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Home , Charles Koch, Good Profit, Koch Industries, The Science of Success

Discovery AUGUST 2018 THE QUARTERLY NEWSLETTER OF KOCH COMPANIES

A change like no other by , Chairman and CEO – , Inc.

Five years ago, I wrote in Discovery that CREATIVE TRANSFORMATION of new models, new ways of doing our “Vision should continually change As our new Vision states, creative things, ways that are transformative. as the business environment and our destruction has always been with us, but That word, “transformative,” is essential, capabilities change, and as we learn today’s rate of change is unprecedented. because in order to deal with today’s rapid what we need to do to more effectively The speed and degree of these rate of change, we make progress.” So it should come as changes are improving people’s Our goal is to create must be willing to no surprise that we have revised Koch lives and creating exceptional transform ourselves Industries’ Vision and Guiding Principles opportunities, but are also virtuous cycles of at every level — once again. threatening the very existence mutual benefit. as , as But these changes are unlike any that of long-standing jobs, firms capabilities and we have made in the past. They are and industries. – Charles Koch as employees. more necessary, more urgent and more Some have reacted to these changes by fundamental. They are so important that trying to slow things down or stop them THE PAST AS FUTURE I want to make sure that you not only altogether. Taxi drivers want to ban To meet our new challenges at the business understand what we’re changing, but why. Uber. Politicians want to ban imports. and capability level, we more deeply Universities want to ban ideas that examined what had made us so successful challenge their orthodoxies. Manufacturing over the years. We found that it was THIS ISSUE... workers want to ban robots. Many creating virtuous cycles of mutual benefit. businesses seek the government’s help — 3 “” back in print The cycle begins when we develop asking it to pick the winners and losers. 5 Explanation of new Vision, Principles capabilities that enable us to create value 14 KTC expands globally The alternative to this harmful approach for others. In business, this allows us 15 Law, and Legislation is to not only embrace change, but drive to capture opportunities where we are it. It’s not enough to just do things more rewarded for creating superior value for our efficiently. We need to be thinking in terms customers. As we improve and add to our capabilities, new opportunities open, SELF-EVIDENT TRUTHS advantage, without having to agree which point to the need for additional on common concrete aims, and bound The Declaration of Independence capabilities, and so on, in never-ending only by abstract rules of conduct, promised a society of equal rights and cycles of improvement and growth. was perhaps the greatest discovery human dignity. To bring this about, the mankind ever made.” It’s a system based on mutually beneficial founding fathers envisioned a government relationships — on a philosophy that would secure these rights rather As I commented at the time, the principles of enlightened self-interest — the than violate them, as had been the case of that discovery “mirror the goal of my realization that you will benefit when you throughout history. business management framework: that make the other party better off. I have yet everyone knows the right thing to do and Frederick Douglass, a former slave and to find any business or aspect of life where is motivated by it — without explicit or leading abolitionist, saw their importance: this approach does not work. overly detailed rules.” “The principles We believe that to succeed in the future, contained in that The role of business in Like Hayek, I believe we every business must greatly improve its instrument are saving succeed when we are ability to create these cycles, utilizing principles. Stand society is to help people free to interact, share whatever technologies are useful. by those principles, improve their lives. ideas, make spontaneous be true to them on connections and help A PRINCIPLED APPROACH all occasions, in all – Charles Koch others do the same. places, against all To help us all understand how we That’s why at Koch we provide a foes, and at whatever cost.” can contribute to this new vision as framework rather than long lists of rules. employees, we have also updated our Douglass also saw that America had We want you to have the freedom and MBM® Guiding Principles. This is essential fallen far short of that ideal. African– opportunity to become self-actualized because virtuous cycles can only be Americans and Native Americans had no — to achieve fulfillment in your life and created by employees who understand and rights, and women, certain immigrants career by realizing your potential. and several religious minorities had only are committed to what is required. Self-actualized people are motivated to partial rights. Many others had their All of us must internalize and live by the make ever-greater contributions to those rights violated through and Guiding Principles. Doing so can enable around them, because doing so enables cronyism, as they do today. anyone to become more fully self- them to have an increasingly rewarding actualized. This is necessary for creating Our Vision for Koch Industries is based and fulfilling life. This is the same concept virtuous cycles, because self-actualized on our belief that we must honor these of mutual benefit at a personal level. people are motivated to cooperate, create inalienable rights and create value and contribute, and are eager to take on for society as a whole, as well as for CONCLUSION new challenges. our customers, employees and other It is time-honored, proven principles constituencies. MBM has been developed from a that form the foundation of our business. wide range of principles originating Those same principles have transformed THE GREATEST DISCOVERY from multiple sources. But there are my life and enabled me to do far more two sources, in particular, that are A pivotal insight from Hayek provided the than I ever imagined. fundamental to understanding our first quote in my book, “.” By applying them to your life’s work, I am Vision and Principles. These are the U.S. “The possibility of men living confident they will do the same for you. Declaration of Independence and an together in peace and to their mutual insight from .

2 KOCH INDUSTRIES, INC. VISION

The role of business in society is to help these changes are improving people’s lives methods and products. Disruptive people improve their lives by providing and creating exceptional opportunities, but technologies can be a powerful tool for products and services they value more are also threatening the very existence of all of these. highly than their alternatives, and do long-standing jobs, firms and industries. By being a preferred partner and so responsibly while consuming fewer To succeed in this new world, we must driving continuous improvement and resources. To the extent a business have a heightened sense of urgency perpetual transformation, we can accomplishes this, its profitability is a valid and the commitment to continually generate virtuous cycles of mutual measure of the value it creates in society. transform our performance. We cannot benefit. Such cycles – created through Creative destruction has always been create superior value for our customers, MBM®, and enhanced by remaining with us, but today’s rate of change is company, employees and society unless private and reinvesting 90% of earnings unprecedented. The speed and degree of we develop new visions, strategies, – result in superior returns and growth.

