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Kellen Jenkins / WBJCharles Koch spent 40 minutes w ith Wichita BusinessJournal Editor Bill Roy and reporter Daniel McCoy on Feb.18.

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Daniel McCoyReporter-Wichita Business JournalEmail | Twitter | LinkedIn | Google+

Note: Our interview with Charles Koch kicksoff a new, redesigned Wichita BusinessJournal. You can see the new look andread the interview in our digital edition,unlocked this week for nonsubscribers.

Charles Koch.

To the American business world, hes agiant head of the nations secondlargest private company.

To the political world, he is, by turns, thecountrys No. 1 bogeyman and benefactor.

RELATED Koch Industries' top players Former Koch employees reflect on theirtime there Koch philanthropy Kochs share withWichita and beyond The list Koch Industries companies

To Wichita, he is the Wizard of Oz ever-present yet rarely seen, influential butinvisible.

To the media, and by extension the public,Charles Koch is elusive and inscrutable.

Until now.

In a rare extended interview with theWichita Business Journal, Koch spokeexpansively with Editor in Chief Bill Roy and

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Who's who Koch Industries' top players

Koch philanthropy Kochs share with Wichita andbeyond

Former Koch employees reflect on their time at KochIndustries

Reporter Daniel McCoy, explaining in detailhis political convictions, his involvement inAmericans for Prosperity and his disdainfor what he calls rampant cronyism.

He criticizes business leaders who say theybelieve in a free-market system, but dotheir best to manipulate that system byworking to impose regulations on theircompetitors or going for smash and grab, short-term profits.

Koch says hes used to being on the receiving end of criticism and name calling, but heshoping that the country can get to a point of civil discourse.

Koch also discussed his commitment to Wichita, his expanding interest in electronics andbiotechnology and where those interests may take his beloved Koch Industries, where hebecame CEO 47 years ago.

We met with Charles Koch in his office Feb. 18, 2014.

(Koch Industries is adding a new 210,000-square-foot building on its campus.)What does the local expansion mean for your operations here in Wichita?

It mainly keeps all our people in Wichita on the same campus, so it improvescommunications, collaboration, cooperation. Were full now, so this will give us capacity forabout 750 people. That should hold us for another couple of years.

The expansion seems like a vote of confidence in Wichita when other largecompanies Boeing, Colemans corporate headquarters are moving away.What makes Wichita a good fit for Koch Industries?

Hows that worked for them? People underestimate the tacit knowledge, the local knowledgethat people ... its the way people think about government, The Fatal Conceit, that a fewgeniuses are telling everybody what to do it doesnt work that way. The people who makeit go are the people doing the work who have the hands-on knowledge. And all you can doat the top is set a vision and standards and try to hire the right people. And then they makeit happen. Thats what so many companies are missing and what I thing were missing in thecountry in a big way. Beyond that, Wichita is a great place. It has a culture that reinforcesour culture and the kind of people we can recruit. If you want to live in the mountains, if youwant to ski every day or live by the ocean and go surfing, thats great. Thats your life.Hopefully its a free country and you can go do that to the extent you can afford it. Dont askme to pay for it, but you can go do that and thats great. But we want people who havehonesty, integrity and desire to contribute to create value. And thats what we find here inthe Midwest. And those are the kinds of kids we recruit from colleges in the Midwest... andnot everybody is bad in other parts of the country, its just a much higher percentage here.Its been a great place for us. Why would we leave? It would be crazy for all of thosereasons.

Why is innovation so important and how do you keep it a focal point among allKoch companies?

One way is to put it in our Vision as a core capability. Another is to list, and describe themhere, some of the key aspects of that. Weve got to have our leaders committed toinnovation and willing to take appropriate risk and willing to go get the talent who are goingto drive innovation. And then have the incentives that dont just reward current earnings butreward the future. ... We mean everything by innovation. And then to put substantial effort,as I say in here, (holding a copy of the Koch vision statement) in disruptive innovation. Andthat requires setting up a separate group that doesnt get drawn in and distracted by solvingday-to-day problems. And weve made tremendous progress in the last five years or so in allof that. Thats what keeps me going. Its exciting. They say Why, as an old guy, what makesyou care about innovation? Well, I mean, I may be old, but Im not dead yet, you know?What keeps people going is having a future. And thats my theory on the country. We needto remake it as a land of opportunity and not a land of dependency. And thats what we tryto do here. If youre not innovating and not growing, if its just the status quo for everybody,then people dont have that hope, and that optimism and that enthusiasm that you havewhen youre driving for the future.

