Growth and Innovation at Georgia-Pacific

Discovery

October 2 013 THE QUARTERLY NEWSLETTER OF KOCH INDUSTRIES Growth and innovation at Georgia-Pacific All across Koch Industries, two words million tons of recycled fiber to custom- lose mill and the largest airlaid nonwo- are often repeated these days: growth ers last year — most of which ended vens machine. and innovation. up in tissues, towels, napkins and boxes. The three Buckeye facilities that pro- Charles Koch made a point of mention- As of July 26, the company is now duce specialty fibers have become part ing them in his Founder’s Day video and involved in plastics recycling processing, of GP Cellulose. Groundbreaking speech, and both are thanks to the acquisition of a Tennessee The two specialty nonwovens facilities, emphasized in Koch Industries’ updated facility from The Highlands Group, Inc. as well as the nonwovens sales, busi- Vision (see page 3). Marc Forman, president of GP Harmon ness and R&D teams from Buckeye, Three recent acquisitions by Georgia- Recycling, says this acquisition will are combining with GP’s existing airlaid Pacific reflect the importance of growth dramatically expand the company’s group to create a new nonwovens busi- and innovation in GP’s plans for the future. involvement in non- ness as part of fiber recyclables. “Buckeye Technologies will GP’s Consumer Temple-Inland Products Group. “Now we can take strengthen our innovation On July 19, GP completed its much- the various polymers Charles Koch fre- anticipated acquisition of Temple-Inland used in milk jugs, efforts.” — Charles Koch quently mentions assets from International Paper, which detergent bottles or innovation as an had purchased the company in 2012. bottle caps and separate them efficiently important reason for this acquisition. The transaction included 15 sites in so they can be converted into high-grade “Companies like Buckeye will strength- eight states and involved more than raw materials.” en our innovation efforts. That’s terrific, 1,800 employees — working mostly Buckeye Technologies because that’s the future. We can’t suc- in the southeastern United States. ceed for long if we don’t innovate.” GP’s latest acquisition, in August, was Temple-Inland is known for making Putting it all together high-quality building materials, such Buckeye Technologies, based in Mem- as particleboard, gypsum products phis, Tenn. It produces specialty fibers Jim Hannan, GP’s president and CEO, and lumber. and nonwoven materials. sees these businesses as important parts Buckeye is the only company in the of a much bigger picture. “This is a long-term investment that world capable of making specialty cellu- fits in very well with our existing opera- “It’s a wonderful thing to grow and lose products (such as the fibers used in tions,” said Mark Luetters, GP’s execu- succeed,” Hannan said, “and these three LCD screens and oil filters) from both acquisitions — made in a span of just tive vice president – building products. wood and cotton cellulose. six weeks — will help us do both. “It’s also a strong indicator of our long- The company’s nonwoven materials are “But the real challenge is to make sure term confidence that the building products used in a variety of hygiene and personal we keep innovating and creating even market will rebound from the recessionary care products, cleaning supplies, baby more value for our customers. lows we have seen in recent years.” wipes, towels and tissues. “If we’re not helping people improve The Highlands Group Five manufacturing facilities — four in their lives and making the world a GP Harmon Recycling is one of the the U.S. and one in Germany — were better place,” Hannan said, “we’re largest recyclable commodities traders in part of the transaction. Buckeye’s assets not doing our job.” the world. It supplied more than seven include the world’s largest cotton cellu- www.gp.com

this issue… Thank you, Koch pg 2 Koch Industries’ new Vision statement pg 3 Nylon’s 75th anniversary pg 9 Perspective: Affordable Care Act pg 10 Postal Pipeline