CAPABILITIES THAT ARE CRITICAL TO OUR VISION:

MARKET-BASED MANAGEMENT® OPERATIONAL EXCELLENCE TALENT MBM® is the overarching capability that Be the preferred operator. Exemplify Select, develop, reward and retain guides all others through the application Stewardship and Compliance. Seek, employees based on their commitment of its framework, dimensions, principles acquire, develop and apply the strategies, to our Guiding Principles. Enable and concepts. methods and technologies that lead to employees to maximize their potential competitively advantaged performance. and contributions by becoming more COMMERCIAL EXCELLENCE fully Self-Actualized. Ensure roles are Be Principled Entrepreneurs. Give INNOVATION based on comparative advantage and preference to counterparties with aligned Identify trends early, continually reward employees for the value they vision and values, and complementary experiment, leverage Knowledge create. capabilities. Use good economic thinking and drive Transformation in order to to generate continuing cycles of new maximize results. PUBLIC SECTOR capabilities and opportunities. Help make Koch the preferred partner of its key constituencies. Create the best possible environment for Principled Entrepreneurship™. Help remove barriers that prevent people from realizing their potential. Motivate others to do the same.

3 GUIDING PRINCIPLES

These principles define who we are as an organization. We all have a responsibility to live by them daily. They are essential to the creation of virtuous cycles of mutual benefit.

1. INTEGRITY 4. TRANSFORMATION 7. RESPECT Have the courage to always act Transform yourself and the company. Treat everyone with honesty, with integrity. Seek, develop and utilize the visions, dignity, respect and sensitivity. strategies, methods and products that will Embrace different perspectives, enable us to create the greatest value. experiences, aptitudes, knowledge 2. STEWARDSHIP & COMPLIANCE and skills in order to leverage the Act with proper regard for the rights power of diversity. of others. Put safety first. Drive 5. KNOWLEDGE environmental excellence and comply Acquire the best knowledge from any 8. SELF-ACTUALIZATION with all laws and regulations. and all sources that will enable you Be a lifelong learner and realize Stop, think and ask. to improve your performance. Share your potential, which is essential your knowledge proactively. Provide and solicit challenge consistently and for fulfillment. As you become increasingly self-actualized you 3. PRINCIPLED ENTREPRENEURSHIP™ respectfully. will better deal with reality, face Practice a philosophy of mutual benefit. the unknown, creatively solve Create superior value for the company problems and help others succeed. by doing so for our customers and 6. HUMILITY society. Help make Koch the preferred Be humble, intellectually honest and deal with reality constructively. Develop partner of customers, employees, an accurate sense of self-worth based suppliers, communities and other on your strengths, limitations and important constituencies. contributions. Hold yourself and others accountable to these standards.

4 Koch Industries’ updated Vision and Guiding Principles emphasize VIRTUOUS CYCLES OF some important new concepts that require close attention and thoughtful application. MUTUAL BENEFIT The following material is intended to help explain these concepts and, more importantly, provide guidelines for applying them in ways that enable us to create ever-greater value.

Virtuous cycles of mutual benefit are made possible by two interrelated philosophies: becoming a preferred partner and continual transformation.

They begin when we develop capabilities that enable us to create value for others. We apply these capabilities to serve the customers for whom we can create the most value, and who will reward us accordingly. We call these cycles virtuous because they benefit all the parties involved.

As we improve and add to our capabilities, new opportunities open, which point to the need for additional capabilities. This leads to never-ending cycles of improvement and opportunity.

To ensure that these cycles are both never-ending and virtuous, we strive to become the preferred partner of all our constituencies: customers, employees, suppliers, communities, co-investors, regulators and society as a whole. These cycles also require that we continually transform ourselves.

At its root, MBM® is designed to help our abilities into valued skills, have roles willingness to create a relationship of organization succeed by creating value for which they have a comparative mutual benefit. for others. More specifically, it is a guide advantage and are rewarded for the to becoming the preferred partner of our • Work to understand what regulators value they create. core constituencies. To achieve this, we: are trying to achieve and then • Select suppliers who share our vision cooperate with them in a philosophy of • Provide customers with products and values, and can and will create mutual benefit. We encourage them to and services they value more than the most value for us. Then we apply regulations in a way that enables their alternatives. Anticipate what compensate them for that value. rather than hinders people’s ability to customers’ alternatives will be so create value for others. we can continue to create value for • Locate in communities that have them in the future. Our preferred the laws, culture, capabilities and • Benefit society by practicing good customers are those who compensate geographic location that enable stewardship and improving our us for the value we create. us to create the most value. We ability to consume fewer resources, dedicate ourselves to making those which frees those resources to • Help employees realize their communities a better place to live satisfy other needs. We also strive to potential. This is why we select, by applying our Guiding Principles. remove barriers that prevent people develop, reward and retain employees from realizing their potential, and based on their commitment to our • Give preference to co-investors encourage others to do the same. Guiding Principles. We work to ensure with aligned vision and values, that employees develop their innate complementary capabilities and a

5 CONTINUAL TRANSFORMATION

Continual transformation is not an option. The alternative is extinction. Our attitude — as a business and as — is that however well we are doing, we can and must do much better. This is what described as creative destruction. THE IMPORTANCE OF “Businessmen,” he said, are always “standing on ground crumbling beneath their feet.”