Youve reworked your company vision statement. Why take that step?

It was really pretty simple. It was just looking at our vision and what we were trying to do andseeing the difference and saying Ok, Ive got to get down what were actually trying to doand what we talk about and what we emphasize. So this isnt really a new vision. This isbringing our vision statement up to date with the reality of what were trying to do, to makesure we get more and more of our people and people we do business with on board withwhat were trying to do, so they can understand that and decide if they want to partner with

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SearchSearchus, if their company wants to sell out to us, or compete with us, or whatever. Its so we canbe absolutely clear about we stand for.

What is the short-term and long-term value of the Molex purchase for KochIndustries?

Short term, they are way ahead of us in transforming their business processes to fullyincorporate information technology. For example, knowing where there products are, beingtied in to their customers on their inventory what their needs are, how theyre changing and we try very hard to do that on a personal level. But were not up to where they are inhaving information technology really guide all aspects of our business. So thats the firstthing were doing. Were bringing people in from there over to lead that effort in getting uscaught up throughout Koch Industries. We have some businesses that are pretty far along,some are quite behind. So theyve got a big job here to do that. Thats the short-term howthey can help us. Then how we can help them, as a public company with limited capital theydid very little in acquisitions. So they need help in business development. Were supplyingthat capability to them to integrate that with their businesses. Then, really broadening theirvision. I would say they have (some) particularly outstanding capabilities. One is inconnectors, another is in cables, and another is in microtechnology. And another isinnovation. The lifecycle in their products is typically two to seven or eight years. They cantfool around with innovation. Theyve got to get an idea built and commercializedimmediately. And some of our stuff takes too long. We have a lot of great innovation, but wedont have the sense of urgency through our organization or the systems to drive it asquickly as they do. Thats another thing we can learn from them. And then another thing,they make so many parts. If were making cases of toilet paper we may make a few million.But they make billions (of parts). So high-speed production is another capability. Thenanother one that were adding for them is economic thinking. All the different businessesand different options weve had, thats been one of my central interests going back 50 yearsand something that weve really developed. So thats one theyre looking forward to. How todo Marshall Analysis better, how to understand the profitability, understand opportunitycosts, understand those things much better.

Then longer term, and this is what I think if we can pull it off is the home run, and thats theInternet of everything. And this is part of broadening their vision, which they really couldntdo as a relatively small, public company with their limited resources. Thats to take theirbase capabilities, find others, either through acquisitions, or a combination of acquisitionsand internal development, and be able to create systems that will bring products andprocesses alive. The Internet of things is creating things that learn. One of the things wellbe doing is having their people that are best at these kinds of systems visit our plants heres how to have your equipment tell you when it needs maintenance better, and tell youwhen its not being fully optimized and re-optimize itself. Guardian is doing this with glass.You tell it what temperature you want, how much light you want to come through, and it willautomatically change. Or how do you build a computer right into your mirror so that you justtouch it and get ... whatever? There is a lot of this out there, and there is so much more thatcan be done. We think the future is smart everything. We believe the combination of theircapabilities and what were trying to do, I mean, the sky is the limit. Its really exciting. Andwhat that will do for peoples lives, what it will do for the standard of living for everybody ...And then as you learn, the learning curve is so steep, it gets cheaper and cheaper sovirtually everybody can afford it.

Guardian Glass and American Greetings represent a strategy of taking anownership stake in a company compared to an all-out acquisition. How are thoseventures panning out?