Thank you so much for your offer to Thank you for including me on the mail- allow me to bring our Youth Leadership ing list for Discovery, which I am happy Conference group to the INVISTA Vic- to receive. toria Wetlands. You have made a lasting The news of Koch’s new building impression on these students. brought back memories of when I was The Wetlands are blessed to have such a interviewed in December 1948 for a great leader as Jon Snyder. He not only position in the administrative offices of has such an interest in our environment, Wood River Oil & Refining Co., Inc. but in teaching our young people about There were about 50 employees at the environment in which they live. that time in the corporate offices — It was also a great honor to have your a far cry from the 3,000 employees plant manager, Paul Hughes, visit with in Wichita today. our students. Having managers tell stories Oct. 4 – David H. Koch attended the dedication of I am privileged and proud to have par- of how they got started in their profes- ticipated in the growth of this phenom- a 14,000-square-foot childcare center at MIT named sion is always interesting to the students. in his honor. He was lead donor for the project, enal corporation for 36 years, retiring contributing $20 million. Lanell Mantey in 1985. Executive director Kenneth D. Rupe Thank you for supporting the History Victoria Business and Education Coalition Victoria, Texas Wichita, Kan. Buffs of Southeast High School. The field trip to the Eisenhower Presiden- tial Library in Abilene was a true highlight of the year for many students. Our guest speakers were outstanding. We hope you continue to support history clubs around the area. Kathy Saar U.S. history teacher Wichita Southeast High School Wichita, Kan. This hand-drawn card from several youngsters On behalf of the American Quarter nate our activities and select the proper thanked Koch Industries for its support of the 2013 Horse Foundation, we would like to horses for our guests. Water Wise program (a series of water safety thank you for giving us the opportunity We could not be more pleased with classes at Wichita’s Downtown YMCA). to enjoy the Legends of the American how everyone was matched with their To “like” and follow Koch companies and leaders – Quarter Horse Trail Ride at the Mata- mounts and received many compli- dor Ranch. including Georgia-Pacific, INVISTA, Flint Hills Resources, ments from our guests on the quality Matador Ranch, Koch Pipeline and Charles and David Our time at the ranch couldn’t have of the horses provided. Koch – visit Koch Industries’ Facebook and Twitter pages. been more perfect, but none of it would Your team illustrated exactly why the have been as enjoyable (or even pos- Matador Ranch was selected as the 2013 Letters and other submissions become the property of Koch sible) without the incredible staff of Best of the Remuda Award recipient. Industries, Inc., and may be reproduced in whole or in part, the Matador. including your name, for any purpose and in any manner. Chris Sitz Letters may be edited for length or clarity. We realize it was a big step to open the Senior director ranch to this event as it required a lot American Quarter Horse Foundation October 2013 | Volume 19 | Number 4 of planning and evaluation to coordi- Amarillo, Texas Discovery Editorial board Questions? Comments? Melissa Cohlmia Contact: Rod Learned Philip Ellender 316.828.6136 [email protected] Rich Fink Jeff Gentry Publication design Dale Gibbens Caleb Swank Greg Guest Amber Vogts Charles Koch Koch Creative Group Jim Mahoney www.kochind.com Dave Robertson © 2013 Koch Industries, Inc. Koch is an EOE. M/F/D/V 2 UNDERSTANDING AND APPLYING Koch Industries’ Vision by Charles Koch