Our transformations are informed by knowledge networks within each business, Koch Industries and across the industry. These networks don’t just happen, they are built. In keeping with our Republic of Science approach, we seek to understand trends anywhere The success of any organization begins extensive effort to communicate our new in the world — from any and all useful with its vision. An effective vision Vision. An effective vision also enables sources — that might improve, disrupt or not only declares what we are trying employees to be self-directed and to fully destroy what we do today. To ignore such to achieve, it provides a credible path utilize their innate abilities. developments is suicide. toward that end. As such, it must be Another important source of knowledge realistic and based on the organization’s THE ROLE OF BUSINESS is experimentation. To generate capabilities. At Koch, our Vision is our Helping people improve their lives is the widespread experimentation, we North Star — a constant guide and ever- proper role of business. To be successful, cultivate a culture of prudent risk taking, present reminder of the path we believe businesses must continually improve without penalizing the failures that best fits us. their products and services, and do so come from well-designed experiments. A well-articulated vision motivates responsibly and efficiently. Only then Successful experiments signal us to move employees to be productive and will customers choose their offerings forward. Unsuccessful ones tell us to innovative — but only if each employee over the many available alternatives. change or stop, preventing much larger knows the vision and is committed to Successful businesses maximize the future losses. it. That is why we are making such an difference between the value they create for their customers and the value of THE 2ND LAW OF THERMODYNAMICS those resources if consumed elsewhere. They also do their utmost to respect the We bring about continual transformation by rights of others. employing all suitable knowledge sources This commitment is reflected in more to enable us to create better opportunities, than just products and services. It strategies and methods. This kind of requires creating a work environment in openness can seem counterproductive when which the safety of employees and others things are going well, but today, creative is the highest priority, the environment destruction will soon revolutionize your is protected, laws and regulations are business, if it is not doing so already. observed, and the temptation to distort nd Science, in the form of the 2 law of the rules in hopes of gaining an unfair thermodynamics, shows why this is so. That advantage is always resisted. law states that in closed systems, entropy In our Vision, we stress the need to (disorder or uselessness) inevitably increases. continually transform ourselves due This applies to every human activity, to the reality of creative destruction. and business. Thus, those who close themselves Although creative destruction threatens off in any way, including to new ideas or outside and always has threatened the very knowledge, decline. This is particularly existence of long-standing jobs, firms tragic when a company (such as Kodak) and industries, it also creates exceptional holds back a new invention (digital opportunities. To give us a better chance photography) so it won’t erode the of capturing those opportunities, we need market for its current products. to fully understand it. That is a prescription for failure. Nicolas Léonard Sadi Carnot, originator of the 2nd Law of Thermodynamics. 6 6 Schumpeter called creative destruction “the essential fact of capitalism” and described it this way: “It is not [price as innovations have made the as a result. When we do, we enjoy and output] competition which counts, industry 100 times more labor superior profitability. Our first hurdle but the competition from the new efficient. Even so, unemployment is getting beyond an understanding of , the new technology, the didn’t increase. Workers found even the concepts; we also need to be able to new source of supply, the new type better employment providing new effectively apply them. of organization which commands a products and services that have decisive cost or quality advantage and This requires learning by doing. Training improved our lives. which strikes not at the margins of the is important because it helps you get profits and the outputs but at their The question is, what should those started, but it cannot take the place of foundations and their very lives.” whose jobs are threatened by new continual learning by trial, error and technology do in this situation? They feedback. We don’t progress if we are need to discover their innate abilities afraid of making mistakes. Real-world and develop them into valued skills. experience is what creates deep, tacit In short, they need to become self- knowledge of how to get results. actualized lifelong learners. Commercial Excellence requires each of Continuous improvement has always Given our new Vision and a rapidly us to be Principled Entrepreneurs. This been necessary, but it has never been changing world, the importance of self- Principle describes our focus on creating sufficient. Long-term business success actualization cannot be overestimated. superior value through practicing a has always required transforming in It is now the culmination of our philosophy of mutual benefit. This order to provide much greater value at Guiding Principles. philosophy enables us to become the much lower costs. preferred partner of our important constituencies. Their capabilities, when If the need to deal with creative UNDERSTANDING OUR CAPABILITIES combined with ours, can create much destruction was important when To continue to build virtuous cycles of greater value than either party could Schumpeter wrote about it (1942), it is mutual benefit, we must continually achieve alone. exponentially more important today. enhance and add capabilities that will This is why we have such a heightened enable us to create the greatest value. Good economic thinking is and always sense of urgency to transform our ability has been critical to our success. Whether In previous versions of our Vision, to create value, and to use disruptive we are evaluating insurance, considering Trading Mentality was listed as a technologies when they will help us do a hedge on our raw material purchasing, capability. In our attempts to streamline so. We are stressing the need for each of or tracking our inventory levels, good our Vision and capabilities, we realized our businesses and capabilities to become economic thinking, judgment and the items listed under Trading Mentality more aggressive in creating virtuous risk optimization should inform our are already incorporated in other cycles of mutual benefit. decisions. Understanding and addressing capabilities. For example, economic shortcomings in the return on capital To continue to succeed at creating thinking is in commercial excellence, across the many parts of our businesses virtuous cycles in this new world, we are waste elimination is in our Vision’s is essential to creating virtuous cycles. even more focused on eliminating waste first paragraph and applying our risk — anything that doesn’t create superior philosophy is articulated in our MBM As Principled Entrepreneurs, we must value. The greatest waste is in continuing framework and concepts. To avoid continually strive to generate new to operate businesses when we are no unnecessary duplication, Trading opportunities that, in turn, require new longer able to create new cycles. This is Mentality was deleted. capabilities in a never-ending cycle. not only a waste of our capital, but of the Prior descriptions of capabilities often Operational Excellence is not just creative of our people. We would included lists of models or attributes. focused on manufacturing operations, rather exit these businesses as soon as we This has changed, too. Rather than but on all aspects of our business. It reasonably can. focus on building blocks and attributes, includes the accountant working in As we transform our businesses, they we have focused on the outcomes a financial reporting and the developer in will become more labor efficient. This capability should generate. IT just as much as it does the operator in means fewer employees will be required the plant. Market-Based Management® is for any given role and each role will be our overarching capability. All Whatever role we are in requires more demanding and fulfilling, involving employees must seek to improve their understanding our responsibility to less drudgery. Naturally, this gives rise understanding of its dimensions, manage our actions and the resources to the concern there will be fewer jobs principles and concepts, and improve entrusted to us in a manner that respects in general, resulting in much higher their application of MBM. the rights of others. This includes safety, unemployment. environmental protection, compliance For MBM to work, results must be But history indicates this doesn’t need to with all laws and regulations, respecting the focus. As stated in our Vision, we be the result. In 1800, 73 percent of the the property of others and keeping our succeed by creating value for others U.S. labor force worked in agriculture. commitments. and becoming the preferred partner Today that number is less than 3 percent,

