APRIL 2016 Discovery THE QUARTERLY NEWSLETTER OF KOCH COMPANIES

Are we paying for insurance without even knowing it?

As mentioned in his new But a review determined that the potential warehouse damage. This simple book, “,” changing Koch’s likelihood of an outage was already low. change eliminated a total of $4 million in approach to traditional insurance has The existing generators had very high insurance costs. saved Koch companies several hundred reliability, and recent investments in Given that there are many lease million dollars. business continuity and disaster recovery agreements across all Koch companies, had reduced the potential consequences. But what about other, less-obvious imagine the potential costs — and savings forms of insurance that may be mixed As a result of this marginal analysis, — embedded in those leases. in with Koch’s many business activities? Koch was able to avoid $2 million of These are called embedded insurance and unnecessary insurance. BEST ALTERNATIVES are often much less obvious. To be fair, some forms of embedded WE’RE SPENDING HOW MUCH? insurance make good economic sense and EMBEDDED INSURANCE Recently, the Koch procurement team enable Koch to evolve and adapt. Dan Solomon, Koch Industries’ chief analyzed our small-package shipping. One example of this is IT security. risk officer, explains it this way: “Think Whenever someone enters a “declared Koch’s management believes a about your home. If you have a backup value” with carriers such as FedEx and significant reduction in the likelihood generator, you have made an investment UPS, it generates an additional cost. In and consequences of potential attacks to reduce the consequences if your main return, the carrier becomes responsible far exceeds the cost of IT security power supply fails. In reality, this is a for any damage during transit. investments. But even then, these costs form of insurance. need to be evaluated continuously. Last year, Koch companies spent $300,000 “At Koch, any time we choose to incur a for this kind of “insurance” but collected Because embedded insurance is so cost or give up a return in order to reduce less than $10,000 in claims. That’s prevalent without being obvious, a the likelihood or consequences of a risk, definitely not a profitable choice. watchful approach is best. It always helps we are making a decision that — from to engage the right people — especially the an economic perspective — is similar to Other examples of insurance include extra risk optimization team for your business — buying insurance.” spare parts, excess inventories and other to help make good, risk-adjusted decisions. redundancies. Contracts and leases often Koch Business Solutions encountered contain embedded insurance. what could have become embedded http://khcwss.khc.local/riskopt/ insurance during the recent Wichita Georgia-Pacific discovered embedded campus expansion project. insurance in its lease for a California THIS ISSUE... warehouse (photo above). The landlord For $2 million more, Koch could have was passing through all insurance-related 4 Fighting corporate welfare reconfigured the backup generators that costs — a common practice. 6 We Are Koch: Vinchiaturo, Italy supply some of the buildings (including the data center) to further reduce the GP’s real estate team renegotiated the 7 Winning Olympic gold – twice chance of a power outage. lease by agreeing to be responsible for Letters and other submissions become the property of Koch Industries, Inc., and may be reproduced in whole or in Postal Pipeline part, including the author’s name, for any purpose and in any manner. Letters may be edited for length or clarity.

Dear Mr. Koch, It has been my good fortune to be a part of Koch since its purchase of Georgia-Pacific I just read your article in the Washington in 2005. Now, after a more than 40-year Post (“Bernie and Me”) and also saw your career (the last nine of it with Koch) and interview on CBS. Based on your comments seven different companies, I am retiring. and writing, I felt compelled to write you. Mr. Koch, in 2015, your engagement of I had a negative opinion of you and your the media at all levels gave us great pride corporation, but now feel you are a sincere in where we work. Your straightforward and honest person. sincerity, logic and purposeful I’m an 84-year-old woman, born of Italian Dear Mr. Koch, conversations made it clear that you and immigrants. My father came to this country your company stood above the rest. to be an American. There were 12 children I wanted to thank you, very sincerely, Your model, MBM®, is profoundly different. in my family. We had no financial help, but for taking time to write the significant Even more important, you practice your hoped to do better in this great country. business book, “Good Profit.” It is by far the most challenging and helpful business philosophy every day. You share and teach Sorry to trouble you with my background, book I have read in my 10 years as a self- risk. You are consistent, not arbitrary. You but I just want you to know there are a employed business owner. have the courage to do the right thing. You lot of good people out there. Like you, we have high standards of ethical and moral On nearly every page of your book I have need good, honest, sincere people in our conduct. You are the rarest of rare leaders. government who will benefit all people, found Principled Entrepreneurship™ Bottom line, I wish for everyone to gain the rich or poor. lessons that apply to my business. I love your key question: How do I create value fulfillment in their careers that I have as a You give me hope that someday people like for others by helping other people improve result of your leadership that has created you will be able to make things right in our their lives? Koch Industries. government. Right now, it is scary to vote Russ McCollister for those who are running for office. I applaud you for your ideals, corporation, Woodland, Washington philanthropy, legacy, family and giving Perhaps you should run for President. unselfishly of yourself. Your work has Sally Fleshman enriched me. Clarksville, Maryland When you see this icon, Susan Howard Elrick additional stories, photos, video Branson, Missouri and more are available in the Discovery Newsletter app.

