Notes - Kochland

July 9, 2025

Chapter 1: Under Surveillance

This chapter introduces FBI special agent James Elroy in 1987, positioned in an Oklahoma cow pasture with a telephoto lens, attempting to surveil employees of Koch Oil. Elroy, despite his irreverence, is a dedicated "law-and-order man" tasked with investigating allegations of oil theft.

The context for this surveillance originates from a series of "devastating" investigative stories published by The Arizona Republic newspaper. These articles alleged widespread corruption and incompetence at the federal Bureau of Indian Affairs (BIA), and more specifically, that oil companies were "looting" Indian lands by underreporting how much oil they pumped, operating on an honor system without effective government verification. This captured the attention of Arizona Senator Dennis DeConcini, who formed a special investigative subcommittee, selecting Ken Ballen to lead it and Jim Elroy as the lead field investigator.

Initially, Ballen targeted major oil companies like Exxon and Mobil, as they were insinuated to be the prime offenders by The Arizona Republic. However, these major oil companies, through their lawyers, confidentially informed Ballen that they were not stealing oil and instead pointed to Koch Industries as the real culprit, alleging Koch was taking "one to three percent" of oil without paying. They explained that fighting Koch Industries was "more trouble than it’s worth" due to Koch's market power and its unique position as the only firm willing to transport oil from less profitable wells.

Ballen's case was further strengthened by a tip leading him to William "Bill" Koch, Charles Koch's estranged brother, who had sued Charles and David Koch for underpaying him for his share of the family business. Bill Koch confirmed the widespread oil theft practices at Koch Oil, stating it happened while he worked there. Despite Bill's testimony being "tainted" by his lawsuit, Ballen proceeded by subpoenaing Koch Oil's documents. The financial records from Koch's Oklahoma operations revealed startling figures: in 1988, Koch Oil had taken 142,000 barrels of oil without paying, and in 1986 and 1987, it was "over" by 240,680 and 239,206 barrels respectively, meaning it possessed more oil than it had paid for. This led Elroy and Ballen to devise the audacious plan of physically measuring oil in tanks before Koch employees arrived and comparing it to their "run tickets" (documents stating how much oil Koch carted off), which is why Elroy was in the cow pasture.

The chapter culminates with Ballen's deposition of Charles Koch at the Koch Industries headquarters in Wichita, Kansas. Charles Koch, described as the "master of this domain," treated with "deference" by his team. Charles confirmed his role as "chairman and chief executive" and acknowledged that he saw quarterly figures indicating Koch was "long" (over) on oil sales, though he denied a stated policy of stealing oil and parsed the definition of "long". He also extensively discussed the "continuous improvement philosophy" of W. Edwards Deming, which he applied to business, stressing accuracy and avoiding losses. The author notes that lower-level investigators believed Charles Koch must have been aware of the widespread misconduct due to its scale.

Chapter 2: The Age of Volatility Begins

This chapter details the foundational years of Koch Industries under Charles Koch's leadership, starting with the unexpected death of his father, Fred Koch, in November 1967. Fred Koch, described as a "larger than life" entrepreneur and co-founder of the John Birch Society, had built a small business empire and intended for Charles to manage it. Charles, initially resistant as he had his own career as a management consultant in Boston, reluctantly took the helm at age thirty-two, determined to prove he was a "builder".

Charles Koch immediately set about a "stunningly ambitious vision" for the company. His plan had several pillars:

• Organizational: He restructured the confusing amalgam of Fred Koch's corporate entities (engineering, oil gathering, pipelines, ranches) into a single entity.
• Personal (Team Building): He surrounded himself with trusted, smart people, most notably Sterling Varner, a charismatic and respected figure who fostered a sense of importance among employees.
• Philosophical: Charles deeply focused on understanding human behavior, seeking "discernible laws" similar to those in the physical world. He read extensively, including works by Karl Marx, economists, historians, and philosophers. However, his conclusions were largely shaped by his upbringing and his father's "horror stories" about the Soviet Union, leading to an entrenched belief in the evils of government interference and the virtues of free markets.

The chapter then illustrates the "Koch method" of oil measurement through the experience of Phil Dubose, a new oil gauger in Louisiana. Dubose was given a "playbook" for taking oil without paying for it, involving practices like "cutting the top" (underreporting oil depth by an inch). This systematic underreporting ensured Koch Oil was "long" on its oil intake, maximizing profits.

A significant strategic move was Charles Koch's secret acquisition of the Pine Bend refinery in Minnesota in 1969. While Fred Koch had only a minority share, Charles acquired full ownership, recognizing a "secret source of profits" due to a government loophole that allowed unlimited, cheaper Canadian oil imports and a "double dip" subsidy of $1.25 per barrel. This gave Pine Bend a huge advantage over competitors. The chapter concludes by introducing Bernard Paulson, whom Charles Koch recruited to manage Pine Bend, highlighting Paulson's tough, unsentimental approach and his admiration for General George S. Patton. Paulson quickly observed dangerous and inefficient practices at the refinery, setting the stage for conflict with the union.

Chapter 3: The War for Pine Bend

This chapter focuses on the intense labor dispute at the Pine Bend refinery under Bernard Paulson's management. Paulson, who began working weekends and inspecting operations firsthand, was appalled by the lax work ethic, including employees sleeping on the job in a highly dangerous environment involving flammable liquids and high pressure.

The primary obstacle to efficiency and control at Pine Bend was the Oil, Chemical and Atomic Workers Union (OCAW), led by Joseph Hammerschmidt. The OCAW had established a framework of rules that gave the union "a large measure of control over the refinery’s operations" beyond just pay and benefits. These rules created significant inefficiencies:

• Strict Trade Specialization: Employees only performed tasks within their specific "trade." For example, fixing a broken valve required calling separate specialists for insulation, electrical work, and even a dedicated union truck driver (who could not ride with a supervisor) to ferry them around the 700-acre refinery. This process was cumbersome and time-consuming.
• Overtime Rules: A rule requiring two hours' notice for overtime work, otherwise a bonus payment was due, led to employees strategically disappearing before the notice period to ensure bonus pay.

