to Washingtonian magazine. Crane described the philosophy as garbage, according to the magazine, and he said it was only perpetuated because no one wanted to offend Charles Koch. There is reason to believe that the whole thing might be hollow. After all, those

“10 Guiding Principles” include things like “Integrity,” “Knowledge,” and “Humility.” This seems like the stuff of crocheted quilts, not a serious strategic plan.

MBM is a mashup of management theory taken from thinkers like Michael Porter at Harvard (who writes about gaining and exploiting competitive advantages) and economic theory from philosophers like Ludwig von Mises (who wrote about the way that free markets set accurate prices for goods and services). Charles Koch mixed in some strategic concepts that are specific to Koch Industries’ business lines like commodities trading. When MBM mentions “humility” and “knowledge” for example, employees know that they are talking about important trading tactics. “Knowledge” refers to the deep data analysis Koch’s traders perform on energy markets while “humility” refers to their acknowledgment that there is a limit to what they know; hence their efforts to try and factor in the unknowable risk factors that can surprise them on the downside. 

I have come to the conclusion, after all this time, that MBM is in fact a very powerful thing. It is responsible for much of the success at Koch Industries. I just don’t believe that it is powerful for the reasons that Charles Koch and other company executives say it is.

The power of MBM, in my view, is that it accomplishes one of the hardest goals in corporate life — it creates true, deep and sustained solidarity among Koch’s workforce. Koch employees speak a common language — when they use terms like “point of view,” they mean something totally different than you and I might mean. Koch employees have a common goal and a common set of incentives to reach that goal. Employees understand that Koch Industries is a mini-society of its own — call it Kochland — and that they have certain roles and responsibilities within that society. Each employee is treated like a property owner in a simulated reality; if the employee does well, their property, their responsibilities and their compensation will increase. If they do poorly, their property will shrink and they will eventually be exiled. People always understand where they stand.

Because Koch employees speak the same language, share the same goals and work under the same incentive system, any given employee can transfer into any part of this wildly diverse company and still be a success. A rising star at Koch can go from the fertilizer division to the paper towel division to the commodities trading division to the chemical division and still feel at home, doing essentially the same job and speaking the same language with co-workers. This isn’t an exaggeration. I saw numerous examples of the career path described above. One Koch employee, named Jim Hannan, started as a finance guy at Koch, which drew on his background as an accountant. He worked in Koch’s mineral division, then worked in a mergers and acquisition group, then shifted to Koch’s chemical division (called Invista), then shifted to oversee operations at Georgia-Pacific, a wood and paper company, where he became CEO. Then Hannan was promoted to oversee a division of Koch that includes Georgia-Pacific along with a glass company called Guardian Industries, a technology company called Molex and the chemical company Invista. All the while, his job never changed in a fundamental way.

Workforce solidarity seems like a squishy concept. Who cares if everyone speaks the same language as long as they get the job done? It might seem unimportant. But I have come to the opposite view, after reporting on Koch. In Koch’s workforce, I saw a cadre of people who wake up every morning and believe in what they’re doing. They are almost desperate to give everything they’ve got to Koch Industries in order to prove themselves. I’ll never forget interviewing one former employee who had been fired for poor performance. We were alone, he was free to speak candidly, and all he could do was sing the praises of Koch Industries and MBM. He learned more at Koch than he could have learned at business school, he told me, and he applied MBM to his daily job after he was fired. Again — this was the level of devotion from someone who had been forced out.

Of course, solidarity can have its down sides. There is a fine line between group cohesion and toxic groupthink. Koch has crossed that line several times in the past.

In 1996, Heather Faragher was a wastewater engineer at Koch’s oil refinery in Pine Bend, Minn. She enthusiastically embraced MBM when she joined the company, but things changed when she had to challenge it. Faragher monitored water pollution levels at the refinery to make sure that the company didn’t pump too many toxins into the nearby Mississippi River.

