Private EnterpriseCharles Koch applied the " science of liberty " to become one of the world ' s richest men . by STEPHEN MOORESunday , May 7 , 2006 12 : 01 A . M . EDTWICHITA , Kan . -- Meet Charles Koch . Philosopher , engineer , self - trained economist , libertarian activist , philanthropist -- and theCEO of Koch Industries , a $ 60 billion , 80 , 000 - employee empire , whichjust recently became the largest and most profitable privately heldcompany in America . But you ' ve probably never heard of it . Neither Charles Koch nor his firm are household names . Mr . Koch ( pronounced " coke ") has managed to live in relative obscurity despitebeing one of the richest men on the planet , with a net worth estimatedat $ 14 billion . He is a man of modesty who craves none of the fame orpublic adulation that seems to preoccupy other members of thebillionaires ' club . Yet celebrity seems to intrude . on the day I visit the company ' s Kansasheadquarters , his office is atwitter over a recent issue of Forbesmagazine featuring the world ' s billionaires . The issue includes aglossy photo of Charles Koch smiling contentedly , and right below himon the page is a picture of a slightly better known titan : Oprah . Running in company like that is bound to bump up Mr . Koch ' s publicprofile -- whether he likes it or not . My mission , then , is to unwrap at least a few of the secrets of his success . Back in 1967 , when Mr . Koch was in his early 30 s , he became thereluctant president of the family business , then a $ 177 million , medium - sized oil firm . He recalls : " My father threatened that he wasgoing to sell the company if I wouldn ' t come back home to Kansas fromthe East Coast and run it . " Nearly four decades later , that family company is a global conglomeratewith net annual sales that exceed the GDP of many small nations , and itincludes a diverse range of businesses supplying everything from jetfuel to plastic , asphalt to beef , toilet paper to lumber . It owns manyfamiliar brand names such as Dixie cups , Stainmaster carpet and Brawnypaper towels . The firm ' s financial performance numbers have beenpositively gaudy , with a rate of return on investment that has outpacedthe Standard & Poor ' s 500 at least tenfold under Mr . Koch ' sstewardship . " Wecouldn ' t have achieved the profitability we have , " Mr . Koch insists , " if we had been a public company . No investor would have been patientenough to allow us to build a firm oriented toward long - term growth andprofits . " This is one of Mr . Koch ' s bugaboos regarding the deficienciesof modern corporate management . He notes , " The short - term infatuationwith quarterly earnings on Wall Street restricts the earnings potentialof Fortune 500 publicly traded firms . Public firms are also feedinggrounds for lawyers and lawsuits . " He then confidently predicts : " Regulatory laws like Sarbanes - Oxley willonly increase the earnings advantages of private firms . I would suspectthat there will be more of these private company takeovers of publiclytraded companies . " He ' s referring to his blockbuster $ 21 billionpurchase of Georgia Pacific last November , a Fortune 500 forest andpaper company . If Mr . Koch is right about the re - emergence of private corporatestructures , it is a very big deal for the near - term future of financialmarkets . The hyperactive trend of the past decade to take companiespublic may be shifting into reverse gear . The Georgia Pacific deal , which was the largest acquisition of a publicly traded company by aprivate firm in U . S . history , would seem to confirm Mr . Koch ' s thesis . " Since the Georgia Pacific purchase , " he tells me , " other publiclytraded companies have come calling , asking whether we would beinterested in taking them private , too . " This creative forward - thinking should come as no surprise , because Mr . Koch is immersed in the ideas of liberty and free markets . Whereas thebookshelves of most of America ' s leading CEOs are stocked with popcorporate management and " how to succeed " books , Mr . Koch ' s office is awall - to - wall shrine to writings in classical economics , or , as he callsit , " the science of liberty . " The authors who have had the mostprofound influence on his own political philosophy include F . A . Hayek , Ludwig von Mises , Joseph Schumpeter , Julian Simon , Paul Johnson andCharles Murray . Mr . Koch says that he experienced an intellectualepiphany in the early 1960 s , when he attended a conference onfree - market capitalism hosted by the late , great Leonard Reed . Mr . Koch is by training a scientist , with master ' s degrees from MIT innuclear and chemical engineering . Despite his business success , he hasno MBA or formal management training . Mr . Koch sees that as anadvantage . " Being an engineer , I realized there ' s an objective realitythat helps one understand the rules and conditions that improve thehuman condition , " he says . " Laws and principles that facilitate theadvancement of peace , prosperity and social progress are as immutableas the laws that work in science . . . . Politicians often come up withmisguided policy solutions , " he continues , " because they suffer fromHayek ' s ' fatal conceit ' and believe they can violate basic laws ofeconomics . They are just as misguided as the man who jumps out the 14 thfloor of a building