Paulson, with Charles Koch's full backing and daily consultation, was determined to break the union's power. The conflict escalated into a strike on January 9, 1973. The OCAW organized a powerful picket line, effectively cutting off the refinery's "oxygen supply of cash" by preventing tanker trucks (whose drivers belonged to the Teamsters union, respecting picket lines) from entering, leading to significant financial losses for Koch. The union expected Charles Koch to quickly "fold".

However, Charles Koch remained unyielding, viewing it as a "war". On March 15, while Paulson slept in his office at the refinery, an act of "industrial sabotage" occurred that nearly destroyed the facility and could have killed employees. The chapter portrays this period as a crucial test of Charles Koch's fighting resolve and his willingness to confront challenges head-on.

Chapter 4: The Age of Volatility Intensifies

Following the OCAW strike, Charles Koch faced a severe financial crisis, fearing Koch Industries "might go out of business" due to losses from his decisions, including the Pine Bend refinery. Despite this, he "invested heavily in Pine Bend to ensure its long-term profitability".

Charles Koch's strategy to navigate this period of "unprecedented market volatility" was centered on information gathering and deep analysis, aiming to "beat his competitors by understanding them better". Bernard Paulson spearheaded this at Pine Bend, building a new database to understand the refinery's optimal operations and efficiency under various conditions.

Pine Bend's success, however, was also significantly due to geography and market bottlenecks. Its location in northern Minnesota allowed it to process cheap "sour" Canadian crude oil, which few others wanted due to the expensive sulfur removal process. Crucially, Koch then sold the refined gasoline into a Midwestern region with "very few other refineries," leading to tight supplies and high prices. This gave Koch a significant "6-cent advantage" per gallon over competitors like Williams Brothers, making Pine Bend an exceptionally profitable "gold mine". Confidential financial documents show Pine Bend was by far Koch Industries' most profitable division in 1981 and 1982, netting $60.9 million and $107.8 million respectively, representing 22% and over one-third of the company's total profits. Koch Oil, despite its "Koch method" of oil gathering, earned roughly half of Pine Bend's profits. The company's success reinforced its culture of secrecy; Paulson notably turned away consultants to avoid revealing Koch's "unique" operational methods.

The chapter also highlights Charles Koch's fierce anti-capitalist stance, articulated in a belligerent 1974 speech at the Institute for Humane Studies, a conservative think tank he co-founded. He criticized fellow business leaders for being too conciliatory, asserting that "in a free market there is no such thing as excess profit". Koch laid out a four-element campaign to change American thought about markets and government:

1. Education: Populating universities with free-enterprise academics.
2. Media Outreach: "Rewarding" media that promoted free markets and withdrawing support from those that attacked it.
3. Litigation: Corporations vigorously resisting government "control programs" beyond legal minimums.
4. Political Influence: Lobbying, though with a "limited program" to avoid hypocrisy. The author notes that Charles Koch remained "remarkably true" to this plan for decades, with the "limited" nature of lobbying being the only significant change later. The success of Pine Bend under Paulson, whom Charles lauded for treating it "like it was his own company," reinforced Koch's philosophy of fostering entrepreneurial thinking among employees.

Chapter 5: The War for Koch Industries

This chapter chronicles the escalating internal conflict within the Koch family, primarily between Charles and his younger twin brother, Bill Koch, after Bill became a full-time Koch Industries employee in 1975. Bill rose through the trading business, an "invisible" but vital sector where Koch acted as a broker for crude oil, gasoline, and obscure industrial chemicals like polyvinyl chloride, often yielding "millions of dollars" per transaction without paper contracts. Bill was instrumental in expanding Koch into chemical trading.

The chapter contrasts the brothers' personalities: Charles, with his engineer's mind and low-key demeanor, harbored ambitious goals, stating Koch would aim to be "the first largest" privately held company. Bill, while engaged in trading, became enamored with "data-driven analysis" and even asked Brad Hall to perform complex Monte Carlo simulations for a coal deal, reflecting a more academic, MIT-influenced approach. However, Sterling Varner's blunt question to Hall – "Is this a good deal?" – highlighted Koch's pragmatic focus on direct business applicability over analytical minutiae.

The core of the "war" lay in Bill Koch's position as a major shareholder (roughly 20% of the company, similar to Charles and David). Bill used his seat on the executive committee to aggressively question Charles's decision-making and the company's operations, even coining the nickname "Prince Charles" and accusing him of being an "autocrat" and "dictator". Bill's central challenge was Charles's policy of keeping exceptionally low dividends, arguing it trapped shareholder wealth within the company, forcing him to borrow money despite his immense paper wealth. Charles, however, insisted on reinvesting profits for faster multiplication, offering to buy out shareholders who disagreed.

The conflict culminated in a series of "acerbic and accusatory" memos from Bill to Charles, which Charles viewed as rooted in "bitter thicket of childhood resentments and tensions". Bill's ultimate threat, to sell or take the company public, was a point of no return. Charles responded by telling Bill, "If this is what you’re determined to do, then we need a divorce". Charles then secretly drafted a lengthy memo for the board, asserting his "far-reaching authority" as CEO of the privately held company and rejecting any "bureaucratic committee or board structures" that would impede efficiency. This memo effectively signaled the end of Bill's tenure.

Amidst this family turmoil, the chapter highlights David Koch's emergence as the public face of Koch Industries' political activity. David, based in New York City, openly ran as the Libertarian Party's vice-presidential candidate in 1980, leveraging his wealth to contribute "several hundred thousand dollars" to gain media exposure for their ideas. This public role initiated a key aspect of Koch's political influence, fulfilling part of Charles Koch's long-term strategy for political engagement.

Chapter 6: Koch University

After severing ties with his "dissident brothers" in the early 1980s, Charles Koch began to fully articulate and implement his unique management philosophy, which became known as Market-Based Management (MBM) and was informally dubbed "Koch University" by employees.

