Discovery AUGUST 2018 THE QUARTERLY NEWSLETTER OF KOCH COMPANIES A change like no other by Charles Koch, Chairman and CEO – Koch Industries, Inc. Five years ago, I wrote in Discovery that CREATIVE TRANSFORMATION of new business 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 businesses, 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 “The Science of Success” 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, Liberty 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 protectionism 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, “Good Profit.” 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 Friedrich Hayek. 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.