The worst failures at Koch Industries came from violating the principle of hiring first on values and second on talent, putting destructively motivated people seeking power and control into leadership positions.

(00:00:00) What an honor to be here. (00:00:01) Thank you for hosting us, Forbes, and welcome. (00:00:04) This will be put out as the all-in interview, so I'm really excited to share this conversation with everyone on the world, on the internet, and to get some time with Charles Koch, Chase Koch. (00:00:15) Chase and I have known each other since 2013. (00:00:19) Yep. (00:00:19) when we overlapped in the agriculture industry, got to know each other. (00:00:23) We've been business partners. (00:00:24) And Charles and I have gotten to know each other a few times over the years. (00:00:28) But I'm really excited for this conversation tonight. (00:00:30) So Charles, thank you for being here. (00:00:32) Thanks for having us. (00:00:33) It's an honor. (00:00:38) Every few years, a new ad channel opens before the market catches on. (00:00:42) That's Axon.ai right now. (00:00:44) The AI ad platform behind one of the biggest runs in tech with access to over a billion daily active users. (00:00:49) Full-screen video ads in mobile games watched for a median of 35 seconds. (00:00:53) Businesses are profitably spending hundreds of thousands of dollars a day on it, and most advertisers don't even know it exists yet. (00:00:59) The window is open at Axon.ai slash all in. (00:01:04) In Silicon Valley, entrepreneurs and even mature company CEOs always like to learn about the story of other businesses and the success of those businesses. (00:01:13) And I've always felt like Koch Industries was that untold story. (00:01:17) probably the most profitable private family-owned business in the world. (00:01:21) Maybe I'm off on a couple of points, but certainly up there. (00:01:24) And one of the most impressive business stories because of the evolution of the business, which I'm hopeful we can hear a little bit about how that evolution came to be tonight. (00:01:34) And just for some statistics, if Coke were publicly traded, the revenue would put it easily in the top 25 of the Fortune 500. (00:01:42) It's a family-owned business based out of Wichita, founded in 1940. (00:01:47) by Fred Koch, with businesses ranging from energy, agriculture, chemicals, building products, consumer products, even cloud computing. (00:01:56) And a very active minority investment portfolio with 120,000 plus employees, that statistic might be off across 60 countries. (00:02:04) Very unique operating model, which we'll get into today, including principles around disruptive innovation of the business, reinvesting 90% of profits in new businesses and growth, (00:02:15) meritocratic values. (00:02:17) And I'm hopeful that tonight we can take an opportunity to hear about the evolution of the business and talk about some of those principles. (00:02:23) And maybe we can get started, Charles, if you could give us a sense of the scale of the business, what are the business lines that you operate today, and maybe provide a little more color to those high-level statistics I shared today. (00:02:35) I can go back through some of the history and the failures and successes, but I'll go (00:02:44) through what we've grown since the early 1960s. (00:02:49) And then we had 300 employees. (00:02:54) Now we have more than 130,000 in 60 countries. (00:03:01) And we have increased in value 9,000 times over that period. (00:03:08) When did you join the business? (00:03:09) In 1961, full-time. (00:03:12) I'd been working (00:03:14) my father, we lived on a farm, and he told me at age 6 he didn't want me to be a country club bum. (00:03:24) So he made me work in all my spare time, which I hated. (00:03:29) And so I was always in trouble. (00:03:32) And so he was kind of tough on me, rightfully so. (00:03:37) And thank God he did. (00:03:40) Years later, I asked him, (00:03:42) Pop, why were you so much tougher on me than you were on my younger brothers? (00:03:47) And he said, son, you plum wore me out. (00:03:51) When you came into the business, what was the scope of the business? (00:03:55) What was the business operating? (00:03:56) We had two main businesses. (00:03:59) One was to design and make fractionating trays. (00:04:07) That is that they separate liquids by differences in boiling points. (00:04:13) And then our largest business was a crude oil gathering system in Oklahoma. (00:04:20) And so my father, and I was, I finished just a few years earlier, finished MIT. (00:04:32) And I was, (00:04:34) working for Arthur D. (00:04:35) Little, then a leading consulting