These sessions, held in the company auditorium for senior managers like Lynn Markel, Brad Hall, and Bernard Paulson, were more than typical corporate presentations; Charles Koch often sat and took notes, treating them as serious classes.

• Early Influences: Initially, Charles invited external speakers. He incorporated Dale Carnegie's theories on management and productivity, focusing on communication. He also brought in Harvard professor Michael Porter, whose book "Competitive Strategy" provided a framework for analyzing markets, competitive advantages, and boosting profits through data-driven planning.
• Charles Koch's Direct Teaching: Over time, Charles himself began leading smaller, intimate sessions with a dozen or so senior managers. These teachings were then cascaded down the chain of command, with executives repeating the lectures to their own employees, ensuring widespread dissemination of the philosophy.
• Core Principles: The philosophy aimed to codify the "classic Sterling" (Varner) guidelines, emphasizing opportunism (seeking new deals) and humility (expanding only into areas of existing expertise).
• W. Edwards Deming's Influence: Charles Koch became "fixated" on Deming, a quality control engineer and guru who had helped Japanese automakers. Deming's core concept of "continuous improvement" through "hard statistics" (measuring, analyzing, and improving processes) was applied throughout Koch Industries with "dramatic" results.

A prime example of MBM and Deming's principles in action was Phil Dubose, the oil gauger who rose to oversee Koch's marine operations in the Gulf of Mexico. Faced with a unit that had consistently failed to turn a profit, Dubose used Deming's "run charts" to track and analyze every cost incurred by each barge (groceries, fuel, maintenance, etc.). He decentralized decision-making, giving skippers the freedom to make choices based on their run charts and even tracking each barge's profits and losses, effectively turning each skipper into a "small-business owner". This approach led to significant cost reductions and profit generation, and those who "couldn’t embrace" Deming's system were "let go".

The chapter also highlights Koch's strategic expansion, driven by the MBM principle that "markets never stood still" and companies must "change and grow with the markets". This led to the acquisition of the Sun Oil refinery in Corpus Christi, Texas. Although initially "ordinary," Bernard Paulson saw its potential to produce paraxylene, an obscure but high-demand petrochemical used in synthetic fibers and plastics.

Phil Dubose's subsequent promotion to transportation manager for the southeast division further illustrates MBM's impact. In this role, Dubose was expected to ensure his region was consistently "over" (selling more oil than it collected) in the pipeline business, where profit came from moving oil, not just selling it. The monthly statistical report from Wichita, highlighting his "overage," became his "report card" and determined his job security and promotions, solidifying the incentive for underreporting oil intake by gaugers using the "Koch method". This internal practice, however, was about to face public scrutiny, hinting at future legal challenges.

Chapter 7: The Enemies Circle

In the late 1980s, Koch Industries faced significant external pressures: a criminal investigation by the US government into oil theft and ongoing litigation from Bill Koch, which Charles Koch and his team perceived as intertwined. The US Senate Select Committee on Indian Affairs held public hearings in May 1989, focusing exclusively on Koch Industries, as evidence pointed to Koch as the "primary culprit" due to its "dramatically high overage levels". Charles Koch refused to testify.

In response, Charles Koch coordinated a "broad counterattack". This marked a turning point in Koch's approach to politics and public policy. The company implemented a "sweeping blanket of secrecy" over its operations, declaring all "financial data, business records, technology and information on corporate strategy" as "secret and proprietary". Crucially, Koch's president, Bill Hanna, issued a company-wide memo on July 11, 1988, ordering the destruction of "written materials which would be useful to our competitors" by "shredding, burning, or some equally effective method." The author notes this was a "license to destroy evidence" at a time when Koch executives knew of the Senate investigation.

Ron Howell, a Koch executive, was tasked with reshaping the political narrative in Oklahoma. His strategy involved reaching out to the Native American tribes (the "victims" of the alleged theft) and convincing them to side with Koch, thereby undermining the rationale for a criminal inquiry by showing "no victims". The Osage tribe, initially appearing to cooperate, publicly denied being swindled, which made the government appear "overzealous and unfair".

Charles Koch, realizing the vulnerability of lacking a political presence in Washington, established a formal political operation in the early 1990s. This included funding an "obscure nonprofit group" called Oklahomans for Judicial Excellence, which graded local judges based on their adherence to free-market economic theory (Hayek and von Mises). The group publicized low scores to "embarrass judges" and offered "free seminars" at luxurious resorts to teach them about "market forces in society," blurring lines between education and influence. This strategy capitalized on the Reagan presidency's era of "deregulation," which reduced antitrust enforcement and allowed large corporate consolidation, benefiting companies like Koch.

The chapter concludes by highlighting the culmination of Charles Koch's efforts to codify his philosophy. In 1990, he formally named it Market-Based Management (MBM). He hired academics to distill his worldview into a "rulebook for working at Koch Industries," culminating in the 1993 publication of "Introduction to Market-Based Management." This sixty-three-page booklet became the "operator's manual," disseminated throughout the company with mandatory seminars. A new MBM-specific vocabulary was introduced, transforming job titles like "managers" into "process owners" and "responsibilities" into "decision rights," reinforcing a unified, intricately encoded corporate culture. The author points out that MBM's real-world efficacy would soon be tested by a "worst debacle" at the Pine Bend refinery.

Chapter 8: The Secret Brotherhood of Process Owners

This chapter introduces Heather Faragher, an environmental engineer who joined Koch Industries' Pine Bend refinery in 1995, specializing in wastewater treatment. She was quickly immersed in the "secret" Koch way of doing business, learning Market-Based Management (MBM) directly from Charles Koch, who presented it as a philosophy based on "individual liberty and free-market capitalism" applicable to both business and life itself. Faragher initially embraced this "new society," but soon discovered its "dark side".