Included in this issue of Discovery is In its role as a North Star, the Vision is changes as we improve our understand- your copy of our new Vision statement. a compass to keep us going in the right ing of these principles. We have revised KII’s Vision to more direction, rather than a destination we In its role as a guide, the Vision should accurately reflect our actual practice and plan to reach. As such it is constant — continually change as the business what is needed to continue our success it never changes. environment and our capabilities and growth in the future. It embodies fundamental principles, change, and as we learn what we need Our Vision serves a dual role: as a such as the role of business in society to do to more effectively make progress North Star and as a guide to keep us and our Guiding Principles. This part on the journey. effectively moving in that direction. of our articulation of the Vision only It is always difficult to develop an effective Vision for KII because, given the breadth and diversity of its businesses, its Vision must, of necessity, be very broad. At the same time, it must be specific enough to guide our actions and the respective visions of our businesses and capabilities. To help accomplish these twin objectives, the Koch Industries Vision now consists of four parts: our view of the role of business, what we need to do to fulfill that role and succeed, the specific capabilities we need to develop and apply, and the further benefits to society when we execute our Vision. I will try to explain each of these parts in enough detail to make them useful to each business and capability as they create their own visions, and to every employee, since it is important that we all understand our philosophy and direction. I realize that our new Vision is much longer and more complex than what we have had “It is important that we all in the past; however, the same is also true of Koch understand our philosophy Industries. It is bigger and and direction.” more complex. Studying this Vision so that you understand it and can help advance it will be well Charles Koch is chairman and CEO of Koch Industries, Inc. worth your time. If you have questions He has served in these roles for 46 years. or concerns, be sure to discuss them with one of your leaders. 3 The role of business This gale is created by competitors con- MBM®, ensure we have sufficient talent stantly innovating and improving in to capture all attractive opportunities, The first paragraph describes what we every way imaginable, forcing less effective remain private so we can focus on the believe the role of business to be and, products, methods and companies out of long term, generate the opportunities therefore, what a business needs to do the market. To succeed long term, a busi- to enable us to reinvest 90 percent to be successful. That role starts with ness must innovate of our earnings at creating products and services that and improve at least “We should be able to continue superior returns and, provide superior value for customers. as fast as its most doubling our earnings, on last, but certainly For a given value provided effective competitor. average, every six years.” not least, ensure that to customers, the amount of re- everyone, everywhere sources used needs to be minimized, Doubling our earnings fully applies MBM including capital, raw materials, Guiding Principles 1 and 2 – Integrity labor and other inputs. As mentioned in the second paragraph and Compliance. In doing so, the business is making the of the Vision, if we can continually Achieving these goals as we continue greatest contribution to society by maxi- satisfy these requirements, we should be to grow necessitates continued im- mizing the difference between value able to maintain our historical growth provement of our return on capital delivered and value of resources con- rate of at least 12 percent, which, when consumed and an increased ability sumed. Thus, a business’s profits, created compounded, allows us to double our to generate and capture sufficiently by the economic means, are a measure of earnings, on average, every six years. profitable investment opportunities. the value it is creating in society. The “on average” modifier is critically The latter requires that our horizons important, because if we began to This accomplishment, while necessary, is increase with our size. We will need attempt to smooth out earnings (as not sufficient for long-term business suc- innovations that move the needle, some public companies feel compelled cess. Each business must take to heart investments that make a bigger contri- to do to defend their stock price) our what Joseph Schumpeter called “the bution and new platforms for growth. future will not be as bright. essential fact about capitalism,” which is Achieving these objectives requires that “its role in the perennial gale Maintaining this growth rate requires we more fully develop and apply our six of creative destruction.” that we more fully and broadly apply core MBM-based capabilities.

“Achieving these objectives requires that we more fully develop and apply our six core MBM-based capabilities.”

Commercial excellence Innovation

2007 2008 Operations excellence Trading mentality

Talent Public sector

4 To the extent we can make our Vision a reality, it would dramatically improve lives across all segments of society — especially for the disadvantaged.