Sometime around June 1 of that year, something started going wrong inside the refinery. The refining equipment started pumping out extraordinarily high levels of ammonia, a pollutant that’s harmful to human and animal health. If Koch continued emitting the high ammonia levels, it would violate its pollution permits with state and federal authorities. The refinery managers had a choice: They could shut down the plant and figure out what was going on, which would hurt profits, or they could continue polluting and face big fines or even charges. Neither option was great. But there was also a third choice — the refinery could quietly dump its pollution in nearby wetlands and forests, where authorities couldn’t monitor it. This would keep the refinery running and avoid pollution fines.

Faragher told her bosses, clearly and repeatedly, that this was the wrong thing to do. But she was in a weak position to challenge them. One of the earliest written versions of MBM was a pamphlet that Koch Industries distributed to employees. The pamphlet pointed out that employees like Faragher worked in “non-profit” divisions of the company — like human resources and environmental compliance — that were necessary but didn’t generate profits. The use of such divisions had to be limited or else they would create a “cost spiral” that could deeply hurt the company, the pamphlet said. The net result of this theory was that Faragher was put on lower footing than her bosses. The plant operators would listen to her, but they had the final say.

As it happened, Faragher was essentially ignored and the operators repeatedly flushed ammonia-laden water out into the wetlands. Faragher cooperated with state and federal authorities who eventually imposed a record-breaking criminal fine on Koch Industries for the pollution.

Faragher was never rewarded for doing the right thing. She said she felt alienated, isolated and marginalized at Koch after she spoke out about the pollution. The cohesion of MBM had been turned against her. She left the company and never was able to get a job again in Minnesota, where she had grown up and wanted to work.

Faragher’s story isn’t an aberration. In 2009, a compliance attorney named David Hoffmann faced similar pressures. Hoffmann worked at Koch’s lobbying office in Washington, D.C. where he led a small group of employees trying to figure out how Koch might operate in world where greenhouse gas emissions were regulated. This was at a time when Congress was on the cusp of passing a “cap and trade” bill that would have put a price on emitting carbon dioxide.

Hoffmann thought his team was practicing the essence of MBM — they were challenging assumptions at the company and looking for ways that it could adapt to new challenges. But when he was invited to a meeting with Koch’s larger political team, he realized just how isolated he was in his views. During the meeting, Koch’s lobbyists and operatives dropped comments and jokes that made it clear they considered the whole idea of climate change to be a hoax, Hoffmann recalled. Rather than adapt to a world where greenhouse gasses were regulated, Koch chose to fight the effort. The company played a critical role in killing the cap and trade bill. Hoffmann’s study group had discovered ways that Koch might actually prosper under “cap and trade,” but the ideas went nowhere. In 2010, Hoffmann left the company.

The stories of Faragher, Hoffmann and others show the downside of intense solidarity and corporate cohesion. If a problem arises from MBM, it can be difficult to correct if an employee is unwilling to admit that MBM is flawed. And if MBM is somehow flawed, then the whole system might not make sense. As a result, employees who challenge MBM tend to leave the company. And those who remain attribute the company’s success to the tenets of MBM.

The drawbacks of MBM haven’t hurt Koch’s growth. The company continues to expand and deliver profits. There is no foreseeable future where Koch Industries goes under. While MBM might not be perfect, there is no doubt that it has played a huge role in this success. Koch employees really do feel like they are part of something special. They are more motivated than most employees I have interviewed. They really do communicate effectively with one another. This is real.

The exact code of MBM probably can’t be replicated anywhere else. But maybe it doesn’t need to be. The important part is not the technical principles themselves; it’s that the principles are taped to cubicle walls and coffee cups, and that employees actually believe in them. If other companies can capture that kind of lightning in a bottle, they could have a workforce like Koch’s: Unified, motivated and marching in one direction.

As Charles Koch would be the first to say, it’s easier said than done.

Christopher Leonard is the author of "Kochland: The Secret History of Koch Industries and Corporate Power in America."