Those are two different situations, but each one illustrates how we approach things. InGuardian, the founder had died several years before and they hadnt found the leadershipthey thought they need to take it forward. So they were looking around for somebody to buyan interest. They didnt want to sell it all because they thought if they could get where theyneeded to be in leadership and direction that it would be a much higher value. So they werewilling to sell a 44.4-percent interest if we were willing to put leadership in. So weve donethat and weve found tremendous opportunities applying Market-Based Management,starting with vision and then bringing the talent in, then building knowledge processes,changing the decision rights so there are fewer silos and more knowledge sharing. And thengetting the incentives in line to reward the people making this happen. All of that is comingabout. Now its a pretty good-sized company, so its not instant pudding. Now AmericanGreetings was completely different. Here is a company that was the leading company in thegreeting card industry and they were public but a very low valuation because everybodythinks that its all going to be done digitally and that theyre going to be obsolete. Well, if youhave a girlfriend and you sent her an Internet greeting, thats going to be the same as youdelivered a card? Theyre not finding that. So they were looking for somebody to providesome capital and help take them private. We liked them. They had great vision, goodvalues, very good people, so we felt very comfortable investing in them. And we find that ourapproach, which is that we have what we want in a deal and they have what they want wefind whats critical to us and learn whats critical to them then we give on the issues thatare critical to them and they give (on ours) and well compromise in between and then we

can have a deal. They found that we were more ready to do that than others. Some of themwere investment firms that have limits on what they can do so they couldnt quite create theflexibility that American Greetings needed and we could. Going private has been great forthem. Theyve been going gangbusters. Its been tremendous.

What other areas might Koch Industries be interested in expanding into?

A primary one will be to further this vision in electronics, to broaden what (Molex) is doingand build this capability to build electronics and knowledge systems into all our products andprocesses. Thats top of mind. Another one that is top of mind is biotechnology. In Invista,weve built a center in the U.K. top scientists, biologists, engineers, chemists from all overthe world and then collaboration with twenty or more different companies, universities, andso on, to supplement the technologies we need to bring us all together so we can usebugs to create certain products much cheaper, much more efficiently and quicker than wecan through just chemistry. I mean its amazing. Thats another very exciting area like thissmart-products area that we think is huge for the future. Then were doing that in ourfertilizer business as well, and were doing it in Flint Hills with biofuels. So thats another areathats a combination of both internal development and acquisitions. Engineering polymers atInvista is another tremendous area. Theres been a lot of work in engineering polymers overthe years, but weve found some gaps in where these materials can be turned into productsand have superior value. I dont want to get into specifics on those because were still in thetrial stage on some of them. But thats another very promising area. Then another one,which involves so much new technology and not that we would go back into the drillingbusiness but in support for directional drilling, particularly, and some of it but not allrelates to fracking, but directional drilling and services for that and technology for that. Thenanother is metals. There have been technical and other changes and new approaches inthat, so were looking at investments in that field as well. And then obviously in consumerproducts, pulp and paper, were continually making acquisitions in that area.

The role your brother David plays in the company is perhaps misunderstood. Whathas he meant to the success of Koch Industries?

He helps hold the company together as he has for years. During our trials of the past, hestayed true to what he thought was in the best interest of the company and put that aheadof his own monetary or ego interests. Thats absolutely been critical. And while doing that,he has built our chemical technology group its 500 fold what it was when he came. Andthen he is one of our best in the company in understanding technology, because he is ascientist, understanding technology and the commercial implications of it. Hes a greatchallenger and idea pusher in that area. And while being a great challenger and pushing onthe growth, we are absolutely arm-in-arm on the direction we want to go. I mean, hechallenges, he wants to make sure he understands and that we havent missed importantissues with what were doing. So hes a great resource in that regard as well.

Your son Chase is the new president at Koch Fertilizer. How do you see his role inthe company expanding and is there a succession plan in place?

I see his role as doing what he can do, given his comparative advantages, that contributesthe most to the company. Thats how he got where he is. It wasnt that I pushed him. In fact, Ichallenged everything, (asked) is he the best person for it? For us to be successful here wehave to have a meritocracy. We have to have the person who can create the most value ineach position. So every step, hes done it on his own. And what he does in the future will beguided by that same philosophy.

Your political views and involvement seem to garner the most headlines nationallythese days. Why continue those investments, given the type of coverage it seemsto have sparked?