7 We constantly strive to improve how commitment to our Guiding Principles relationships and actions enhance individuals, work is accomplished. For example: and their contribution to value creation. organizations, communities and society as strategies — including using data to a whole. We are committed to always acting The supervisor plays a critical role in more deeply learn what our customers in accordance with our Principles, never enhancing our culture and in helping value; methods — such as making violating them in pursuit of profit. all employees transform their ability paper products using less pulp; and to contribute. It is no easy task for We oppose cronyism and protectionism in technologies — including using sensors employees to replace old mental models all forms. We believe government should to increase safety and eliminating with new ones based on MBM and our secure equal rights for every person and never highly repetitive tasks by using bots. Guiding Principles. But as they do, they engage in picking winners and losers. All this reflects our commitment increasingly realize their potential and to continuous improvement and Seeking to make Koch the preferred become self-actualized. perpetual transformation. partner of its important constituencies is This takes a real desire to change on the the responsibility of every employee and Innovation starts with encouraging employee’s part, as well as mentoring especially every leader — whether in a the passionate pursuit of hunches, by the supervisor. It is also critical that business or capability. Any employee who no matter where they originate. We employees have roles, responsibilities makes it more difficult for any of our key proactively seek knowledge from the and expectations that reflect their constituencies to deal with us undermines the best sources — inside and outside the comparative advantage(s), which need overall success of Koch Industries. company — rather than being satisfied to be adjusted as the group changes. with familiar sources. We seek to remove the societal barriers to Public Sector is seeking to create an opportunity that are holding so many people We stress clearly articulating our environment in which everyone can back. Everyone benefits when individuals hypotheses in a concrete and specific practice Principled Entrepreneurship™ throughout society have the opportunity way, so they can be challenged, — one in which mutually beneficial to learn, contribute and succeed. tested and improved. Innovation usually involves numerous changes in direction that lead to the discovery of new paths. We look beyond today’s successes in order to recognize the trends and market forces that could disrupt existing products, services and ways of doing business.

It is critical that we all embrace challenge, both by soliciting different perspectives and expertise, and by having the courage to speak up when we disagree.

Experimenting appropriately helps us know what and how to drive transformation — in our products, methods and the use of technology. This 1990s experiment by Koch Ag was unsuccessful. We never pursue innovation or transformation just for the sake of change itself; we do it in pursuit of EXPERIMENTATION AND FAILURE value creation. A good experiment leads to new knowledge that brings about change, even if our Talent is essential for our success; assumptions or hypotheses turn out to be wrong. however, even more vital to MBM and Appropriate experimentation recognizes that benefits seldom come immediately. virtuous cycles is the right culture. Progress — whether in business, an economy or science — comes through This is why we hire people first on experimentation and failure. Failures quickly and efficiently signal what doesn’t values, second on talent and not at work, minimizing waste and redirecting scarce resources to what does work. all on credentials. Employees are expected to take the time to design experiments appropriately. No matter how difficult a role is to fill, Leaders must be patient and not punish failed — but well-designed — we cannot overlook values. A decision experiments. to hire someone with bad values is A market economy is an experimental discovery process in which business much costlier (in so many ways) than failures are inevitable. Any attempt to replace them with grand plans only a delay in finding the right candidate. ensures even greater failures. Once hired, employees should be retained and rewarded based on their

8 GUIDING PRINCIPLES

THESE PRINCIPLES DEFINE WHO WE ARE AS AN ORGANIZATION. WE ALL HAVE A RESPONSIBILITY TO LIVE BY THEM DAILY. THEY ARE ESSENTIAL TO THE CREATION OF VIRTUOUS CYCLES OF MUTUAL BENEFIT.

The ultimate goal of these Principles is for every employee to become more fully self-actualized, because self- actualized employees are vital to our Vision. Employees must internalize our Guiding Principles through reflection and routine practice until they can apply them instinctively.

The extent to which our organization has an innovative and constructive culture vs. a dysfunctional one is Acting with integrity requires Nothing is more important than human life determined by the degree to which our courage because doing the right and the safety of employees, contractors, employees are self-actualized. Leaders thing can sometimes be difficult and community members and all those affected have an especially important role in uncomfortable. We expect employees to by our business. That is why safety comes making our culture constructive. Good act with integrity, even if it makes them before all other important aspects of leaders not only live by our Guiding fearful or subject to criticism or attack. business. All employees must help create Principles, they regularly review them What good are principles if we abandon the conditions for a safe workplace by with employees and provide frequent them under pressure? asking questions and challenging practices and honest feedback that stimulates when they have concerns. dialogue and change. Driving environmental excellence requires Effective leaders make a point STEWARDSHIP & understanding and addressing the highest- of holding themselves and their COMPLIANCE consequence risks first. We must use good organization accountable for applying 2 judgment, economic thinking and initiative these Principles in a way that enhances ACT WITH PROPER REGARD to achieve ongoing improvement in our self-actualization, leading to virtuous FOR THE RIGHTS OF OTHERS. performance. PUT SAFETY FIRST. DRIVE cycles of mutual benefit. We also implement responsible ENVIRONMENTAL EXCELLENCE environmental practices — even if not AND COMPLY WITH ALL LAWS required by law. We respect the rights and INTEGRITY AND REGULATIONS. STOP, values of others, which aids us in becoming 1 HAVE THE COURAGE TO ALWAYS THINK AND ASK. a preferred partner in our communities. ACT WITH INTEGRITY. Stewardship is defined as an All employees are expected to know and individual’s responsibility to manage Integrity is our first Guiding Principle understand the compliance requirements his or her life and property with proper because it is the foundation for trust and for their roles, identify factors and risks regard for the rights of others. When mutually beneficial relationships. To act that might lead to non-compliance, and understood this way, the word “rights” with integrity is to adhere to a firm moral discuss with their supervisor how best to refers to everyone’s right to their own code. For us, that moral code includes all comply. Compliance does not preclude the life and property, and equal treatment our MBM Guiding Principles. fact that there is always a better way to do under the law. things. Imagine how productive businesses As an employee, stewardship means would be if everyone acted with complete The only way to truly create value in society responsibly managing your actions and integrity, with their word as their bond, is to be a good steward. When unsure about the resources entrusted to your care never doing anything they wouldn’t want how to respect the rights of others, work in a manner that respects the rights exposed to the whole world. There would safely, achieve environmental excellence of others. Such resources can range be much less need for all the time and or comply with legal and regulatory from company property and natural money spent on controls, litigation and requirements, you must stop, think and resources to business relationships security. The enormous drag of transaction ask before proceeding. and time (both yours and others’). costs would be greatly reduced, too.