For the past three years I have been sailing onboard a tug and barge unit that is on contract with Koch Shipping. I wanted to tell you how much I have Discovery enjoyed working with your company. April 2016 Flint Hills Resources’ docks in Ingleside, , are some of the nicest and Volume 22 | Number 2 best maintained docks I have seen in the U.S. or overseas. I never have to EDITORIAL BOARD worry about falling or tripping hazards because everything at Susan Armitage FHR Ingleside is very safe and Philip Ellender Jeff Gentry well maintained. Greg Guest When it comes to loading or Charles Koch discharging of cargo, none Steve Lombardo Walt Malone of your personnel take short Dave Robertson cuts. I like the requirement Ken Spain that hoses cannot be connected until a boom is put QUESTIONS? COMMENTS? around the vessel. This is one FHR’s Ingleside dock in Corpus Christi, Texas. Email us at: of the many ways that I see [email protected] Congratulations! Koch trying to protect the environment. Julia and will Download the Discovery celebrate their 20th wedding Companies get blasted in the media when something goes wrong or Newsletter app for news that comes to you! anniversary on May 25. The someone makes a mistake, but don’t get much praise when they do a couple were married in their good job. I want your employees to know that their hard work does not go Southampton home on Long unnoticed and is much appreciated. Island, where this picture was taken. The Kochs have three Micah Sims children: David Jr., Mary Julia, Mount Pleasant, South Carolina and John Mark. www.KOCHind.com

2 © 2016 Koch Industries, Inc. Koch is an EOE. M/F/D/V. International News

Under the hood, in the dashboard and powering your radio, develops electronic solutions that make your car safer and more entertaining. Molex is also advancing automotive technology by supporting the race car of the future.

The company has teamed up with distributor Mouser Electronics to joint- sponsor Jay Penske’s Dragon Racing team for the second season of the global FIA Formula-E electric car racing series.

The Formula-E car racing series serves as a framework for research and development around electric vehicles.

Dragon Racing Team’s Venturi VM200 race car was created using the very latest in technology, made from carbon fiber and aluminum, and powered exclusively by electric .

“We feel this sponsorship provides Molex with the opportunity to illustrate its commitment to developing products that help advance the automotive industry,” said Mark Rettig, global marketing director of transportation for Molex.

“We have a long history of designing small footprint, high-performance interconnects that excel in heavy-duty powertrain and body-electronic applications. These make our products ideal for addressing many of the challenges found in today’s evolving automotive applications.”

The Dragon Racing team includes two talented and decorated drivers — Loic Duval and Jerome D’Ambrosio — each of whom will drive cars featuring prominent Molex and Mouser branding.

The 2015-2016 FIA Formula-E series started October 24 at the Beijing ePrix. It also features races in Malaysia, Uruguay, , Germany, England, Russia and the United States. Follow @DragonRacing on Twitter, like them on Facebook or visit dragonracing.com.

INVISTA recently celebrated the one-year anniversary of a unique business experiment in China. The results, you might say, are shaping up nicely.