firm. (00:04:37) And I was, and you'll think this is a joke, at age 25, I was doing management consulting. (00:04:44) I mean, I have to laugh at the absurdity of that. (00:04:48) But they were paying me for it, believe it or not. (00:04:54) So my father called me and he said, son, (00:04:58) I want you to come back and join the business. (00:05:00) And as tough as he had been on me, and as I say, rightly so, I declined. (00:05:07) So he called me a few weeks later and he said, son, either you come back to run the company or I'm going to have to sell it because my health is bad and the companies aren't doing well and I don't have long to live. (00:05:25) So I agreed because (00:05:30) I, for a number of reasons. (00:05:33) One, the first one is I got 3 degrees at MIT in engineering and I sucked as an engineer. (00:05:41) I mean, get that. (00:05:42) And so how'd you get through MIT? (00:05:44) Because I was real good at the math and the science and the theory. (00:05:50) And I was no good at making or operating things. (00:05:55) So I figured out pretty quickly that I wasn't going to make it as an engineer, so I needed to be an entrepreneur. (00:06:03) And because I was good at principles, and that's why we led, so I was always looking for principles that would help me contribute and succeed. (00:06:18) And that's what (00:06:22) That's what transformed our company. (00:06:24) So you come into the business, a couple 100 employees, you said? (00:06:28) 300 employees. (00:06:29) 300 employees. (00:06:30) And how did you think, was the mandate to grow the business? (00:06:34) Was it just to keep it stable? (00:06:35) No, it was, could I take a few minutes to go through those first two businesses? (00:06:39) Your show, I'm there, yeah. (00:06:40) That sounds great. (00:06:42) Okay, the first one was making fractionating trays, designing those, (00:06:50) We had a president then who was one of our principals, you don't want to be negative, is top down and obsessed with controlling everybody. (00:07:03) So he would send out memos every week demanding on what they spent, how did you spend it on, what did you do, did you do this right? (00:07:15) So they were, for us, matter of fact, they started ignoring him. (00:07:19) And then the whole culture was protectionist. (00:07:23) That is, when they sold the internals for a fractionating tower, they wouldn't tell them the design. (00:07:33) And, well, we need to know the design so we can correct it. (00:07:37) No, they wouldn't give it to them. (00:07:39) And then what's even worse, to satisfy the European market, they didn't even build a plant there. (00:07:48) They had multiple subcontractors do parts of a tray and then bring them all together and assemble with another contractor. (00:07:58) Now you can imagine how that was for speed and cost. (00:08:03) So we were losing our ass, if you excuse the expression. (00:08:08) And so I changed the management and changed the philosophy. (00:08:13) Okay, the first thing we're going to focus on (00:08:16) is creating value for our customers. (00:08:19) And then the second thing, we're going to empower our employees so they want to do this. (00:08:25) And the third thing, we're going to do a plant. (00:08:28) We're going to build a plant in Italy to satisfy the European market. (00:08:33) We're going to do it all ourselves. (00:08:36) And so we became profitable. (00:08:40) And then we started (00:08:45) adding related products. (00:08:50) And I'll get to that later. (00:08:55) And so we started growing. (00:08:58) Can I ask a question? (00:08:59) Yeah. (00:09:00) You come in at 25 plus or minus a little bit, and you see the problems at the business, it's not profitable, it's not being well managed, and you overturn the management team. (00:09:11) How did you have the confidence at this age, coming with the experience you had to take that level of action that quickly? (00:09:18) Well, it was life or death. (00:09:21) And my father said, you can run this business any way you want. (00:09:25) The only thing you need my approval on is to sell. (00:09:28) That's the way he talked me into coming back after I said I didn't want to, or I wasn't going to. (00:09:38) And then in 1970, what really helped is my brother, your brother David, joined the business. (00:09:47) And then he continued that growth. (00:09:50) And then you're now running a profitable operation. (00:09:55) You've got a European business. (00:09:56) And at that point, did you start to think about expanding into other products and other? (00:10:00) Well, that's it. (00:10:01) And this is, so I was learning all these different principles. (00:10:06) And what I saw we were doing, not here, not