Commercial excellence ing, design, relationships and public Optimization: Optimize the use of relations to anticipate and satisfy what all Koch resources, including assets and Vision Development: Assess the busi- they value. talent, across and within businesses, ness’s core capabilities and determine plants and groups, using tools such the opportunities for which they can Origination and Knowledge Networks: as marginal analysis, opportunity cost create the most value in an environ- Build formal and informal global rela- and supply chain management. ment of creative destruction. Improve tionships to learn relevant information existing capabilities and add new ones before competitors and get a preferred Prioritization: Prioritize to maximize to enhance the company’s ability to look at opportunities for which we can Koch Industries’ long-term value by create value. create superior value. first doing what is required to stay in business, then proceeding in order Opportunity Generation, Evaluation and Principled Entrepreneurship™: Maxi- of the risk-adjusted present value of mize long-term profitability by creat- Capture: Create an organization that the alternatives. ing superior value for customers while will do a superior job of internally and consuming fewer resources and always externally generating, evaluating and Operations excellence acting lawfully and with integrity. commercializing or acquiring the most profitable opportunities. EHS Excellence: In addition to comply- Customer Focus: Become the preferred Decision Making Framework: A process ing with the applicable laws and regula- supplier by doing a superior job of un- tions, achieve a level of safety and envi- derstanding our customers and antici- for improving opportunity capture by using the best knowledge, exploring ronmental performance that provides pating and satisfying what they value. superior protection and value, placing Doing so means we must be responsive the full range of outcomes, identifying ways to mitigate risk and discovering the highest priority on risks that could and the terms of our transactions must cause the most serious harm to people, be considered reasonable. the best alternative. The process should be made as simple as possible consider- the environment or the business. Marketing: Profitably orchestrate ing the size and complexity of the deci- Permitting: By understanding the communication and engagements sion, given that the goal is directional objectives of the relevant regulators and with customers along the path to pur- accuracy, not precision. potential opponents and supporters, chase, with a focus on positioning, Logistics: Connect our assets to develop permit application processes product, price, placement and that will provide the greatest chance of the purchase experience. markets and ensure reliable service to customers by delivering transportation success in the least time at the least cost. Brand Building: Provide a unique solutions to supply goods and services Cost, Energy and Capital Effectiveness: and difficult-to-imitate position in the in a timely and cost-effective manner Eliminate costs that don’t create suf- hearts and minds of customers by using while providing a competitive advan- ficient value, reduce energy usage wher- insights, analytics, marketing, packag- tage to our businesses. ever economical and apply innovative 5 approaches to capital expenditures to Build Talent Acquisition Networks: employee’s comparative advantages. To maximize value creation. Build formal and informal relationships the extent a role requires an employee to globally with organizations and individ- apply a disadvantaged aptitude, the role Reliability: Build, operate and main- uals that prove effective at identifying should be modified. tain our assets and processes so they and recruiting the diverse talent needed. can consistently and predictably maxi- Accelerating Employees’ Learning and mize long-term value. Trade Skills Recruiting: Overcome Practice of MBM: Ensure employees the shortage of certain skilled trades by understand and are applying MBM Benchmarking: Identify, understand partnering with educators, proactively to get results. and adopt relevant best practices, recruiting globally, and attracting and including the best in Koch, in the ABC Process: Apply the ABC process training less-experienced people with industry and in the world. to improve commitment to the Guiding the appropriate aptitude. Principles and the level of talent. This Ownership-Based Work Systems: includes ensuring that the role of each Select First on Values: Hire, advance, Build ownership for value creation at employee fits that employee’s compara- reward and retain people with the the operating level and all other areas tive advantages.