The core issue arose from MBM's distinction between "profit centers" and "nonprofit groups" (like environmental engineering). MBM pamphlets warned that services like environmental engineering, being "free," might be overused, draining resources from profit-making divisions, akin to "government agencies that handed out free services". To counter this, Charles Koch created an "internal market system" where profit centers had to "pay" to use nonprofit services, making them "think twice about sucking up support resources". This structure created a fundamental tension, as "these 'nonprofit' resources were all that stood between successful business and criminal conduct".

Faragher's role was to ensure wastewater treatment complied with state limits, like 8.3 kg of chromium and 714 kg of ammonia daily. She believed in keeping pollution levels significantly below the legal limit (e.g., 20 parts per million (ppm) for an 40 ppm limit) to provide a "large buffer" against unexpected spikes and adhere to the "intent of the law". However, her boss, Steve David, instructed her to run pollution levels "just below the permit level," maximizing output and avoiding "expensive treatment procedures," though this approach was legally permissible in theory. Faragher was "uneasy" because it "counted on things going just right," which "wasn’t how life really worked".

Problems escalated when a sour water stripper malfunctioned, leading to dangerously high ammonia levels in wastewater. Despite Faragher's unequivocal opposition, her bosses discussed opening "hydrants" to flush polluted water onto land – a practice called a "bypass" that was "specifically outlawed in the permit". Koch's senior attorney, Jim Voyles, refused to side with Faragher, leaving the matter as an "enduring 'gray area'". Without Faragher on vacation, shift supervisor Estes, believing Faragher had given "the green light" (which was untrue), proceeded with flushing ammonia-laden water onto fields and wetlands.

Upon her return, Faragher, feeling undercut and isolated, decided to report Koch's activities to the Minnesota Pollution Control Agency (MPCA). MPCA official Don Kriens confirmed the flushing was illegal and ordered Koch to cease and notify the state for future incidents. Faragher drafted a memo to her supervisors and the MPCA stating Koch's compliance, but Voyles "deleted that entire paragraph," replacing it with a statement asserting Koch was "unaware of any statutory or regulatory duty to seek approval" for such discharges. Feeling pressured to lie, Faragher called Koch's ethics hotline, only to be dismissed as "emotional because you’re pregnant".

Subsequently, Koch Industries continued to illegally dump ammonia water in February and March without state approval. Whistleblowers Charlie Chadwell and Terry Stormoen, plant workers who found this unethical, reported Koch's violations and extensive documentation to the MPCA. In response, Steve David instructed Faragher to provide "as little information as possible" to inspectors, leading her to mislead them. David himself lied about pond overflows. Faragher eventually called Kriens, stating David had lied and agreeing to help the state.

The chapter details the retaliation faced by whistleblowers: Chadwell and Stormoen experienced immense pressure, disciplinary meetings, interrogations, and perceived attempts to "kill" Chadwell, leading to his termination. Faragher, pregnant and stressed, was "at the center" of a federal investigation, asked to become a state's witness. In contrast, managers like Brian Roos and Timothy Rusch, who were involved, were promoted. The author highlights similar alleged environmental misconduct elsewhere in Koch, including benzene emissions at Corpus Christi and pipeline leaks that resulted in a $30 million fine, the "largest fine of its kind in US history". The author concludes that these problems were "being exported" as Koch focused on rapid expansion.

Chapter 9: Off the Rails

This chapter focuses on Koch Industries' aggressive pursuit of rapid expansion and acquisitions in the late 1990s, guided by a new framework called the Value Creation Strategy (VCS), which made growth a required metric for executive bonuses. This period was marked by Charles Koch's intense focus on expansion, leading to concerns from long-time executives like Brad Hall that "Charles got cavalier".

Dean Watson, a rising Koch executive, embodied this aggressive growth mindset, speaking of the need to "execute violently" against business plans and viewing Koch as his entire life. Koch's fertilizer business, despite previous setbacks, was seen as a platform for growth, leading to the largest animal feed maker in America, Purina Mills, becoming an acquisition target. Koch borrowed over $550 million to finance the deal.

Watson was tasked with integrating Purina's operations and, critically, subsuming its corporate culture into Koch's Market-Based Management (MBM), calling it a "long-term culture-shift play". This meant Purina's executives had to learn and internalize MBM's "five dimensions" and "Ten Guiding Principles". However, Purina's deeply entrenched "Danforth culture," rooted in a century-old family legacy, resisted this imposition. Purina's COO, Arnie Sumner, found MBM to be "management consultant sloganeering" and observed that Koch was not trying to "mesh" cultures but to "eradicate it".

The acquisition quickly turned disastrous. Unbeknownst to Koch during its hurried due diligence, Purina Mills had a massive exposure from a program to boost hog feed sales by effectively owning six million pigs, leading to a $240 million liability for "hogs that had literally zero financial value" by 1998. This disaster unfolded as Charles Koch was just emerging from his decades-long legal battle with Bill Koch, which had concluded in Charles's favor in June 1998.

Faced with the Purina catastrophe, Charles Koch applied a core principle of MBM: "True knowledge results in effective action," meaning that pouring money into a failing venture was futile. Koch Industries made the decision to provide no extra money to Purina, leading to Purina's bankruptcy filing in October 1999. This left Koch to lose its $100 million investment, and infuriated bankers who had financed the acquisition, knowing Charles Koch's immense wealth despite his secrecy.

The bankers sued Koch to "pierce the corporate veil," arguing that Purina was essentially a division of Koch Industries and not an independent company, making Koch liable for Purina's massive debt. This was a "risky proposition" for Koch, as a loss could "call into question the walls between all of Koch’s divisions" and expose the entire company to "enormous liabilities". Ultimately, Koch agreed to pay an additional $60 million to help Purina emerge from bankruptcy, totaling a $160 million loss. This "failure would reshape Koch Industries," leading the company to further fortify its corporate veil and create an "even more complex and opaque" structure to shield itself from future liabilities. Brad Hall succinctly described it as being an "example of piss-poor management".