just here, but in other things, is we were building capabilities. (00:10:16) That is, I looked at it, we need to be capability-bounded, not industry-bounded. (00:10:23) Like, okay, you could say to a certain extent, because we were in crew or gathering, we're in the oil industry. (00:10:30) Oh, that means everybody was saying you need to be an integrated oil company. (00:10:34) You need to be in everything. (00:10:36) And I was applying divisional labor by comparative advantage. (00:10:39) No, you need to be in the part of it, of the industry, in the part of the value chain where you can create more value than others, otherwise you're going to fail. (00:10:50) And that's what we're seeing happening now. (00:10:52) There's more specialization by comparative advantage. (00:10:57) And so that's what, so I started this, I created this principle called (00:11:06) creating virtuous cycles of mutual benefit. (00:11:10) And what that led us to do is to start this never-ending cycle of growth, innovation, success, and failures, and failures that (00:11:33) when we did it right, that we learned from and made us better and taught us better how to apply principles to create value. (00:11:42) And we're still going through that. (00:11:44) We have a lot of failures. (00:11:46) And that's when you apply creative destruction in your new things. (00:11:49) If you're not failing at everything, (00:11:52) You're not doing anything new. (00:11:53) Where did you learn that lesson? (00:11:54) So what was the first major failure that, they always say you got to plan until you get punched in the face. (00:11:59) What was the first punch in the face? (00:12:00) Well, I had a bunch of them with that company. (00:12:05) It was called Coke Engineering then. (00:12:08) And like I said, okay, when we got into refining, we created petroleum coke. (00:12:14) So I said, let's come up with a (00:12:18) a way to use that as based to make activated carbon. (00:12:23) And that was a fair, we spent a fair amount of money on that. (00:12:26) And I just, we had a whole bunch of those. (00:12:30) And we've had many more. (00:12:32) How did you make the decision to shut it down or walk away? (00:12:35) At some point, a lot of entrepreneurs have this problem. (00:12:37) They build something, they're too in love with it, and they don't know when to say enough is enough. (00:12:42) Yeah, well, that's when enough is enough, when we lose our ass enough. (00:12:46) No, it's when we decide we don't have the capability to create superior value for our customers and that we're going to be rewarded for. (00:12:57) And sometimes it can be the structure of a business. (00:13:02) Like a company that Case found a coke disruptive technology, Insight Tech, it's been, it does tremendous things, but it is a structure (00:13:16) that makes it hard to make it profitable. (00:13:19) And so that's the other thing is, so that's another, these are principles that we've learned. (00:13:24) Okay, we didn't apply that. (00:13:26) What were the principles that we didn't apply that caused us to fail? (00:13:29) That's what I mean, we learned from failure. (00:13:32) So the businesses where, you ask the businesses we're in now, and Jason, there's Coke people here, you all can catch me up if I, the ones I miss, but we have, (00:13:45) engineering products, engineering construction. (00:13:49) We have, we build solar plants. (00:13:54) We have commodity trading and distribution. (00:14:00) We have fertilizers. (00:14:02) We have refined products. (00:14:03) We have chemicals and polymers. (00:14:06) We have glass. (00:14:07) We have forest and consumer products. (00:14:12) We have four different (00:14:15) investment firms with different comparative advantages. (00:14:21) And we have electrical products and we have software systems for management. (00:14:32) Dave, let me just hit one point, something. (00:14:34) Did I miss it? (00:14:35) No, you got it. (00:14:36) You did a great job. (00:14:37) I mean, basically, like, (00:14:41) Eight wholly owned business unit platforms that he described, and then four investment different businesses. (00:14:48) But I just wanted to kind of really drill a point home, because when I came out, when I started really hanging out with you and the whole tech community and trying to build that network, a lot of people had the same question that you did about who is Coke, what are you guys all about? (00:15:04) You know, I know it's a large private business, but being in Wichita, we don't know that much about it. (00:15:09) I think this point that is so different about Coke versus almost any other company out there is what my father said on being capability-bounded, not