9 TRANSFORMATION 4 TRANSFORM YOURSELF AND THE COMPANY. SEEK, DEVELOP AND UTILIZE THE VISIONS, STRATEGIES, METHODS AND PRODUCTS THAT WILL ENABLE US TO CREATE THE GREATEST VALUE.

Employees must have an attitude that no matter how well they are performing today, they can always do better — and much better as superior methods and technologies become available. Doing so requires becoming a lifelong learner rather than resting on your laurels.

The same is true for businesses. No matter how well a business is doing, if it doesn’t drive continuous improvement and perpetual transformation, it will become obsolete. Any attempt at closing itself off from competition or innovation will prove fatal. It’s not a matter of if that business will die, but when it will die.

An individual or business cannot be successful in the modern world without improving at a greater rate than current and future competitors. There can be no long-term success without continual transformation. Each of us must develop new knowledge and skills to keep up with the rapid pace of change happening all around us.

KNOWLEDGE ACQUIRE THE BEST KNOWLEDGE PRINCIPLED for others. This requires each of us 5 FROM ANY AND ALL SOURCES THAT ENTREPRENEURSHIP™ to be entrepreneurial — applying 3 initiative, judgment and economic WILL ENABLE YOU TO IMPROVE PRACTICE A PHILOSOPHY OF thinking consistent with the company’s YOUR PERFORMANCE. SHARE MUTUAL BENEFIT. CREATE risk philosophy — in order to identify YOUR KNOWLEDGE PROACTIVELY. SUPERIOR VALUE FOR THE and pursue the opportunities that will PROVIDE AND SOLICIT CHALLENGE COMPANY BY DOING SO FOR create the most value. CONSISTENTLY AND RESPECTFULLY.

OUR CUSTOMERS AND SOCIETY. We strive to become the preferred Knowledge is more than data, facts or HELP MAKE KOCH THE PREFERRED partner with all our important information; it’s about understanding PARTNER OF CUSTOMERS, constituencies: customers, employees, and know-how that is used profitably to EMPLOYEES, SUPPLIERS, suppliers, communities, co-investors, improve results. COMMUNITIES AND OTHER regulators and society as a whole. We Each of us must seek knowledge from IMPORTANT CONSTITUENCIES. become a preferred partner when others sources both inside and outside our choose to work with us. Practicing a philosophy of mutual company, industry and field of expertise. benefit means we pursue opportunities, In a spirit of mutual benefit, we do Building knowledge networks is critical, relationships and transactions in which our best to understand and provide because no individual or company can we can succeed by benefitting others. what each customer values, and give match the world’s rapid innovation and This is our foundational philosophy. preference to those for whom we can improvement with internal resources alone. create the most value, and who will Our starting point in developing business Knowledge networks are made possible by compensate us accordingly. opportunities is understanding what applying a philosophy of mutual benefit capabilities we have that will create value — where we collaborate and engage in