Chapter 10: The Failure

This concluding chapter of Part 1 reflects on the challenging 1990s for Charles Koch and Koch Industries, despite his personal belief in his vision and principles. The decade was characterized by:

• Public Embarrassment: Stories focused on Koch's "lawbreaking and litigation".
• Family Feud: Charles Koch was depicted as a character in a "pathetic family feud".
• Management Philosophy Challenges: Charles Koch's own Market-Based Management (MBM) philosophy was seen as having "sown problems throughout the company". Oil gaugers interpreted "continuous improvement" as justification for theft, and refinery managers used "profit centers" as a reason to dump pollution and delay investments. MBM's common language sometimes led to "groupthink," causing managers to "persecute whistle-blowers rather than heed their important warnings".

Charles Koch admitted these were "difficult times" and that he found it "depressing". However, despite these failures, he still believed in the company and his principles. The author highlights that Charles Koch, from his desk, was the only one who could see the "entire machine" of Koch Industries due to its intentional opacity and complex network of divisions.

He saw two core strengths that would eventually make Koch Industries one of America's largest and most powerful corporations:

1. Unified Workforce: MBM, despite its flaws, had created a "common language" and a "common mission" among Koch's sprawling confederation of divisions. This enabled employees to easily "shift from one division to the next and understand each other perfectly," preventing fragmentation.
2. Knowledge and Learning: Koch had built an organization that "learned, and learned constantly," treating "every transaction as a data point, every relationship as a conduit for information, every business unit a listening post". The company invested heavily in computing power to "churn and analyze mountains of information".

Charles Koch remained unwavering in his belief that "quantifiable laws" drove the world and business, and that his principles were correct, even if he had "simply made mistakes in carrying them out". His solution was simple: he would "just work harder". This sets the stage for Part 2, where Charles Koch and his team would reinvent Koch Industries, leading to its continued growth and dominance.

Chapter 11: Rise of the Texans

During the year 2000, Charles Koch and a small, trusted team secretly and urgently reinvented Koch Industries, overhauling the company's strategy and corporate structure. This involved private and sometimes tense meetings where seemingly every idea was considered, including moving Koch's headquarters from Wichita or even breaking up the company and having David Koch sell his ownership stock. Charles Koch's guiding message to his new management team was, "I don’t like losing," and their mission became "Stopping stupid," referring to the follies of the 1990s.

A key outcome of this transformation was the impervious strength of Koch's corporate veil. Under the new structure, Koch Industries transitioned from an integrated conglomerate into primarily a holding company, owning numerous smaller, nominally independent firms. These companies were rigorously segregated from each other and from Koch's central operations by a robust legal wall designed to be impenetrable. This structural change meant that Koch could credibly argue that each division was a stand-alone entity, responsible for its own liabilities. This strategic shift prevented angry creditors, like those from the Purina Mills debacle, from threatening the cash reserves of Koch Industries' central treasury. The new corporate veil allowed Koch Industries to accumulate billions of dollars in debt over the subsequent decade, by loading it onto these nominally independent divisions, thereby containing the risk of failure. While this strategy was often framed in terms of free-market principles, emphasizing that each company would succeed or fail on its own merits, its practical effect was to enable expansion while significantly limiting downside risk, fueling Koch's appetite for new acquisitions.

Another central element of Koch's new game plan was its reliance on superior information. Although outsiders perceived Koch as an energy company, within the firm, it was fundamentally regarded as an information-gathering machine that amassed deeper and sharper knowledge than its competitors. This strategy, rooted in Koch Industries' earliest days, was refined to a fine art with the implementation of a new business development board. An example of this information focus was Ron Howell's initiative to create a central trading desk in Houston. Here, traders from diverse markets and product lines shared everything they learned in real time. This pooling of impressions allowed Koch to develop a comprehensive, real-time view of highly complex and interrelated markets for crude oil, diesel fuel, and natural gas liquids.

Charles Koch also implemented a new "10,000 percent compliance" regime across all operations, meaning employees were expected to obey "100 percent of all laws 100 percent of the time". While seemingly a platitude, this slogan represented a fundamental shift in operations. Koch expanded its legal team, embedding lawyers directly into its far-flung operations. Process owners, like refinery managers, now had to consult legal teams before taking actions such as releasing ammonia-laden water. Commodity traders consulted legal teams for new strategies, and legal inspectors threatened to shut down factories if managers couldn't prove proper inspections. This strict mandate for legal compliance served a strategic purpose: it aimed to keep state and federal regulators off Koch's properties, thereby eliminating distractions and maximizing profits by allowing the company to focus on its core growth plan. The entire restructuring effort was kept secret to avoid attracting attention from competitors and the public, reinforcing Koch's competitive advantage in information. This period also coincided with the tumultuous 2000 US presidential election, which displayed a lack of national consensus on the federal government's role in regulating private enterprise.

Chapter 12: Information Asymmetries

For commodities traders like Brenden O’Neill in Houston, work began early in the rolling series of global mornings, aiming to be at his desk for the frenzy of the New York market to execute multi-million dollar transactions. The heart of Koch's trading strategy was deep analysis, not mere hunches. The company hired teams of analysts who worked directly with traders, and profits were split between them, reflecting the critical importance of the analysts' reports as the "bedrock where a trade began". In the early 2000s, information regarding prices, especially for natural gas, was scarce and incredibly valuable due to the absence of electronic exchanges and slow government data. Every "origination deal," a specific type of transaction, provided fresh and precise information on supply, demand, and prices. To further facilitate information sharing, Koch integrated its origination group into its trading group, creating "one trading book" and eliminating separate profit centers.

The book draws a parallel between the Koch traders' preferred Houston pub, the Ginger Man, and the Coates Bar in Minnesota where union workers from the Pine Bend refinery used to gather. While the Ginger Man was more refined, the architectural similarities subtly highlight a shift in the American economy, from blue-collar factory workers to millionaire derivatives traders as central figures.

