Charles G. Koch has been co-owner, chairman and CEO of Koch Industries, America’s second largest private company, since 1967. His net worth is estimated at more than $48 billion. Today, he explains why organisational culture has been crucial to the success of Koch Industries.
The importance of organisational culture
Every organisation has its own culture. If that culture is not created consciously and purposively, it will degenerate into a cult of personality or an “anything goes” environment. Whether good or bad, an organisation’s culture is determined by the values, beliefs and conduct of its members, as well as the rules and incentives set by its leaders – and modelled by them behaviourally. Koch’s core values are incorporated in our Market Based Management® Guiding Principles (MBM) and our Code of Conduct, which experience convinces us are critical for good profit in the long term.
MBM requires a culture with many virtues that, fortunately, can frequently be cultivated if they are underdeveloped in new hires. These attributes set the standards for evaluating policies and practices, measuring conduct, and establishing the norms of behaviour and shared values and beliefs that guide individual actions. But it’s important to recognise that they are guidelines, not specific orders.
Setting expectations according to general principles rather than specific orders not only helps employees understand the importance of their work; it frees them to think and innovate. We’ve experienced little progress when our people mindlessly followed instructions – whether they had good values or not.
Any group of people, whether a society or an organisation, functions more effectively when guided by general rules of just conduct rather than specific commands. As the French writer Frédéric Bastiat observed: “The surest way to have the laws respected is to make them respectable.” Leaving the particulars to those doing the work encourages discovery and enhances their ability to adapt to changing conditions.
Unless Koch remains humble, our company will be caught off guard by creative destruction. We must never think of ourselves as too big – or too good – to fail. To get the full benefit of MBM, all employees must internalise our core values and exemplify them in everything they do.
Those values, which Koch refers to as its Guiding Principles, are drawn from three different realms. The first is the underlying framework of the free society, where innovation and productivity thrive – to the degree that the framework is upheld. The second category is the theories of philosophers and psychologists whose behavioural prescriptions strike me as refreshingly reality-based – thinkers such as Hayek, Planyi and Maslow.
The third is my own life experience, which was spent working with all different kinds of people. I’ve been honoured to have worked with many with the right kind of values, most notably my father and Sterling Varner. But there were many others I was exposed to whose values I questioned: my classmates back in Quanah who were mystified as to why I did more than the minimum needed to pass a math exam; the business leaders who hurt so many Americans when they promised riches but delivered bankruptcy; and the U.S. politicians who promised to eliminate poverty but made it permanent instead.
I am not a perfect exemplar of ideal values. No one is born with the right values, myself included. I had to learn the principles that are important for success in business, and how they are best articulated and applied. Everyone, in every business, and in every position within a company, can be constantly learning and strengthening the values that drive good profit.
Every year, I am subjected to the same kind of evaluation that is done throughout Koch – an evaluation of my performance by those I work with most closely. I want to know how to increase my performance by those I work with most closely. I want to know how to increase my contributions – and I get some great suggestions.
Guiding principles in action
Maintaining and enhancing the most beneficial culture at Koch requires every employee – including the CEO – to internalise and practice these Guiding Principles:
- Value creation
- Principled entrepreneurship
- Customer focus
Although these principles may seem like common sense, developing the ability to apply them routinely and instinctively to achieve results requires constant reflection and practice. As Voltaire noted, common sense is not so common.
Many companies have principles somewhat similar to Koch’s Guiding Principles, but rarely are they the basis for a company’s culture. Very few companies take a systematic approach to making them central to every aspect of employment. Failing to do so ensures that the principles become nothing more than empty slogans, buzzwords or posters on the walls, with managers often widely viewed as hypocrites.
At Koch we strive to hire and retain only those who embrace our principles. We give detailed explanations of our Guiding Principles and their role (investing a great deal of time and resources in mentoring and training), and clearly and consistently communicate the expectation that these principles guide employee behaviour.
We ensure that opportunities, advancement and compensation depend on how well an employee reflects our Guiding Principles. We also give regular feedback and will ultimately terminate employees who do not act in harmony with them. That’s how serious we are about ensuring our culture is based on principles.
For MBM to be applied effectively, results must be the focus. The challenge is to get beyond the superficial stage in which employees understand the words and concepts but haven’t yet been able to effectively apply them. Promoting those who cannot “walk the talk” undermines our ability to create value and damages the culture. Like chess players, we must apply the concepts and basic rules in a way that creates winning strategies. A key talent for leaders is the ability to identify people who are able to apply these principles to achieve superior results.
Charles G. Koch is one of the most successful businessmen in the world. This extract is from his book Good Profit.