The experiment involves marketing shapewear garments under the L by LYCRA™ name. Instead of focusing on garment manufacturers, which is the normal practice in the industry, has targeted the shoppers who buy these garments in retail stores or online.

This is the first direct-to-consumer initiative for INVISTA’s Apparel and Advanced Textiles business. Serge Vigouroux, executive vice president of that business, says the initial results have been very encouraging.

“In China, we’ve known for a long time that customers place a very high value on our LYCRA® brand,” Vigouroux said. “In keeping with our MBM® philosophy, we decided to reach out to those customers in a new and proactive way.”

INVISTA originally signed an agreement with GUJIN, one of the largest lingerie QUESTIONS? COMMENTS? specialist chains in China, to place a core range of garments in 15 multi-format Email us at: stores in three major cities, including Shanghai. That has now expanded [email protected] to include 100 stores in 15 cities. The company also set up a dedicated e-commerce platform available to consumers.

“Our ‘Shape Your Day’ campaign was supported by targeted communication and merchandising activities,” Vigouroux said. “As you would expect from a Koch company, we were careful to limit the size of our experiment to a manageable scale.

“The sales results for our first full year of the experiment were encouraging. I’d say we’re cautiously optimistic about not only expanding this concept in China, but making it available worldwide, starting with select cities in Asia.”

3 Fighting Corporate Welfare

By Philip Ellender For many special interests in Washington How can this happen to a company that actively opposes D.C., the end of the year is already here. corporate welfare of any kind? As usual with government President of government These groups are keeping an eager eye programs, the devil is in the details. and public affairs, on the status of dozens of tax extenders Koch Companies Public (a mish-mash of subsidies in the form A TANGLED WEB Sector, LLC. of tax breaks, credits, incentives and Consider the Railroad Track Maintenance Tax Credit, which other exemptions). acts as an incentive for companies to maintain and improve Congress typically debates and passes the railroads they use. Koch uses railroads, as do many of tax extenders in December. Rather than Koch’s competitors. It seems logical that any company letting these extenders expire, they are relying on railroads would keep its tracks in good shape, usually reviewed and renewed a year or two but the U.S. government pays them extra for doing so. at a time. This process sets off an annual There’s also the Combined Heat and Power Business Energy lobbying frenzy for businesses determined Investment Tax Credit which allows us to exclude certain to ensure their priorities and special clean coal power grants from our gross income. treatments are included in the package. At Koch, we actively This year, that frenzy started months advocate the Should clean coal get tax earlier than usual, thanks to a U.S. Senator elimination of all these breaks that other forms who suggested a jump-start of the process. special privileges at all Special interests immediately began levels of government — of energy don’t? pushing to get their wish lists included in federal, state and local. an aviation safety bill, essentially hijacking The result would be a level playing field for Koch companies that legislation for their own purposes. and all of our competitors. Instead of the government Among the many outrageous exemptions choosing winners and losers, customers would decide what being reviewed are tax breaks that let they value based on market competition that is free from racehorse owners depreciate the value political meddling. of their thoroughbreds. If you prefer But until these tax provisions and other special favors are your racing on four wheels instead of eliminated, we will nonetheless use them. Doing otherwise four hooves, there are also tax breaks for would place us (and our 60,000 U.S. employees) at a investments in NASCAR tracks. competitive disadvantage among our industry competitors. Eagerly standing in line for these handouts REALITY CHECK are many of the biggest multinational corporations in the world. Sad to say, Koch Some may argue that the examples above are well- Industries sometimes ends up benefiting intentioned. Even so, we believe it is absurd for politicians from those programs. to dictate how any company should conduct its business

3 4 beyond the normal limits of the law. It’s simply unnecessary and corrupting to a free and open economy.

We have reached a point where policymakers have rigged the system so aggressively with cronyism that these policies (such as mandates, trade restrictions, regulations that hamper competition, and so forth) have become impossible and impractical to reject. That’s why we contend they must all be eliminated.

In a free and fair economy, the success or failure of any business should be determined by the value it creates through the products or services it offers.