industry-bounded. (00:15:21) And how do you get from a small crude oil gathering company in southern Oklahoma to all of those businesses that he described? (00:15:30) And there's, I mean, the principles obviously throughout, which we'll be talking about in this discussion, but one of the absolute core differences is that whole approach to capabilities. (00:15:41) And I would encourage anyone that's in a business and trying to scale, think about it from that lens. (00:15:47) What capabilities have I demonstrated that I can add value to customers? (00:15:52) And then point it at new industries where I can experiment. (00:15:56) This is one of our principles as well, experimental discovery. (00:16:00) Not trying to do everything at once and trying to conquer the world, but experiment and test, does the customer value my product or not? (00:16:09) And then along the way, (00:16:11) those core capabilities for us started off as operations, logistics, trading. (00:16:18) In the very early days of Coke, that's what we demonstrated we were good at. (00:16:22) We were getting great customer feedback. (00:16:24) But then when we had the capability approach to say, okay, we started in energy, we started in crude oil gathering pipelines and refineries, can we point those same capabilities into natural gas? (00:16:38) Can we point those into chemicals? (00:16:40) Let's experiment there. (00:16:41) Can we point those into fertilizers? (00:16:43) Because then we learned about natural gas. (00:16:45) And then the Georgia-Pacific opportunity comes along. (00:16:49) And it's like, hey, these are wood products. (00:16:51) It doesn't seem similar to these other businesses, but it's the same core capabilities. (00:16:58) We buy Georgia-Pacific, and along the way, it was somewhat of a happy accident that we started learning about consumer products and branding. (00:17:07) So branding became a new capability for Coke through acquisition, but it started with where do we think we can add value and do a good job on that and collect new capabilities along the way. (00:17:18) So I think that's like a really simple way to think about Coke and it's (00:17:23) over the course of time, like how we're different. (00:17:27) One other thing I'll mention too, because I've been asked many times, it's like, well, so is it sort of like a Berkshire Hathaway where you have all these different businesses, a conglomerate? (00:17:38) And I would say no. (00:17:40) I mean, obviously Warren Buffet and his team have done an unbelievable job operating the business the way they have. (00:17:46) But we think about our business very differently instead of operating them all as independent businesses. (00:17:53) in almost like in silos, think about it as a republic of science. (00:17:58) We're not a conglomerate. (00:17:59) We're an integrated set of capabilities. (00:18:02) Is it fair to say that you wouldn't consider an acquisition or a new business line if there wasn't some relatedness to an existing competency at the company? (00:18:11) It depends. (00:18:13) I mean, as you see when you read the book, we went through one chapter on creative destruction. (00:18:22) And what Schumpeter called all the different ways to do that, and one is to create a new management approach. (00:18:31) Okay, that's our biggest one. (00:18:34) So the question is, when we bought Molex, it makes electrical connectors, which has done fantastic. (00:18:41) And at first, (00:18:43) it wasn't doing great. (00:18:44) So we said, we think if we can get them to apply these principles, it will turn them around. (00:18:52) And we didn't, we, and the problem when we do that, they, the tendency is to learn the lingo. (00:19:01) And so you can call everything (00:19:04) by these names, and you still do what you always did. (00:19:07) And that's what was going on there. (00:19:09) And so finally we got in. (00:19:12) No, we had changed the management. (00:19:15) And once we did that, and they started applying these principles, they took off, and now they're knocking it out of the park. (00:19:26) But let me go back to failures, because I mean, we're understating our great strength in failures. (00:19:36) And that is, I'll give you our worst failures and what caused it. (00:19:41) And it caused us by violating the principle of hiring people first on values and second on talent. (00:19:56) And what I've for years, I've told our people, Look, if you want... (00:20:00) to hire somebody with bad values because you like them or something. (00:20:06) Hire them slow and stupid and so we can catch them real quick and get them the hell out. (00:20:12) Maybe get them to go to work for our competitors or