10 knowledge seeking and sharing in a in the spirit of improvement. We must when we fall short of these standards. way that enhances the rate of learning listen and be open to others and their Holding others accountable (bearing the for everyone involved. Benchmarking ideas, regardless of their position or title. consequences, good or bad) for results and experimentation are also and behavior consistent with our MBM important methods for gaining the Principles is critical to our success. This beneficial knowledge needed to HUMILITY often requires courage, especially when it improve our performance and is necessary to deal with someone’s poor BE HUMBLE, INTELLECTUALLY transform our business. performance or behavior. 6 HONEST AND DEAL WITH Seeking, sharing, discussing and REALITY CONSTRUCTIVELY. challenging ideas and plans plays a DEVELOP AN ACCURATE RESPECT crucial role in our success. We define SENSE OF SELF-WORTH TREAT EVERYONE WITH challenge as continual questioning and BASED ON YOUR STRENGTHS, 7 brainstorming to find a better way. HONESTY, DIGNITY, RESPECT LIMITATIONS AND Challenge should always occur in the AND SENSITIVITY. EMBRACE CONTRIBUTIONS. HOLD spirit of making better decisions and DIFFERENT PERSPECTIVES, YOURSELF AND OTHERS achieving better results. To consistently EXPERIENCES, APTITUDES, ACCOUNTABLE TO THESE provide and solicit challenge means to KNOWLEDGE AND SKILLS IN STANDARDS. make it a habit. It has to be a central ORDER TO LEVERAGE THE part of our culture. Our approach To be humble is to understand and accept POWER OF DIVERSITY. to challenge is based on the noted yourself as you really are, and to accept To advance our Vision of creating superior philosopher of science, Karl Popper’s others as they really are. It is the absence value for others and becoming the view of the scientific method: After of arrogance and conceit, not the absence preferred partner of our constituencies developing a theory, strive to falsify, of strength or intelligence. Intellectual through a philosophy of mutual benefit, disprove or find the flaws in it, rather honesty is even broader. It is dedication we must treat everyone with dignity and than trying to defend or justify it. to truth, even when the truth is painful. respect. Individuals are more motivated, A challenge process is essential for Rather than just looking for evidence productive and innovative when they are important decisions. This may occur to support our ideas and views, or treated respectfully. at a formal meeting where people with pretending to be something we are not, It is disrespectful to judge an individual different aptitudes and expertise — we must sincerely seek constructive — positively or negatively — based those with knowledge about the key criticism and strive to see things as they on group identity. It is natural and drivers of success — discuss, brainstorm are rather than how we wish them to appropriate for people to be proud and improve outcomes. But knowledge be, and act accordingly. Constructively of their heritage and other personal sharing and challenge can and should dealing with reality could mean we stop characteristics, but there is no excuse also happen in informal settings, such doing something that isn’t working, for an “I’m better than you” attitude as one-on-one discussions, casual improve what we are doing or try towards those who are different. We conversations or small group meetings. something completely new. must recognize that each person is a Either way, efforts to disprove or Every individual has inherent worth as unique collection of aptitudes, abilities identify the shortcomings of an idea a person. This has nothing to do with and interests, and create an environment are a natural (and essential) part of our money. An accurate sense of self-worth where all of us are able to maximize our culture. It’s much less expensive to comes from first believing you are worthy contribution and realize our potential. disprove a bad idea or find and correct of life and respect, then discovering your In many companies, diversity is an faults if we do so before taking action. talents and limitations, and developing initiative with demographic quotas and applying them in ways that To continually improve and transform, or goals that focus on factors such as contribute to society. nothing and no one can be immune to gender and ethnicity. Market-Based challenge. To respectfully provide and We should have high expectations of Management views and approaches these solicit challenge means that we need to ourselves, give credit where credit is due things differently. For us, leveraging challenge ideas, not people, and do so and willingly admit and make corrections the power of diversity means to seek and embrace different perspectives, experiences, aptitudes, knowledge and skills to drive innovation and enable us to create value for the variety of our customers. When done well, this stimulates teamwork, and the division of labor by comparative advantage, maximizing value creation.

11 SELF- other ways to contribute, which leads to a ACTUALIZATION life of virtuous cycles on a personal level. 8 Achieving this personal transformation BE A LIFELONG LEARNER AND goes beyond satisfying your basic REALIZE YOUR POTENTIAL, WHICH physiological and communal needs. You IS ESSENTIAL FOR FULFILLMENT. must also develop your innate abilities. As AS YOU BECOME INCREASINGLY Maslow warned: “If you deliberately plan to SELF-ACTUALIZED YOU WILL be less than you are capable of becoming, BETTER DEAL WITH REALITY, you’ll be deeply unhappy for the rest of FACE THE UNKNOWN, CREATIVELY your life. You will be evading your own SOLVE PROBLEMS AND HELP capacities, your own potential.” OTHERS SUCCEED. So, to paraphrase Maslow, what you can be, We have made self-actualization the final you must be. Principle because a person who internalizes The characteristics of a self-actualized and lives by these Principles becomes person include: self-actualized. Such people are motivated • liking responsibility, especially for to contribute, face reality, creatively solve one’s self problems and help others succeed. Self- actualized people are essential to the • being active rather than passive success of any business, particularly one • preferring meaningful work whose vision is to create virtuous cycles of mutual benefit. • having a realistic understanding of one’s own strengths and limitations Self-actualization was defined by psychologist Abraham Maslow as realizing • a willingness to face the unknown one’s potential — what he described as • constructively dealing with reality How does someone begin the journey “everything one is capable of becoming.” • thinking for one’s self toward self-actualization? It starts Reaching this level requires discovering, with the belief in your self-worth. As • creatively solving problems developing and utilizing your innate America’s founding fathers wrote in the abilities to live a life of meaning and • being motivated by accomplishments, Declaration of Independence, “all men contribution. It requires becoming rather than succeeding at the are created equal, and endowed by their motivated to contribute, rather than expense of others Creator with certain inalienable rights.” motivated by deficiencies. When self- • and being free of defensiveness, Not only do you have the right to exist actualized people contribute, it gives them posturing and hypocrisy. and pursue your own path, you have such a good feeling that they strive to find innate abilities and aptitudes. You have the ability to learn, contribute and succeed. As you believe this, you begin to act on it. As you develop, you better yourself by contributing.

Moving toward self-actualization requires Every day, each of us makes decisions deliberately and persistently striving to that will decide if we will continue improve, developing your aptitudes in ways that to grow and improve, be responsible are useful to others. “Every person is, in part, rather than dependent, be motivated by his own project and makes himself,” Maslow courage instead of fear, creatively solve said. “We must constantly learn about our problems and face the unknown rather own strengths and limits and extend them by than protect the status quo and cling overcoming difficulties, by straining ourselves to to the familiar. When we are willing to the utmost by meeting challenge and hardship, learn from anyone who has something even by failing… This is the to teach us, we greatly increase the best path to healthy self- chance we will succeed — not just today esteem, which is based not but for a lifetime. Lifelong learning is only upon approval from essential to realizing our potential and others, but also upon actual becoming increasingly self-actualized. achievement and successes and upon the realistic self- confidence which ensues.” Abraham Maslow

12 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.

I wish to express my gratitude and appreciation for the Fred & Mary Koch Foundation Scholarship given to my daughter, Alicia, over the last four years.