By contrast, when the government picks winners and losers (by subsidizing, mandating or providing incentives for certain industries or products), the system becomes corrupted, innovation and opportunities for the disadvantaged are stifled, competitiveness is dulled and markets are distorted, with the politically connected reaping the benefits.

When these conditions exist, what consumers truly value is disrespected. If businesses aren’t really creating value, people question why any business should profit or even exist. As a result, public support for government control and socialism grows.

We see this in practice every day across all industries. Countless companies are pursuing what would otherwise be unprofitable business ventures thanks to politicians’ desires for political support.

When Congress extends and advocates for more tax subsidies and mandates, it obscures the path we should be pursuing — one toward a simpler A MARKET-BASED SOLUTION and less burdensome tax code. In his new book, “Good Profit,” Charles Koch attacked this problem head-on by Here’s what Berkshire Hathaway CEO Warren outlining a much better way: a market-based approach that puts decisions in the Buffet said when speaking to an audience in hands of consumers. Omaha, Nebraska, in 2014: “A business that continues to be unprofitable should be restructured, sold to a “I will do anything that is basically covered better-suited owner, or shut down. If a business requires subsidies or protective laws by the law to reduce Berkshire’s tax rate. For to survive or employ more people, it is not generating good profit,” Koch wrote. example, on wind energy, we get a tax credit “Creating value for society requires Principled Entrepreneurship™ — not political or if we build a lot of wind farms. That’s the only other forms of entrepreneurship, such as corporate welfare or fraud.” reason to build them. They don’t make sense without the tax credit.” There are 30 temporary business tax provisions in the tax extender package which expire this year. Instead of renewing these provisions as in years past, we As Charles Koch wrote in his recent Washington believe the Congress of the United States should allow them to expire and advance Post opinion piece: “Democrats and Republicans comprehensive business tax reform. have too often favored policies and regulations that pick winners and losers. This helps Going forward, lawmakers must put a renewed focus on treating all constituencies perpetuate a cycle of control, dependency, equally — individuals and businesses alike. The U.S. can no longer afford politicians cronyism and poverty in the United States.” picking winners and losers. Consumers should be making those decisions for themselves.

5 Noteworthy

Permissionless Innovation – The Continuing Case for Comprehensive Technological Freedom by Adam Thierer

Innovations have changed our lives for the better in countless ways. But Thierer contends there is now a bitter struggle between two competing visions of innovation. The will to succeed The first is the “precautionary Like much of Europe, Vinchiaturo, a small “They made a point of telling management principle,” town northeast of Naples, Italy, was hit they were willing to make whatever which contends that new ideas must hard during the Great Recession. changes were necessary to turn things be stopped or held back until proven around,” Attura said. absolutely safe for all. Governments By 2010, two of the town’s major employers are often the heavy-handed enforcers had shut down operations and it looked as “Five or six years ago, this place felt like of this vision. if the Koch-Glitsch fabrication shop might the writing was on the wall. Today, it’s be next. world-class. And it’s the employees who The second approach is called made it that way.” “permissionless innovation,” which But what makes this facility a remarkable contends that, in general, new success story rather than an economic SOMETHING TO CELEBRATE technologies and business models casualty is what the Koch-Glitsch should be allowed unless a compelling employees did when faced with adversity. This year, on March 17, the employees, case can be made that they cause Rather than give up or blame someone else, temporary workers and subcontractors serious harm. they decided to drive change. working at Vinchiaturo celebrated the 25th anniversary of the facility. “We need flexible, adaptive policies TRANSFORMATION BEGINS Not only is it still open, it has added new and approaches going forward,” writes For the next two years, the 28 employees at equipment. The plant now runs three shifts Thierer, with “diverse solutions for a Vinchiaturo rallied as a team and embraced per day, six days per week, creating new diverse citizenry. a new way of operating. According to jobs and opportunities in the hard-pressed “We must avoid approaches that are Alessandro Attura, one of Koch-Glitsch’s local community. top-down, one-size-fits-all, overly leaders, “they used MBM® to absolutely The best practices established at rigid, and bureaucratic. transform this place.” Vinchiaturo have become a model for Koch- “Instead, we need approaches that are The employees took ownership of Glitsch’s global operations team. bottom-up, flexible and evolutionary maintenance responsibilities that were “This year’s anniversary was a very in nature. not part of their job descriptions. They happy day for us,” said Massimo Bizzi of “The payoff to society for getting this embraced new and more efficient ways of Koch-Glitsch, who was on hand for the balance right will be enormous.” operating, and shared ideas for reducing celebration, “because this group has done costs and shortening turnaround times for more than just survive. product deliveries. “These employees have succeeded in doing As part of a labor-share experiment, a much better job of creating real value for Cautious counsel is often workers were bussed to another Koch- our customers, the company and society. fatal to a daring enterprise. Glitsch facility three hours away. This “That’s something to celebrate!” enabled them to bring valuable training – Washington Irving and new knowledge back to Vinchiaturo. Additional photos are available in the Discovery Newsletter app. 6 Looking Back