something. (00:20:17) Maybe help them get a job. (00:20:18) But anyway, that was huge. (00:20:21) And then we made that even worse by taking people (00:20:31) who had terrible values and made them leaders. (00:20:37) And so what we call that is rather than we want everybody in the company to be contribution motivated, that I want to succeed by contributing, I want to be rewarded for my contributions, not for anything else. (00:20:53) And the value I create for our customers or for the future (00:20:58) And so they would, some of these people were destructively motivated. (00:21:04) What they wanted was power or control, and they would hide their failures and make up their successes. (00:21:17) And so I'll give you 2 examples. (00:21:19) One goes back to 1973. (00:21:21) You remember the war in the Middle East and everything. (00:21:24) And they had gotten us into all kinds of wild, reckless trade. (00:21:29) So that could have bankrupted the company. (00:21:33) And then later, because I mean, much later, shows you (00:21:41) that repetition penetrates even the dullest of mine. (00:21:45) So I needed this to happen a bunch of times. (00:21:48) So it finally, okay, I got it. (00:21:51) I got it. (00:21:51) God, don't punish me anymore, please, for my stupid mistakes. (00:21:56) So this was, we did it about the same time, our ag group. (00:22:03) We put leaders in who were destructively motivated, and in refining, we got a leader, and they were destroying those businesses. (00:22:16) And so it didn't almost bankrupt it, but it almost wiped out all of Coke's earnings in the late 1990s. (00:22:29) So does that give you a flavor? (00:22:31) Yeah, so you'll appreciate this being an ag guy. (00:22:33) To go a little deeper on what happened in the late 90s in our ag business, we called it a strategy the gas to bread spread. (00:22:42) So we wanted to basically be in every element of the value chain, all the way from pulling the natural gas out of the ground, converting it into fertilizer, making the nitrogen products to grow the crops, (00:22:53) that would ultimately then end up on the grocery store shelves and being bread, we got in pizza crusts, all this crazy stuff. (00:23:02) When you look back on it, like, what the hell are you doing, right? (00:23:04) But it was what he was saying is like leadership thinking about we can do anything, and if we can basically kind of control the entire value chain, like we can make that successful, completely violates probably all 41 principles in the book, right? (00:23:23) discovery, knowing where your capabilities are, right people, right roles. (00:23:28) And so we called it the gas to bread spread. (00:23:32) Some people call it the ass to bread spread, too. (00:23:34) And there's another one in there, integrity, because when they knew there were losses in some of these, and then they wouldn't tell us they wanted to go ahead anyway. (00:23:45) We had a deal within that, like purina dog food. (00:23:50) So one of the things that was acquired was the large animal feed. (00:23:57) Mainly hogs. (00:23:57) Yeah, so hog feed. (00:23:59) And did no diligence, and this is one of our principles, apply the scientific method. (00:24:05) So disprove your hypothesis as much as you try to prove it. (00:24:08) And so we closed that acquisition, and within days we found out that we had hundreds of millions of out of the money (00:24:17) hog contracts. (00:24:18) We didn't even look at the contracts. (00:24:20) So I mean, that's when I think this is really important for founders that want to grow, right? (00:24:25) You have this growth at all cost mindset and you start not like asking why not. (00:24:31) And this is the kind of trouble that you get yourself in. (00:24:34) So let's go back to the management piece. (00:24:36) How do you (00:24:37) take these principles which you've applied successfully to, I would use the term iterate, because for me, failure is all about iteration to success and finding paths that work, finding businesses that work, and ultimately finding people that work. (00:24:51) But how do you drive that culture that represents the principles? (00:24:55) Because you could create a book and give it to all your employees and say, guys, here's 41 principles. (00:25:00) We've sat down, we've thought about it, we've written them. (00:25:03) they're going to work. (00:25:04) But to actually live them, to realize them, to hold people not just responsible, but accountable to them, how did you do that as you developed these over the decades? (00:25:13) Because at first, we tried to get them to do it through sheep dipping. (00:25:18) That is, you take everybody in, you give them a big seminar, and I'll go