by clarifying responsibili- ties and ac- countabilities, enabling team members to expand their contributions to match their individual capabilities. Business- Determine the talent of all types that will be required long term to maintain our current operations and rapid growth. Focused Prioritization and Improvement: Develop a prioritized approach to talent necessary to produce results, Innovation sustainable improvement by tying but only those who embrace our opportunities to the business vision MBM Guiding Principles. Ensure Leader Commitment: Effective inno- while reducing complexity in order to that our policies, practices, communi- vation requires leaders to define the recognize and capture opportunities cations and compensation reinforce vision, set priorities on the highest- faster than the competition. these Principles. value opportunities, apply the right Talent Development and Optimization mix of talent and resources, optimize Quality Management: Provide risk and establish a culture that creates for KII: Leaders at every level must the planning, control, assurance transformative value. and improvement in quality neces- ensure that sary to deliver products or services employ- “Given Koch’s growth and Identifying Unmet Needs: The that consistently meet or exceed ees are successful development of new developed size, our emphasis should be customers’ expectations. on disruptive innovations.” products, services and business and given models is facilitated by identify- Talent opportuni- ing unmet needs of customers. ties (not hoarded) throughout Koch in Since customers are not yet aware of which they could create the most value. Anticipate Talent Needs: Determine the undiscovered alternatives, this is best talent of all types that will be required Roles and Development by Compara- accomplished indirectly by observation long term to maintain our current op- tive Advantage: Roles and develop- and research to understand their subjec- erations and rapid growth. ment plans should fit and enhance an tive values and dissatisfactions. 5 6 Disruptive Advances: Given Koch’s Technology Adoption: Be an early vide significant gains and reduce losses. growth and size, appropriate emphasis experimenter and timely adopter of Since the future is always unknown, should be on innovations that disrupt superior new technology that increases evaluate a range of outcomes. the status quo. This requires an expan- value for customers, reduces costs, re- Knowledge Systems: Build superior sion of our Vision regarding talent, configures the value chain or improves knowledge sources globally for rel- external networks, capability develop- knowledge. This requires that we have evant developments through trading, ment, resource commitment, risk taking good knowledge networks. and time horizon. knowledge of customers, suppliers Commercialization: Since the value of and their operations, understanding Republic of Science: Innovation is an innovation is, in large part, deter- logistics and political factors, and enhanced by adapting how the best mined by the cost and time to get it having knowledge networks. scientific communities share knowledge implemented and commercialized, we Strategy Development: Understand and focus on real value creation. This must not only have world-class idea gen- key drivers of price movements, such as includes the freedom to determine how eration, but be world-class in execution, supply/demand, money flow, the eco- to create that value, taking into account integration and commercialization. nomics and subjective values of market what is already known. Intellectual Property Strategy: In order participants, demographic, policy and Experimental Discovery: Innovation to maximize the NPV generated over regulatory trends, and logistic econom- is derived from numerous well- the lifetime of an innovation, we must ics and constraints. Only make bets designed experiments to determine which hypotheses will (and which won’t) be successful. The investment in each experi- ment should reflect the risk, the potential return and the value of the knowledge gained. Internal Knowledge Sharing: Recognize that discoveries best occur in a system of shared knowledge and mutually adjust- ing individual initiatives. Thus, we need to proactively share knowledge throughout Koch Innovation is derived from numerous well-designed experiments to determine which hypotheses will be successful. through spontaneous order. where we have (at a minimum) com- External Knowledge Networks: not only optimize the revenue, we must petitive knowledge systems and other Build formal and informal networks optimize our intellectual property posi- capabilities. Ensure rapid and nimble to be aware of relevant develop- tion through patents, copyright, secrecy, response to events and information. ments taking place everywhere in the licensing and contracts. world. Our networks should include Appropriate Risk Taking and Risk-taking Optimization: Absorb risk customers, suppliers, specialists, Incentives: Ensure the level of innova- when we have the capability to manage universities, technology companies, tion risk is optimized for the magnitude it while eliminating unprofitable risk entrepreneurs, investment groups and of each opportunity by providing the mitigation and structuring deals to business advisors. right measures, decision rights, culture optimize returns and avoid catastrophic risks. Employees need to adopt the risk Joint Programs – Internal and External: and incentives. profile of the company, not their own. Apply the division of labor by comparative advantage to innovation by jointly Trading mentality Optionality: Since the future is un- working on opportunities with groups known, always attempt to get profitable that have the best complementary capa- Point of View: See and act on relevant options built into contracts and facili- bilities. These groups may be within or long- and short-term trends before com- ties. Be aware, though, of all the costs independent of Koch. petitors, which, if correct, will both pro- of getting options, such as trade-offs for 7 other terms, the relationship with the integrity. Protect the company, its counterparty or in the capital or operat- employees and shareholders by ensuring cost of the facility. Be careful not to ing 10,000 percent compliance and undervalue the cost of giving options. providing effective legal representation. Making this Vision a reality should provide significant benefits Help further the goals of our busi- for our employees, communities and society as a whole. Asset Ownership Optimization: We nesses in a manner that builds trust and should only own assets or businesses confidence — both with those we deal Results that are worth more to us than some- with in adversarial settings and those in To the extent we are successful in body else, considering our point of commercial transactions, making us the making this Vision a reality, it should view, the capabilities they provide and preferred counterparty. provide significant benefits, not only whether they are a platform for growth. to Koch Industries, but to our employ- Frequently update hold values. Communications: Provide internal ees and communities, and society as a and external communications that whole. If we can demonstrate that our Industry Opportunity Perspective: For accurately depict our performance approach to business and life benefits any service, trade or technique we perform and record, and build an environment those who apply it and those they touch, today or discover that creates value inter- that welcomes the ideas and values it would become much more universally nally at Koch, explore whether the poten- we advocate, while effectively counter- accepted and applied. tial, considering opportunity cost, is large ing misrepresentations. enough to justify offering it externally. The more companies focus on profiting Community and Government only by the economic means, the more Relations: Establish produc- effective they will become at satisfy- tive relationships with relevant ing consumer needs. This, in turn, will officials at all levels of govern- make them more productive and able ment who have jurisdiction to provide more and better jobs, all over our facilities and businesses. while improving workplace safety and Understand and be responsive the environment. to the concerns of our neighbors and leaders in our communities, Through ours and other efforts to which will build trust. encourage market-based policies that improve human well-being, we hope to Branding: Clearly and accu- enable more companies to more fully rately define who we are, what practice Principled Entrepreneurship. we stand for and why we do This would not only make businesses We need to proactively share knowledge throughout Koch. what we do. Ensure that our brand and messages accurately more productive, but, by removing the roadblocks of destructive regulations Waste Elimination: Every activity represent our philosophy and resonate and taxes, open opportunities for busi- should be constantly analyzed (using with relevant audiences. ness start-ups and more and better jobs. benchmarking and other measures) Network Building: Build networks to identify and eliminate waste, which These changes would dramatically with like-minded people and organi- is always increasing as businesses and improve lives across all segments of soci- zations with whom we can work in a methods change. Examples include ety, especially for the disadvantaged. mutually supportive manner to encour- obsolete or unprofitable plants, units, age market-based policies that improve As opportunities open for people to products and practices, unprofitable people’s lives. develop and improve, depressed com- information gathering, needless stud- munities would move from a culture of ies and decision-making processes, or Advocating Policies that Enhance poverty, dependency, hopelessness and value-adding activities with a higher Principled Entrepreneurship™: corruption to one of prosperity, oppor- opportunity cost. Educate the public, organizations and tunity, self-help and self-worth. policymakers as to the philosophies and Public sector policies that we believe best contribute This, in turn, would move us toward to societal well-being. Advocate these what Tocqueville described as the best Legal: Ensure that the company’s af- policies while opposing those we be- in America: civility, voluntary coopera- fairs are conducted lawfully and with lieve to be detrimental. tion, self-help and mutual aid. 8 Looking Back