8 PRINCIPLES 8 POTENTIAL Alicia graduated summa cum laude from These principles define who we are as an organization. We all have a responsibility to live by them daily. They are essential to the creation of virtuous cycles of mutual benefit. DePauw University on May 20 with a degree 1 INTEGRITY 5 KNOWLEDGE in biochemistry. Have the courage to always act with integrity. Acquire the best knowledge from any and all sources that will enable you to improve your performance. Share your knowledge proactively. Provide and During her time at DePauw, she 2 STEWARDSHIP & COMPLIANCE solicit challenge consistently and respectfully. Act with proper regard for the rights of others. Put safety first. Drive environmental excellence and comply 6 HUMILITY volunteered at the local prison, tutoring with all laws and regulations. Stop, think and ask. Be humble, intellectually honest and deal with reality constructively. Develop an accurate sense of self-worth based on your strengths, limitations and inmates who were pursuing their GED. 3 PRINCIPLED contributions. Hold yourself and others accountable ENTREPRENEURSHIP™ to these standards. Practice a philosophy of mutual benefit. Create 7 Alicia plans to attend law school and work superior value for the company by doing so for RESPECT our customers and society. Help make Koch the Treat everyone with honesty, dignity, respect preferred partner of customers, employees, suppliers, and sensitivity. Embrace different perspectives, to reform our criminal justice system and communities and other important constituencies. experiences, aptitudes, knowledge and skills in order to leverage the power of diversity. help those less fortunate than she is. 4 TRANSFORMATION 8 SELF-ACTUALIZATION Transform yourself and the company. Seek, Be a lifelong learner and realize your potential, develop and utilize the visions, strategies, methods which is essential for fulfillment. As you become Thank you, and products that will enable us to create the increasingly self-actualized you will better deal greatest value. with reality, face the unknown, creatively solve problems and help others succeed.

Constantine Cotsoradis On June 5, Charles Koch announced MBM®, MARKET-BASED MANAGEMENT® and PRINCIPLED ENTREPRENEURSHIP™ are trademarks of Koch Industries, Inc. in the United States, and may be registered in certain jurisdictions. © 2018 Koch Industries, Inc. Compliance Manager – Measurement that would be retiring from Flint Hills Resources the Koch Industries board and other Omaha, organizations due to persistent Koch’s full-sized Guiding Principles health problems. poster will be available in late August. Following are some of the comments To order, visit KOCH.link/MBMinPrint. received after that announcement. Koch Industries

Lynn and David shared their stories of personal tragedy, Really sad to hear about David’s health redemption, and perseverance and how they hope to inspire young adults to lead lives of meaning and purpose: THE SCIENCE OF SUCCESS issues. I will be forever grateful for the https://bit.ly/2qFzSPdTHE SCIENCE #SecondChancesMonth OF SUCCESS This popular book, originally published in 2007, was written to explain blessings provided to me and my family the development and application of Market-Based Management® to a broad audience. It includes a brief history of Koch Industries, a chapter by the . From my first job devoted to praxeology (the science of ) and a chapter for each of the five dimensions of MBM®. in America to a great foundation to grow In 2015, Charles Koch’s next book, Good Profit, became an instant Times bestseller. It is the most complete and up-to-date book my career. about MBM, and also the most personal. It is highly recommended for anyone who wants a better understanding of the concepts and principles that are essential to Koch’s unique business philosophy. HOW MARKET-BASED MANAGEMENT® BUILT Jesus Sanchez-Salvatierra THE WORLD’S LARGEST PRIVATE COMPANY Manager Charles G. Koch is chairman of the board and CEO of Koch Industries, Inc., a position Cimarron Energy, Inc. he has held since 1967. Since then, the company has been transformed into a dynamic and diverse group of companies in refining, chemicals and biofuels; forest CHARLES G. KOCH and consumer products; polymers and These soundfibers; process andlike amazing, control systems; electronics and data analytics; Several years ago we had the opportunity simply ;fantastic ranching; organizations, trading; and investments. Familiar led Koch company brands include STAINMASTER® carpet, Quilted Northern® to provide consulting services for David by twotissue incredible and Dixie® cups. Koch leaders. has continuously supported God academic bless and public policy research (including several Nobel Prize winners) for and the Koch ChemTech Group. What you both,more than Lynn 50 years, andand has received David. numerous honors I am and awards, very including three honorary doctorates. Koch received a bachelor’s degree in general engineering and two master’s degrees – in a great experience. I really enjoyed happy tomechanical see and chemicalthat engineering Koch – from Industries the Institute of Technology. observing his leadership style. is supporting this work. I workedU.S. $22.95 ISBN 9780470139882 52295 > for Koch for a short time in Wichita, Gary Mason CHARLES G. KOCH CEO, KOCH INDUSTRIES, INC. iSi Environmental and it was during this time7804709 that139882 my employer () made it possible for me to get involved in Big Thoughts and prayers are with you Brothers Big Sisters. It is very hard and your family. My 22 years of Koch when working full-time, and raising After being out of print for several experience — including four years of IT a family, to take additional time to years, Charles Koch’s 2007 book, help for David — were some of the great give back to the community. This “The Science of Success,” will once blessings of my life. Peace. speaks volumes of the value system again be available, beginning in mid- Randal Robison and culture of Koch Industries. September. Copies may be purchased Inductee, 2017 CIO Hall of Fame – Carie Gaytan for $18 at Hot Commodities in Wichita or ordered from KOCHcopromo.com.

13 International News

Bengaluru, – Two years ago, the Viren Bhatia, the KTC general manager, chief information officers of several sees it as an important step forward. “Our Koch companies met with other senior vision is to support all Koch companies, leaders to discuss a five-year information not just KBS or those that may have a technology strategy. One of the biggest manufacturing presence nearby, such as gaps they identified involved the lack of an or KCTG,” Bhatia said. international IT footprint. “Like all Koch companies, we are working At least 90 percent of all Koch’s IT very hard to make sure we have employees

professionals were in the U.S., yet close to A work station at the new KTC in Bengaluru. who are not only talented, but who half of all employees are in other countries. understand and are committed to our This puts the company at a significant unique culture and strategies.” new Koch Technology Center, to be built in disadvantage in the global market. Bengaluru, India. That site, approved last Future hiring and possible expansion will To help fill that gap and support growing August, is now up and running, and has depend on results and demand across all opportunities, the KII board approved a about 50 employees. Koch companies.