do this. (00:25:23) And from Polanyi, if you want to (00:25:28) read a book that's hard to read. (00:25:30) I mean, if you want really hard one, you can read Human Action. (00:25:32) This is even harder called Personal Knowledge by Michael Polanyi, who was a chemist and then became a philosopher. (00:25:46) And he goes through what it takes to develop personal knowledge. (00:25:54) You have to rewire your brain. (00:25:56) to have it work differently, right? (00:25:58) You have a habit. (00:26:00) So you don't need to think about it. (00:26:01) And then if you want to change, like, do I brush my teeth first or do I comb my hair first? (00:26:07) No, I want to start combing my hair first. (00:26:09) And all of a sudden you're back brushing your teeth first because you're not thinking about it. (00:26:14) And so because your brain gets, I mean, you know your body. (00:26:19) Let's say you're a weightlifter and you want to be a marathoner. (00:26:23) Okay, it's going to take work with intensity over time to change your body. (00:26:27) Well, your brain's part of your body, so you've got to do the same thing. (00:26:32) So we said, okay, we've got to start with. (00:26:35) Okay, let's find a group that's really interested in this. (00:26:39) They're struggling, they're having problems, and here are the principles, and we'll coach them, we'll help them start doing it. (00:26:48) And if they work with intensity on it, and then they succeed, (00:26:52) Then we don't need shift dipping because then the other businesses and capabilities says, gosh, I'd like to do that. (00:27:02) So you don't need to call them in. (00:27:04) Then we have more demand for people who can help them. (00:27:07) And the hardest thing is to have our people in strategy or our principal-based management group who are really good at helping them. (00:27:18) And boy, they're in more demand than anybody. (00:27:21) So the best thing is success will drive social mimicry. (00:27:24) You'll see other. (00:27:24) That's it. (00:27:25) Here's another like take on what he's saying that I think like really connects about culture to your question. (00:27:32) And that is like the essence of like principle-based management and all the principles in this book as well is like, what if you could have a business and a culture, small, medium, or large, (00:27:45) where everyone knew what to do without being told. (00:27:49) And so that's like hard to get your head around, right? (00:27:51) Because I think most businesses come at it from top down. (00:27:55) There's the iconic leader that's the smartest guy in the room building the strategy and then telling everyone what to do. (00:28:02) And so I think one of the most important principles in this that we tell a lot of stories around is to flip that on its head. (00:28:08) And it's about bottom-up empowerment with principles. (00:28:11) and empowering your talent, your team, your leaders with these principles. (00:28:16) So that then you use the collective knowledge of everyone, not a couple smart guys at the top of the company. (00:28:22) Most people in most enterprises that aren't owner operators don't want to fail. (00:28:27) They want to keep their job. (00:28:28) They want to move up the ladder by being repeatedly successful. (00:28:32) And if you want to create a culture of creative destruction, if you want to create a culture of failing and learning from failure, it's very hard to get individuals who live on an income on a salary to do that because if they make a mistake, if they fail and then they fail again and they fail again, I'm worried about losing my job. (00:28:48) So what you typically see in most scaled organizations is middle management and even senior management when founders or owners don't operate it anymore. (00:28:56) saying, I'm going to take the less risky path. (00:28:58) I'm going to do the less creatively destructive thing. (00:29:01) I'm going to do the thing that's least likely to fail because I don't want to lose my job. (00:29:05) I want to keep my job, get my bonus, move on to year two, and go home to my kids and my wife and take care of the family or whatever the family situation is. (00:29:13) And that's my objective. (00:29:15) But see, and that's that approach creates perverse incentives. (00:29:21) And so we try to align our incentives (00:29:25) that we want to reward people according to their overall contribution to Koch's future. (00:29:34) So for example, if they have an experiment, and that doesn't mean doing this thing in ag where you buy all these hogs and you lose hundreds of millions of dollars over what, that's not an experiment. (00:29:49) It's an experiment, a good experiment