Noteworthy

Charles Koch credits the transformative power of Market-Based Management® for the remarkable success and growth of Koch Industries. “But past performance does not guarantee future success,” says Koch. “To continue to achieve superior results, we must continually improve our understanding and application of MBM®.” On Sept. 20, 1938, U.S. Patent number INVISTA, which became a Koch To help achieve that goal, the MBM 2,130,948 was issued for one of the company in 2004, has spent hundreds team has produced a series of videos that great innovations of the 20th century: of millions of dollars to continually de- provide detailed case studies involving nylon fiber. velop and manufacture new and better several Koch businesses. Six months later in Seaford, Del., con- nylon products. The first video in the series tells how struction began on the first commercial INVISTA is now the world’s largest applying MBM enabled Georgia-Pacific’s nylon plant. When it opened in Decem- producer of nylon 6,6 polymer (the Green Bay Broadway Mill in Wisconsin ber 1939, that plant established Seaford original form of nylon) as well as ADN to improve safety, productivity, product as the “Nylon Capital of the World.” and HMD — key chemical components quality and leadership. The first commercial use of nylon was for making nylon. MBM also helped transform the future for bristles in toothbrushes, but it The greatest growth area for nylon is in of GP’s North American Consumer didn’t become a household word until engineering polymers and resins. These Products business, which had been it replaced silk as the fiber of choice for tough but lightweight products are des- losing market share. A second video women’s hosiery. tined to play a greater role in automo- documents that turnaround. When nylon stockings were introduced tive manufacturing as car makers try to design more fuel-efficient vehicles. The newest case study in this series details to the commercial market in 1940, they how a team from INVISTA’s Victoria site were so popular that mob scenes some- studied MBM in action at FHR’s Pine times developed at retail stores. Bend Refinery and used shared knowl- Nylon soon became the standard for edge to improve its utilities operations fishing line, surgical thread and tire back in Texas. cord. By the time the U.S. entered All three are available on DVD, or at World War II, nylon 6,6 was also used http://mbm-prod.khc.local/default.aspx. in parachutes, tent canvas and ropes. The development of nylon resin, which could be molded into solid parts, led to its use in thousands of products, from automobiles to adding machines. Constant innovation INVISTA has introduced more than 80 new styles of STAINMASTER® carpet fiber this year — more styles than any other competitor. Although the original patent for nylon expired in 1955, further innovations But odds are, INVISTA already has a have been ongoing for decades. presence in your vehicle. Approximately CORDURA® and SUPPLEX® fabrics, one billion air bags have been made us- TACTEL® fiber and TORZEN® engi- ing INVISTA nylon fiber. neering polymers are just a few exam- And then there are the tire cords, carpets, “In order to be successful it is ples of further breakthroughs. seat belts, wheel covers, oil pans and elec- necessary that you want to be. In his book (and recent Founder’s Day trical connectors made with nylon. You must have the will to win.” message), Charles Koch points to INVISTA Nylon may be 75 years old, but its story