convinced that he can repeal the law of gravity . " As we continue , Mr . Koch becomes increasingly animated . He discussesanother seminal work in his collection , F . A . Harper ' s 1957 " Why WagesRise . " The book demonstrates " that wages rise not because of unions orgovernment action , but because of marginal productivity gains -- peopleget more money when they produce more value for other people . " Then heconfides , " I was so thrilled by this revelation that I had what Maslowcalled a ' peak experience . '" Ideas seem to exhilarate him . This no doubt explains in part why thisprofessorial CEO delivers " dozens and dozens " of lectures around thecountry to his employees on these very topics . But what does any ofthis have to do with explaining his company ' s prodigious profitability ? Well , everything -- hebelieves . Mr . Koch contends that the key insight of his business careerwas melding these philosophical insights about the way thewealth - creation process works into a business operating system called " Market Based Management . " This system , which he has trademarked , enables every division of his business empire to operate as a separate , autonomous , profit - maximizing unit . It is intended to reward employeeswho think like entrepreneurs . " Long term success entails constantly discovering new ways to createvalue for customers and building new capabilities to capture newopportunities , " he instructs . " In this sense , maintaining a businessis , in reality , liquidating a business . " Mr . Koch likens the cycle toSchumpeter ' s " creative destruction "-- where the old and inefficient areruthlessly swept away by the new . What we have here are the theories of supply - side economics operatingon the micro - level of the firm . Incentives matter ; competition fostersinnovation ; property rights must be firmly established . Koch Industriesgives big financial bonuses for entrepreneurial behavior by employees , whether it ' s a project head or a janitor . The idea is to reward allactivities that add to the bottom - line profitability of the firm . " Wewant our employees to act like owners , " Mr . Koch explains . Similarly , employees earn " decision rights " for past successes . " Just as centralplanning is a failure in running government , so it is at the level ofthe firm , " he says , repeating one of his favorite operating tenets . Some of the ideas that undergird Market Based Management seem fairlycommonsensical to me , and I ' m not entirely sold on the notion that thisprogram somehow represents a seismic breakaway from what is taught atHarvard Business School . Some former employees also complain that topmanagement ' s absolutist devotion to MBM has created a cult - likeatmosphere that can be overbearing . To succeed at the company , theysay , one has to become a " Koch addict "-- which means , in part , buyinginto MBM . Mr . Koch himself willingly concedes that the ideas don ' t bearfruit with everyone , and that many times employees simply " memorize andregurgitate the ideas , " rather than apply them on the job . But even thedeepest skeptic can ' t argue with the bottom - line results . Quite simply , Mr . Koch ' s firm has tripled in size and profitability in the lastdecade , among its many other achievements . Charles Koch -- no surprise -- disdains government and the political class . He has invested tens of millions of dollars into free - marketthink - tanks and political activist groups ( including several founded bythis author ) . He ' s disgusted with the runaway federal budget under theRepublicans , and he proposes that " every new law should be subject tothe question : Will it strengthen the culture of prosperity ? " Won ' tabout 90 % of the laws fail that test ? " Yes , that ' s exactly what Imean , " he replies . " But the problem isn ' t the people in government , it ' s the system -- the incentives are perverse . " Mr . Koch ' s latest crusade to spread the ideas of liberty has been hissponsorship of a twice - yearly conference that gathers together many ofthe most successful American entrepreneurs , from T . Boone Pickens toformer Circuit City CEO Rick Sharp . The objective is to encourage thesecaptains of industry to help fund free - market groups devoted toprotecting the fragile infrastructure of liberty . That task seemsespecially critical given that so many of the global superrich , likeGeorge Soros and Warren Buffett , finance institutions that underminethe very system of capitalism that made their success possible . Isn ' tthis just the usual rich liberal guilt , I ask . " No , " he says , " I thinkthey simply haven ' t been sufficiently exposed to the ideas of liberty . " Sounds as though Messrs . Soros and Buffett would benefit more fromsitting down with Charles Koch than I would . For my part , afterlistening to this natural - born teacher exalt the superiority of freemarkets and the boundless wealth that they can create , I feel as thoughI ' m about to experience one of Maslow ' s " peak experiences " myself . Butour time is up , and if Mr . Koch has learned nothing else from hisspiritual mentors , it ' s the concept of opportunity cost . Time is money , and it ' s time to get back to his greatest passion of all : building theprofitability of his world - class company . Mr . Moore is a member of The Wall Street Journal ' s editorial board .