is where the value, what you learn from this is higher value from this failure than the cost of the experiment. (00:30:04) And so when we do that, and we're evaluating what the person, you are building capability for the future. (00:30:12) That's why we're so, (00:30:14) We put so much emphasis on, are you building capability? (00:30:18) And capability, part of it is the culture. (00:30:20) And what Chase did with Koch Labs, when he started Koch Disruptive, he said, Koch Labs, I want every business to be a laboratory for what we find, both to help us source these opportunities, these tech opportunities, and (00:30:41) And then we'll let, if they're just trying something, we'll try it out in that business. (00:30:47) And being in all these different businesses that touch almost every part of the economy, it gives us a big advantage in that. (00:30:55) So, but that affected the whole culture. (00:30:58) I mean, none your business, don't you want to be part of Koch Labs? (00:31:02) We're an experimental discovery group. (00:31:04) We're just not a bunch of grunts here grinding stuff out. (00:31:09) Yeah, I think the KDT example is a really good one because you asked about motivating and what if you fail and then what if you get fired and all that. (00:31:18) We tried to basically take a little bit of the Silicon Valley approach and bring, of experimental discovery. (00:31:25) You learn more and you pivot and learn, have a failure. (00:31:28) But then now I know what I don't want to do. (00:31:30) I'm going to pivot my strategy to what may be working. (00:31:32) I'm going to keep trying, as long as you don't go sink the company with some massive bet, right? (00:31:37) And I think (00:31:39) KDT was a great experience. (00:31:42) Like I call, when we did that, when we made those first investments, this in venture, the losers fall out first and the winners take a hell of a lot longer to materialize. (00:31:57) So if we would've just judged it based on, okay guys, you got three or four years to figure this out, we would've shut down KDT. (00:32:04) But it was that experimental discovery principle and mindset that we applied to it. (00:32:09) And oh, by the way, we were learning so much as Coke from seeing the technologies that were coming around the corner that might disrupt our core business. (00:32:19) And so we value that learning, and we rewarded the people that were bringing that knowledge in. (00:32:26) If you just look at it on the bottom line basis in the first couple of years, you say, just shut this down. (00:32:31) right? (00:32:31) But then over time, all these different things and then the returns are starting to come because we thought long-term about it. (00:32:37) But it all came from that experimental discovery, one principle, and then creative destructions. (00:32:42) Like if we're not in the game on technology and we don't see what's coming, something's going to happen, especially with how fast technology is moving today. (00:32:51) Some of our businesses are going to become dinosaurs. (00:32:54) How much of that risk were you willing to take and did you take on acquisitions? (00:32:58) So doing homegrown experiments on new (00:33:01) business ideas and strategies and products can be lower cost. (00:33:04) But if you're going to do an acquisition, do you have less room for figure? (00:33:07) Well, how about this? (00:33:08) We were a much smaller company and we bought Georgia Pacific for 20 billion. (00:33:13) Well, can you just tell us what Georgia Pacific is for those who don't know? (00:33:16) It's a wood products company and it's got two big pieces to it, building products and consumer products. (00:33:22) Well, it's got a third one, but... (00:33:25) Yeah. (00:33:26) Okay, I'm generalizing. (00:33:28) But go ahead. (00:33:29) Sorry, no, I'll shut up. (00:33:32) Shut up, you old guy. (00:33:33) No, But anyway, but on that one. (00:33:39) So when did you buy it? (00:33:40) And how big of a betting the company moved was that? (00:33:43) 2005. (00:33:45) Well, that was, yeah, we were much smaller in 2005. (00:33:49) I can't remember how much smaller, but it was a lot smaller. (00:33:52) It was a massive bet. (00:33:53) How'd it come up? (00:33:55) Okay, we were applying this virtual cycles of mutual benefit. (00:34:01) We were saying, okay, what's one of these cycles are chemical process industries? (00:34:12) And wood creating the pulp and stuff was, matter of fact, we found in my father's thesis, he did a (00:34:24) a study in Maine on this very thing on pulping. (00:34:27) I mean, I found it later, but that didn't. (00:34:30) His MIT thesis. (00:34:32) Yeah, Wow. (00:34:33) So we said, okay, let's look at