Its like Lee Trevino used to say, somebody asked him how are you winning all these golftournaments, and he said, Well somebody has got to win them and it might as well be me.Thats the way I am on this. There doesnt seem to be any other large company trying to dothis so it might as well be us. Somebody has got to work to save the country and preserve asystem of opportunity. I think one of the biggest problems we have in the country is thisrampant cronyism where all these large companies are into smash and grab, short-termprofits, (saying) how do I get a regulation, we dont want to export natural gas because of myraw materials ... well, you say you believe in free markets, but by your actions you obviouslydont. You believe in cronyism. And thats true even at the local level. I mean, how doessomebody get started if you have to pay $100,000 or $300,000 to get a medallion to drive ataxi cab? You have to go to school for two years to be a hairdresser. You name it, in everyindustry we have this. The successful companies try to keep the new entrants down. Nowthats great for a company like ours. We make more money that way because we have lesscompetition and less innovation. But for the country as a whole, its horrible. And fordisadvantaged people trying to get started, its unconscionable in my view. I think its in ourlong-term interest, in every Americans long-term interest, to fight against this cronyism. Asyou all have heard me say, the role of business is to create products that make peopleslives better while using less resources to do it and making more resources available to

satisfy other needs. When a company is not being guided by the products they make andwhat the customers need, but by how they can manipulate the system get regulations ontheir competitors, or mandates on using their products, or eliminating foreign competition it just lowers the overall standard of living and hurts the disadvantaged the most. We end upwith a two-tier system. Those that have, have welfare for the rich. The poor, OK, you havewelfare, but youve condemned them to a lifetime of dependency and hopelessness. Yeah,we want hope and change, but we want people to have the hope that they can advance ontheir own merits, rather than the hope that somebody gives them something. Thats betterthan starving to death, but that, I think, is going to wreck the country. Is it in our businessinterest? I think its in all our long-term interests. Its not in our short-term interest. And itsabout making money honorably. People should only profit to the extent they make otherpeoples lives better. You should profit because you created a better restaurant and peopleenjoyed going to it. You didnt force them to go, you dont have a mandate that you have togo to my restaurant on Tuesdays and Wednesdays or you go to prison. I mean, come on.You feel good about that?

Can we get to a more collaborative political dialogue and process?

Thats our No. 1 focus now, to change the national conversation from name calling to a realdebate on what policies will best create opportunities to improve their own lives. I dont knowif you ever saw Michael Rowes show Dirty Jobs. Were working with him and myfoundation. His position is that pushing all these kids into four-year liberal arts (programs),they have all this debt, they dont have the aptitude for it, so they end up driving cabs if theycan get a medallion, or tending bar, or unemployed and living with their parents ... Whereasthey may have great aptitudes as an electrician or a mechanic, making $100,000 or$200,000 a year some of them with that aptitude start their own businesses. Theybecome wealthy because they are satisfying a real need, not because somebody subsidizedthem and pushed them into things they cant really make a contribution in. Thats just oneaspect of the things were working on and are concerned about.

Some have portrayed you as essentially pulling the strings behind the scenes forAmericans for Prosperity. What is an accurate portrayal of your involvement withthe group?

I write a check. David is on the board and is chairman of the 501C3 (AFP Foundation). Butbelieve me, I know what David does and he is not in there day to day. He helps, like theother board members, to set the policy. Now we are major contributors, but theyve got closeto 100,000 contributors and 2 million members. So its a big organization and a lot of peopleare involved. We contribute and we helped start it, so we have some influence. We try topush them on things that will help people make their own lives better and policies that movein the direction of well-being for everybody and fighting cronyism. But they do a lot ofdifferent things. Listen, if I could do everything thats attributed to me, I would be a very busyboy.

Do those type of allegations in the media get frustrating?

When you start attacking cronyism and peoples political interests, it gets nasty. Weve beencalled every name under the sun. And some of this stuff is ridiculous. One of them said thatthe reason we supported a number of governors in the upper Midwest was because we hada secret plan to control all the water in the Great Lakes. Im still trying to figure out what todo with it all, other than go drown in it. Thats about the only thing I can come up with. Theone that takes the cake, this individual said that the reason David gave $100 million to NewYork Presbyterian Hospital is to enable us to take over the medical care industry. Youcannot have a conversation with people like that. Either theyre just intent on anything todemonize us and destroy us and discredit us, or theyre just in outer space.

Some brands owned by Koch IndustriesGeorgia Pacif ic brands-AngelSoft-Dixie-Braw ny-Quilted Northern

Invista brands-Lycra Brand-Stainmaster carpet

Daniel McCoy covers aviation, manufacturing and automotive.

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