Too True Too – Fred C. Koch as an example of constant innovation. at INVISTA is far from over. 8 9 Dale Gibbens Perspective Vice president – KII Human Resources During my 31 years in Human Resource More than likely, the federal government, Then what? roles at Koch, nothing has prompted with its huge purchasing power, large At Koch we often talk about second- more concerns or questions than the subsidies and pricing controls would and third-order effects — the unintended Affordable Care Act (ACA), often force private car dealers out of business. called “Obamacare.” consequences of a policy or action. Meanwhile, auto manufacturers, forced With the ACA, companies are already Under this law, nearly all U.S. citizens to sell at artificially low prices, would experiencing higher costs because and legal residents will be required to have little incentive to innovate or of new taxes buy health insurance next year. Anyone invest. The final result would be less and fees. who doesn’t, faces a fine (the Supreme choice and lower quality. Many em- Court called it a tax) ranging from $95 This, I fear, will be the unfortunate to more than $2,000 per year. Over ployers are outcome of the Affordable Care Act: also reducing time, the fines/taxes will increase to moving us from an admittedly flawed more than $12,500 per year. employee health insurance model to a single-pay- work hours Tax increases are a big part of the ACA. er, government-run system that severely to avoid the The Medicare withholding tax rate damages the quality, accessibility and in- requirement for millions of taxpayers has already novation of the entire health care system. to provide jumped by 50 percent. A 3.8 percent The set-up health care for surcharge and new taxes on medical those work- If this seems far-fetched to you, consider devices and some insurance plans are ing 30+ hours also being implemented. the Health Insurance Marketplace that just opened. per week. My biggest concern is that these costs Another and changes are only the tip of the iceberg. The government says it’s “a new way to get affordable coverage” and encourages consequence What worries me most is not what hap- people to “learn if you qualify for lower will be lack of pens January 1, when the individual costs.” Sound familiar? innovation. If researchers and entre- mandate kicks in. I’m much more con- preneurs cannot cover their costs — cerned about the long-term effects Of course, the promise of lower costs and let alone be rewarded — for develop- of this law. better coverage has been made before. ing better treatments, why bother? Kick the tires In 1967, shortly after Medicare was And then there is the issue of fairness. launched, the government said it would Imagine if the government decided cost just $12 billion by 1990. In reality, As with so many government pro- everyone had to buy a car. It wouldn’t Medicare cost over $98 billion that year grams, the ACA does not provide a matter if you needed or wanted one — and $551 billion last year. level playing field. you would have to buy a car or face Ironically, the govern- President Obama recently granted waiv- a costly fine. ment is telling us the ers to large companies, allowing them For the millions “What worries me is not what ACA will actually to postpone compliance until after the who couldn’t happens January 1. I’m much result in less spend- next election. Government employees afford a car, a more concerned about the long- ing, even though it may not have to comply at all. Yet in- federal dealer- allows millions more dividuals, families and small businesses ship would offer term effects of this law.” to enroll in Medicare have to comply immediately. taxpayer-subsi- without paying for For years, Koch Industries has worked dized financing by the government and that coverage. I find that prediction to provide reasonably priced health care artificially low prices (mandated to auto beyond belief. benefits. Unfortunately, this new law manufacturers). Younger buyers would Whenever the U.S. government has makes it harder for us to maintain good be forced to subsidize older buyers so all wanted to cut Medicare spending, it has benefits at an affordable cost. prices could be “normalized.” often done so by reducing payments to The ACA has done nothing to help us States would be free to sell, too, giving doctors and health care providers. or other employers improve quality, citizens the choice of private, state-run As a result, many doctors actually reduce cost or increase the number of or federal dealerships. lose money seeing Medicare patients. providers. That is deeply concerning Given that scenario, what would you Consequently, more than 10,000 U.S. for me and, in my opinion, should be expect to happen? doctors no longer accept Medicare. for all Americans.