The chapter provides a concise explanation of derivatives contracts, such as "calls" (allowing purchase at a certain price) and "puts" (allowing sale at a certain price), describing them as forms of insurance against fluctuating prices.

Koch's sophisticated information network was further illustrated by its internal reports, such as the "Daily Analysis," which were composed of complex graphs and spreadsheets detailing electricity usage, weather patterns, and even water levels from sources like the Grand Coulee Dam. Complementing these detailed reports was an innovative internal instant messaging system called Koch Global Alerts, which transmitted real-time news from plant managers and refinery operators to traders. This constant flow of internal information gave Koch a significant advantage. For instance, in 2000, two Koch analysts and a reservoir engineer accurately predicted a coming disaster that would lead to blackouts, utility bankruptcies, and skyrocketing costs on the West Coast, a prediction they underlined and bolded in their "Natural Gas Point of View 2000-2001" slideshow.

Despite the substantial wealth generated by his trading activities, Brenden O'Neill noted that it brought him "comfort" but "didn't bring power with it" or "enough money where you can influence things," a level of influence he observed accruing to his bosses at Koch.

Chapter 13: Attack of the Killer Electrons!

The energy crisis that unfolded in California in late 2000, leading to widespread power outages and economic chaos, notably began in Sacramento, a place that typically received little attention. The crisis's roots trace back to 1996, when California initiated the deregulation and restructuring of its electricity industry. State Senator Stephen Peace, known for his deep knowledge and aptitude for tackling complex policy issues, became a leading authority on electricity and utilities, having learned the issue from top to bottom. The deregulation movement of the 1990s aimed to replace highly regulated monopolies with competitive markets, promising cheaper electricity and increased efficiency. However, these legislative efforts, including Peace's public hearings in 1996, garnered virtually no media attention at the time.

The American Legislative Exchange Council (ALEC), a group that extensively promoted electricity deregulation, saw its policy positions effectively influenced by corporate members like Koch Industries and Enron. These corporations, through a "pay-to-play" structure, not only determined policy but also coauthored the bills that ALEC's legislative members sought to pass.

Koch Energy Trading (KET) leveraged this deregulated environment through a controversial practice known as "parking" trades. For example, KET had an information-sharing agreement with PNM, an Albuquerque utility. This arrangement allowed KET to effectively "borrow" electricity from PNM at low prices, then immediately "resell" it back at much higher prices into California's desperate market, even though no actual power changed hands. KET profited by collecting "congestion" fees, exploiting loopholes in the market design. While these trades were technically legal, they created the illusion of increased supply in a crisis-stricken market, exacerbating price volatility and contributing to the financial strain on California utilities. The crisis escalated on January 14, 2001, when power reserves fell below 7%, leading to a "phase 1 emergency" and rolling blackouts in San Francisco, affecting tens of thousands of customers.

The state legislature eventually passed an emergency bailout bill, and Governor Gray Davis declared a state of emergency on January 17, 2001, after a truck crashed into the capitol building. The conventional wisdom that emerged blamed legislative incompetence and a flawed system of "price caps" for consumers coupled with deregulated wholesale markets. However, this narrative was misleading; utilities themselves had pushed for the rate freeze, anticipating outsized profits. The crisis ultimately ended Stephen Peace's political career.

Chapter 14: Trading the Real World

By 2002, Koch's Corporate Development Board served as the central hub of its "black box," accessing multiple, ultra-high-value flows of information from every part of the company. Charles Koch received detailed quarterly updates from division leaders, whom he could quiz on any topic. The board also drew upon vast amounts of data and analysis continuously generated by the company's trading floors in Houston and from smaller development groups embedded within divisions like Koch Minerals and Flint Hills Resources.

Steve Packebush, a marketing executive from the struggling Koch Nitrogen division, presented an investment thesis to this board. Around 2000, natural gas price spikes severely weakened high-cost US fertilizer producers, as natural gas constituted approximately 80 percent of production cost. Instead of panicking, Packebush and his team adopted a "very Koch way" of responding: they conducted an in-depth study of the fertilizer markets. Their analysis confirmed that Koch's Louisiana plant was a "permanent loser" but projected that the market would stabilize after an initial "bloodletting," leaving "a small island of winners" supported by strong local demand. They believed there would always be a need for nitrogen-based fertilizers for US food production. This led them to a strategic conclusion: it would be smart to acquire any fertilizer plants that went up for sale, but only if Koch could purchase them at replacement value—the cost required to rebuild the plant from scratch if it were destroyed.

This strategy became particularly relevant when Farmland Industries, a large agricultural cooperative, faced bankruptcy in 2002. Packebush's team identified Farmland's network of fertilizer plants, including its "crown jewel" in Enid, Oklahoma, as valuable targets.

The chapter also introduces the academic concept of "agency theory," which gained prominence during this period. This theory posited that a company's CEO should act merely as an "agent" of the shareholders, with their primary responsibility being the maximization of shareholder returns, subordinating other considerations like employee pay or long-term company value. This new framework contrasted with previous management philosophies. Koch's subsequent acquisition of Farmland's fertilizer assets exemplified this approach, as the company moved to consolidate and optimize these holdings.

The private equity business, characterized as a "game board" for companies, leveraged heavy debt and a strong corporate veil to achieve immense profits. The private equity firm would borrow large sums to take a struggling but cash-generating company private, then use the target company's cash flow to pay down the debt. Once the debt was cleared, the private equity firm retained ownership of the now-debt-free company. The corporate veil was a critical component of this strategy, shielding the private equity firm itself from catastrophic losses, as the debt was explicitly loaded onto the acquired company. Thus, if the target company failed, the private equity firm's losses were limited to its initial investment, often a small fraction of the purchase price.