the, oh, and they were saying they need to spin off some of those parcels, the pulping part. (00:34:44) And we said, okay, let's buy that. (00:34:48) And we bought that as an experiment, and we did real wealth with it. (00:34:53) And so we said, wow, they have other, because that was a commodity business, and they were trying to get their price to earnings ratio. (00:35:02) It was like six, and if they became more of a consumer products, they could get it up to nine. (00:35:08) So we proposed, we met with them and proposed that we buy the commodity part, (00:35:22) And we'll pay them a high enough price that then they can be all consumer products and get their price. (00:35:30) And we showed them all the economics. (00:35:32) And they said, that's fine, but we'll be sued for constructive fraud because we all have all these lawsuits against us. (00:35:44) And so we can't do it, but we like the value. (00:35:49) And so we went home and says, okay, what if we just offered the whole thing? (00:35:54) And a couple of them were getting ready to retire and the senior officers, so they were really liking it. (00:36:01) And they were kicked out of all the board meetings from then on. (00:36:04) But anyway, (00:36:06) So we sold them, and that was a time when money was tight and stuff, so nobody came in and topped us. (00:36:14) I'll give you just one funny story. (00:36:17) We sent one of our people in to be the CEO, Joe Moeller, who had been president of the company. (00:36:24) And he, they had, it was totally top-down, bureaucratic. (00:36:36) They were, in Atlanta, they had this 51-story building, is it 51? (00:36:42) You can correct me. (00:36:42) That's right, yeah, you got it. (00:36:45) And they had a private elevator to get up there, and you didn't have to wear a coat and tie, but if you came up to visit, all the management was on this 51st floor, and you had to put on a coat and tie and get permission to come up there. (00:37:01) And so Joe immediately (00:37:04) kicked them all out. (00:37:05) Well, we fired a bunch of them and then set the remaining ones down to work with their groups. (00:37:12) On the regular floor. (00:37:13) And then regular floor and then turned it all into offices. (00:37:16) I mean, into meeting rooms open to anybody. (00:37:20) And so that, I mean, you asked about how you get culture change. (00:37:23) A lot of business signals like that, particularly when a bunch of them get fired for. (00:37:31) Would you say that business unit operates like the rest of Koch Industries today? (00:37:35) Oh, absolutely. (00:37:36) But how long will it take, Bob? (00:37:37) I'll just say, that is such a rare and difficult thing to pull off. (00:37:42) I mean, there's just countless stories of acquisitions where the acquirer thinks that they have culture, thinks that they know how to transfer culture, and literally no one seems to be able to do it. (00:37:52) This was one of the insights from Warren Buffett is, (00:37:55) You find great managers, you let them continue to operate as owners of that business, and they get some profit share or whatnot, and they've got a durable moat so he can make a long-term investment, and he just leaves them and... (00:38:05) Yeah, but that wouldn't work for us, the stuff we bought. (00:38:09) Let me give another one, if I could, that was even more difficult. (00:38:16) And that is, sadly, my father died (00:38:22) not too long after I came with the company in 1967, and we had owned an interest in a small refinery in Minnesota. (00:38:31) And so, but two years later, we were able to buy it. (00:38:37) And it was not being operated very well, because the management had let the union control how it was run, and so it was run very inefficiently. (00:38:52) And so the first thing we tried to do is change the work rules. (00:38:57) So they went out on strike. (00:39:00) And by the way, that was at the start of my honeymoon. (00:39:05) Thanks a lot, guys. (00:39:08) And it was violent. (00:39:09) I mean, they ran a switch engine and tried to knock down one of our units. (00:39:13) They shot high-power rifles in there, and they blocked the gates. (00:39:18) I mean, it was impossible to get in there. (00:39:20) We had to take helicopter, but we were successful in operating without the union workers for nine months, bringing people in from our other plants, and it operated better than they did. (00:39:40) So finally we got the work rules changed, and then we (00:39:45) Then we said, okay, we're going to empower the employees. (00:39:48) We're going to change the culture. (00:39:50) Now, you think the Georgia Pacific was tough. (00:39:54) This was much tougher than that. (00:39:56) And so we