Clockwise from left: Bill Hougland worked for Koch’s oil- gathering business from 1962 until 1991. Hougland (center) was captain of the U.S. men’s team at the 1956 Summer Olympics in Melbourne, Australia. Hougland shakes hands with a Soviet player in Helsinki. Hougland, now retired, lives in Lawrence, . The final score of the 1952 Olympic men’s basketball final in Helsinki, Finland.

Good as gold — twice

It has been 25 years since Bill Hougland retired as a leader of Koch the Americans won, this time 89 to 55. Hougland accepted the gold Oil Company, 60 years since he stood on the podium to receive his medal on behalf of the U.S. team. second Olympic gold medal, and 64 years since he won a collegiate After college, Hougland served two years in the Air Force during national championship with the men’s the Korean War. He then went to work for Phillips in a basketball team. But his memories of all those experiences are training role and played basketball for the . Phillips still vivid. eventually assigned him to a role in Wichita. Hougland considers himself fortunate to have been coached by COMING TO KOCH one of the legends of basketball, (who himself was coached by the inventor of basketball, James Naismith). Hougland Sterling Varner, a Koch executive, was in the audience when is also thankful he had the chance to work with men of principle, Hougland showed a film of the 1956 Olympic final to a PTA meeting including Fred Koch, Sterling Varner and Charles Koch. in Wichita. A few weeks later, Hougland ran into Varner again and I COULDN’T DUNK was invited to lunch with Varner and Fred Koch. “Two days later, Sterling called me and asked for an interview. A native Kansan, Hougland attended the University of Kansas, Two weeks later, they offered me a job,” Hougland recalled. “They where his basketball teammates included , the future wanted somebody working full time on buying crude in Kansas. hall of fame coach for North Carolina. The Jayhawks won the national championship in 1952, Hougland’s senior year. “Back then, nobody I knew in the oil business knew much about Koch.” By the time Hougland retired from the company 29 years That summer, the NCAA and AAU champions were combined to later, Koch Oil had become the largest crude oil purchaser in form the U.S. Olympic basketball team. “Nobody on our team could North America. dunk,” chuckled Hougland. Even so, the team won seven games in a row, scoring an average of 75 points per game, to earn a place in PRINCIPLE 5 the championship game against the USSR. Fit and energetic at 84, Hougland and his wife, Carolie, will “That was the toughest game I ever played. The Russians were celebrate their 65th wedding anniversary this June. He still enjoys tough mentally and physically, and never smiled. They shoved you wearing his NCAA championship ring and the retirement watch he around a lot. Doc (Coach Allen) told us how they would play and was given by Koch in 1991. said ‘Don’t back off from anybody.’” The U.S. won 36 to 25. To hear Hougland explain it, MBM® Guiding Principle 5 — Four years later, Hougland was the only returning member of Customer Focus, was the reason for the remarkable success of Koch the U.S. team when it competed in Melbourne, Australia. His Oil. “We owed most of our success to customer relationships,” roommate for that trip was , a future NBA hall of famer. Hougland insisted. “If you didn’t service your customer well, you Again, the U.S. faced the Soviets in the Olympic final, and, again, could bet somebody else would.”

7