Chapter 15: Seizing Georgia-Pacific

Koch Industries' largest acquisition in its history was Georgia-Pacific, a deal led by a scouting team that included Jim Hannan. After the acquisition, Koch embarked on "Kochifying" Georgia-Pacific and Invista, integrating them into the Koch Industries system. While Koch utilized conventional private equity tools, such as heavy debt, a robust corporate veil, and in-depth financial analysis, it also imprinted Charles Koch's distinct vision onto these new holdings. Notably, unlike some private equity firms that would strip assets, Koch invested billions into its newly acquired companies.

Invista, a synthetic fabrics manufacturer, became a testing ground for another core tenet of Koch's operating philosophy: the unwavering commitment to "10,000 percent compliance". This doctrine mandated that Koch's operations adhere to "100 percent of the law, 100 percent of the time". This was particularly critical for Invista, as Koch inherited a vast network of factories handling dangerous equipment and chemicals, each posing potential federal violation risks. Jim Hannan and David Hoffmann, an environmental attorney, were instrumental in spreading this new doctrine. Hoffmann's team, for instance, implemented drastic actions: they immediately shut down a benzene treatment system in Victoria, Texas, found to be non-compliant, and discovered that DuPont, the previous owner, had expanded processing equipment and boilers in South Carolina and Delaware without proper permits, operating them out of compliance. Koch reported these nearly seven hundred violations to the EPA, entered an agreement for quarterly audits, spent approximately $140 million to bring everything up to code, and then sued DuPont for $800 million in damages. This rigorous compliance strategy, applied across all Koch operations, was not merely a gesture of corporate citizenship but a pragmatic tool to maximize profits by eliminating costly legal troubles and regulatory distractions, allowing Koch to focus on its growth plan.

The chapter further elucidates the private equity business model, explaining how debt became its "lifeblood" during the 2000s. The strategy involved identifying struggling companies with strong cash flow, borrowing massive sums to take them private, and then using the acquired company's cash flow to repay the debt. Once the debt was cleared, the private equity firm retained the company and its subsequent profits. A crucial element in mitigating risk for the private equity firm was the creation of a deep and strong corporate veil. By loading the debt directly onto the target company, the equity firm's potential losses were confined to its initial investment, shielding it from catastrophic liabilities. Koch Industries applied this model by forming a shell company, Koch Forest Products, to facilitate the Georgia-Pacific acquisition.

Jim Hannan, now CEO of Georgia-Pacific, kept a constant reminder of the Purina Mills failure – a cup he looked at frequently – to instill the necessity for "ever-better performance and leaner operations" driven by the heavy debt Koch had leveraged for the acquisition. This immense pressure from Charles Koch and his executives was then transmitted down the chain of command, profoundly impacting the middle-class American workers at Georgia-Pacific's ground level.

Chapter 16: The Dawn of the Labor Management System

When Koch Industries acquired Georgia-Pacific, it inherited a vast network of paper mills and timber operations, notably the warehouse complex in Portland, Oregon, which became the setting for a prolonged labor dispute. Steve Hammond, a long-time warehouse worker, observed the steady erosion of middle-class jobs and benefits over decades, as successive corporate owners aimed to squeeze more profits from the mills and warehouses. The Inlandboatmen's Union (IBU), a "fierce, energized union" that historically provided solid work and pay, fought to protect its members' wages and job security. Hammond, for instance, worked for twenty years before earning enough seniority for day shifts, often working seven days a week to earn overtime pay.

Koch's approach to its new workforce included mandatory Market-Based Management (MBM) training. Supervisors like Dennis Trimm were required to attend multi-day seminars led by trainers like Benjamin Pratt, who conveyed Charles Koch's philosophy as secret knowledge directly from Koch's headquarters. Attendees were given Charles Koch's book, The Science of Success, and told to consult it regularly. Pratt's direct message — that employees could "look for employment elsewhere" if they disliked the long hours — effectively silenced the room, signaling Koch's uncompromising stance. The paramount directive for supervisors became increasing the bottom line and maximizing efficiency across Georgia-Pacific's "assets" (warehouses), driven by the billions in debt leveraged for the acquisition.

To achieve this, Koch implemented the Labor Management System (LMS), a software suite that tracked workers with the same granular detail used for inventory. Each worker was assigned a unique "bar code," and their every minute was recorded and analyzed throughout their workday, week, and career. Supervisors monitored "performance against time standards" and "gaps in time" ("indirect time"), requiring drivers to log and explain all non-work-related minutes, such as bathroom breaks or emergency phone calls. The system fostered intense competition among drivers, with public rankings and the threat of reprimand, "notice," "last chance" status, and ultimately termination for those consistently in the "yellow" or "red" zones.

This system aligned with Charles Koch's "ABC process" for employee retention, outlined in The Science of Success. According to Koch, "A" performers are a competitive advantage, "B" performers are necessary, but "C" performers "do not meet expectations" and should "not be retained" if they don't improve quickly. Kerry Alt, a forklift driver described as "incurably slow" despite being a hard worker, was a prominent victim of this system, eventually "forced out". Supervisors were also ranked monthly based on metrics like safety accidents and, most importantly, "cost-per-case" – the cost to move each unit of material through the warehouse. This metric pushed for "fewer people moving more product ever more efficiently". Despite Koch's emphasis on "10,000 percent compliance" and "safety first," supervisors like Trimm felt pressure to adhere to safety rules precisely as prescribed by Koch, rather than simply being safe.

Chapter 17: The Crash

By summer 2008, despite the looming financial crisis, David H. Koch's fortune had dramatically swelled from approximately $4 billion in 2002 to $19 billion. Amidst the rapid unraveling of the economy in September 2008, Charles Koch convened his trading team, including Cris Franklin, in the "black Tower" to address the crisis, directly questioning the continued existence of the trading unit.

Charles Koch presented a distinct narrative on the cause of the economic crash, articulating a belief that it was not a failure of the free market, but rather a result of "overweening government control and interference". He contended that government interventions, such as the federal bailout plan, the $787 billion stimulus package, and initiatives like national healthcare, distorted market incentives and jeopardized prosperity. Koch Industries, in his view, served as a "microcosm of free enterprise," striving to adhere to the "true laws of prosperity". Employees were expected to embrace and spread these values, viewing outsiders who clung to the idea of big government solutions as misguided or uneducated.