10 Koch Industries, Inc. Vision MBM® is the overarching capability vital to achieving these objectives, from which specific core capabilities have been and are being developed:

Commercial Excellence The role of Vision development; Principled Entrepreneurship™; customer focus (become business preferred); marketing; branding; origination and knowledge networks; opportunity is to help people improve their lives by generation, evaluation and capture; DMF; logistics; optimization; prioritization. in society To the extent this Vision is realized, providing products and services they value more highly than their alternatives, Operations Excellence we will not only fulfill our role as a and to do so while consuming fewer resources. To the extent a business does business, but further benefit society by: EHS excellence (prioritized by seriousness); permitting; cost, energy and capital this by the economic means, its profits are a measure of the value it creates effectiveness; reliability; benchmarking; ownership-based work systems; business- in society. Creative destruction is inherent in a market system, so a business ➤ Motivating other companies to focused prioritization and improvement; quality management. ™ must not only continually improve the value it creates for customers and practice Principled Entrepreneurship such that they profit only by the society, but do so significantly faster than its competitors. Talent economic means, Thus, to continue to succeed, our Vision is to improve the value we create Anticipate talent needs; build talent acquisition networks; college recruiting, including for our customers more efficiently and faster than our competitors. This should internships; trade skills recruiting; select first on values; talent development and ➤ Educating and mobilizing key enable us to generate the return on capital and investment opportunities optimization for KII (rather than a business); roles and development by comparative constituencies to advocate market- needed to achieve a long-term growth rate that doubles earnings, on average, advantage; accelerating employees’ learning and practice of MBM; ABC process. based policies that improve human every six years. This necessitates significantly accelerating the application well-being, and (in every aspect of our businesses and capabilities) of MBM®, becoming much more forward-looking in talent acquisition and Innovation Leader commitment; identifying unmet needs; disruptive advances; Republic ➤ Helping people improve their lives development, remaining private and continuing to reinvest 90% of earnings, of Science; experimental discovery; internal knowledge sharing; external through new business opportunities, while conducting all affairs lawfully and with integrity. knowledge networks; joint programs – internal and external; technology adoption; new and better jobs, and safer To achieve these goals we must improve our return on capital consumed and commercialization; IP strategy; appropriate risk taking and incentives. communities in which people are substantially increase the origination and capture of investment opportunities. mutually supportive. Our investment focus will be on those opportunities that — by utilizing existing Trading mentality or adding new capabilities — provide the greatest value creation, the highest Point of view (e.g., seeing trends early); knowledge systems; strategy development; returns and contribution, and new growth platforms. risk-taking optimization; optionality; asset ownership optimization; industry opportunity perspective; waste elimination.

Public Sector Legal; communications; community and government relations; branding; network building; advocating policies that enhance Principled Entrepreneurship™.

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