Erzincan Province, Turkey – Koch Knight six new autoclaves. The process involves specializes in making materials that can recently received a Contractor of the Month lining stainless steel tanks with KNIGHT- withstand the corrosive chemicals that award for its work at Anagold’s Çöpler gold WARE® PV33P bricks and PYROFLEX® acid- are essential for many manufacturing mine site in east-central Turkey. resistant sheet lining membrane. Both are processes. It also provides a variety of proprietary products. engineering and installation services. The massive site, which has been producing gold since 2010, includes a The contractor team (shown celebrating in preschool, elementary school, high school a local restaurant) was evaluated for safety and hospital, so safe and environmentally incidents, corrective actions, manhours sensitive operations are a top priority. worked and schedule progress before being awarded the honor. The Koch Knight team is installing more than 1,000 tons of surface protection inside Koch Knight, based in Canton, ,

Discovery August 2018 Vancouver, – In Volume 24 | Number 3 April, Koch Chemical Technology Group (KCTG) DISCOVERY ONLINE announced a significant investment KOCHnews.com/media- resources in Genesis Robotics, a Canadian company transforming the way robots are

EDITORIAL BOARD built and move. Susan Armitage Genesis Robotics is the developer of the Philip Ellender LiveDrive™ actuator, a mechanism that combines Jeff Gentry Greg Guest electric motors and actuation technology in new Jim Hannan ways. (Actuators turn energy into motion.) Amy Hennes LiveDrive gives robotic devices more torque This simple-looking disc (above) is actually Charles Koch with less weight while enabling greater the world’s highest-performance direct-drive Steve Lombardo speed and precision. robotic actuator. It is the essential component Walt Malone of robotic arms (left). Brad Razook “This is an important investment,” Dave Robertson said KCTG president Bob of LiveDrive and cofounder of Genesis Peter Ventimiglia DiFulgentiz. “LiveDrive is not only Robotics’ parent company, is excited about what KCTG’s investment will help his EMAIL US disruptive — with huge potential [email protected] across many industries — but a big team accomplish. “Koch has global reach step forward in our efforts to make in marketing and commercialization,” www.KOCHind.com KCTG a leader in new forms of Klassen said, “and a history of successfully © 2018 Koch Industries, Inc. industrial technology.” growing businesses. Koch is an EOE. M/F/D/V. James Klassen, the inventor “We have a lot to look forward to.”

14 Looking Back

Noteworthy

Law, Liberty and Legislation by F.A. Hayek

Long after the end SM of World War II, Nobel Prize-winning economist F.A. Hayek believed the world

was still at war — Market-Based Management® but a war of a Guiding Principles different kind. 1 INTEGRITY

Hayek saw an ongoing 2 COMPLIANCE

conflict between 3 VALUE CREATION two irreconcilable 4 PRINCIPLED ENTREPRENEURSHIP philosophies. The 5 CUSTOMER FOCUS first belongs to a tribal mindset, which 6 KNOWLEDGE insists on blind loyalty and authoritarian 7 CHANGE rules. The second champions an open society, emphasizing justice and more 8 HUMILITY abstract guidelines. 9 RESPECT

10 FULFILLMENT Hayek filled almost 660 pages spread across three volumes with his thoughts on this relationship between law and liberty. If that sounds like too much, consider reading just This month marks the rollout of a new Vision to “Have a compelling desire to create and the 19 pages of Chapter 11 in volume two. and capabilities for Koch Industries, plus produce such that work becomes a major That is where Hayek talks about “the revised Guiding Principles. focus of life.” greatest discovery mankind ever made” — It has been five years since the last change to That same year, Koch Industries published its the possibility of a peaceful society focused Koch’s Guiding Principles, and KII’s Vision “10 Principles of Management,” which began on mutual advantage, with enormous was changed the year before that. with “Understand the Business.” Other individual freedom. Principles included “Teamwork,” “Personal It’s important to note that there were many, Change” and “Open and Receptive.” As Charles Koch mentions on page 2 of this many changes before those — and future issue of Discovery, this concept, together changes are just as certain. More changes followed in 1999, 2000 and with the Declaration of Independence, 2004. In a 2004 letter to employees, Charles In 1983, there were only five Guiding provides much of the foundation for KII’s Koch explained why. Principles at Koch, intended to serve as new corporate Vision. a “basis for continuous improvement.” “We thought this revision was timely,” Koch Also included in Chapter 11 is Hayek’s stern They were: Competitive Advantage, wrote, “given all our recent and upcoming warning about “social justice,” which tends Entrepreneurial Spirit, Innovation, acquisitions, which are more than doubling to replace broad-based rules of just conduct Teamwork and Customer Orientation. the number of Koch employees.” (Koch had with the restrictive rules of an organization. acquired Farmland Co-op in 2003, INVISTA In 1990, the list grew to 10. There was and -Pacific’s pulp business in 2004, no shorthand for each principle (such as and would acquire all of GP in 2005.) Integrity, Humility, etc.), but much of the It is simply not true that language then still sounds familiar today. In his 2013 Founder’s Day message, Charles Hitler or Mussolini, Lenin or Principle 10, for example, said “Maintain an Koch said, “We didn’t arrive at these changes atmosphere in which business affairs are arbitrarily or overnight. They were made Stalin, appealed only to the conducted lawfully and with integrity.” thoughtfully” and “involved a very robust challenge process” that included senior worst instincts of their people: Principle 7, on the other hand, has changed leaders, the MBM team and other employees. they also appealed to some considerably: “Develop in everyone an attitude of constructive discontent.” Integrity, The same has been true for the latest of the feelings that dominate instead of being first, was Principle 10. revisions to our Vision and our Guiding Principles — and the process will contemporary democracies. Four years later, Integrity topped the list, with undoubtedly be repeated again. the final Principle encouraging employees – F.A. Hayek

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