The chapter then details the impact of this philosophy on the IBU labor contract negotiations in 2010, particularly at the Georgia-Pacific warehouses where Steve Hammond worked. Analysis revealed a severe degradation of working conditions: despite increased productivity, warehouse workers experienced a 23 percent pay cut (adjusted for inflation) over three decades, while the Labor Management System (LMS) imposed increasingly onerous work conditions, logging even bathroom breaks and conversations.

Abel Winn, from Koch's experimental economics lab, had conducted a study on "holdouts" in property acquisition. His research, which would later be published, astonishingly found that the most effective way to "destroy a holdout's position was to make them expendable". This strategy, akin to commodity trading where information asymmetry benefits the more knowledgeable party, involved negotiating with all property owners simultaneously to inject uncertainty and pressure on individual sellers, a tactic directly applicable to labor bargaining.

University professors Lynn Feekin and Ron Teninty advised the IBU, stressing the importance of demonstrating union strength and solidarity to convince Koch that settling was preferable to fighting. However, Koch's proposed "cafeteria-style" health plan, which introduced variable premiums based on family size, fundamentally undermined the union's principle of solidarity, where all members paid the same premium.

Ken Harrison, Georgia-Pacific's lead negotiator, adhered to deep analysis and an uncompromising stance, driven by the directive to operate "more efficiently at a lower cost" due to the billions in debt levied on Georgia-Pacific. Koch's strategy involved strategically refusing to meet with the union, giving IBU members "time to start thinking things over" while simultaneously stressing to workers that they could be replaced. The IBU's pension fund also suffered a significant loss, and Koch, unlike other employers, demanded employee contributions to shore it up. The final contract offered in 2011 severely limited the IBU's ability to honor other unions' picket lines, effectively breaking inter-union solidarity. A defeated Steve Hammond ultimately advised his fellow union members to vote in favor of the contract, acknowledging that they had "no better options".

Chapter 18: Solidarity

There is no specific content provided for this chapter within the given excerpts from "Kochland - Christopher Leonard.pdf". Its inclusion in the table of contents suggests it is part of Part 3: Goliath, which likely focuses on Koch Industries' transformation into a powerful entity.

Chapter 19: Warming

In December of each year, Charles Koch hosted a private party at his home for the elite Koch Industries employees who donated the maximum legal amount to the company’s political action committee (PAC). This event fostered a sense of exclusivity and special belonging among the attendees, including board members and senior executives. The annual gathering, often held around the time of the company's board meeting, implicitly signaled that an employee had a profitable year and received a substantial bonus.

While Charles Koch's speeches at these parties were typically polite and general, focusing on the importance of economic freedom, his 2009 address was notably urgent. He expressed that America's future was imperiled and that the political fight was just beginning, implying the company's survival was at stake.

At this time, a significant threat to Koch Industries stemmed from a dedicated group of liberal congressional staffers in Washington. This team had been working for years to draft a thousand-page law aimed at controlling greenhouse gas emissions. Jonathan Phillips, a driven member of this team, was initially optimistic, unaware of Charles Koch's looming influence. Phillips and his colleagues were deeply motivated by the belief that human life on Earth was endangered by climate change. They focused on communicating the "incontrovertible" scientific data showing the accumulation of carbon dioxide and other more potent greenhouse gases in the atmosphere, which trap heat. Data from Charles David Keeling's air monitor in Hawaii, showing a steady increase in atmospheric carbon from 316 parts per million (ppm) in 1959 to 354 ppm in 1990 (exceeding historical levels), fueled their desperation to enact legislation, as they felt their warnings were not being heard.

The proposed Waxman-Markey bill sought to establish the largest cap-and-trade system in history. This system aimed to limit greenhouse gas emissions across nearly every economic sector, from automobiles to power plants. The concept was inspired by the successful cap-and-trade program implemented in 1990 for sulfur dioxide (acid rain), which led to a 60% reduction in emissions by 2008 at lower-than-expected costs. Phillips and his peers felt they were participating in a historic moment, comparable to the architects of the New Deal, believing they were shaping the governing framework for future generations. There was a strong sense that the Democratic Party was on the verge of long-term political dominance, with Republicans seemingly relegated to a minority faction.

Koch Industries, recognizing the threat, began to strategically consolidate its lobbying efforts. Previously, lobbying was fragmented across divisions like Invista and Georgia-Pacific, reflecting Koch's corporate veil structure designed to limit legal liabilities. In 2008, however, Koch Industries merged these operations into a single entity, Koch Companies Public Sector, to enhance coordination and effectiveness.

David Hoffmann, an environmental attorney from Koch, who was instrumental in implementing the company's "10,000 percent compliance" doctrine (obeying 100% of laws 100% of the time), led an internal committee to explore how Koch could adapt to and potentially profit from a cap-and-trade system. Hoffmann believed this adaptation aligned with the Market-Based Management (MBM) philosophy, embodying the principle of "hope for the best but prepare for the worst". His committee even identified opportunities, such as Invista earning valuable carbon credits by reducing its nitrous oxide emissions, which are 290 times more potent than carbon dioxide.

However, Hoffmann's view that cap-and-trade was inevitable was a minority opinion within Koch's lobbying office. Koch's top lobbyist, Philip Ellender, saw the primary role of Koch's lobbyists as gathering and analyzing information within the complex and opaque congressional system. This detailed intelligence allowed them to understand which bills had momentum and how politicians stood on issues crucial to Koch. When engaging Democratic politicians, Koch's lobbyists strategically focused on three factors: the preferences of a legislator's voters, the broader political impact of their vote, and the legislator's personal convictions and idiosyncrasies.

Koch's strategy was to target moderate Republican politicians to undermine support for the Waxman-Markey bill, aiming to cause its collapse. Republicans, led by figures like Mike Pence, attacked the bill by labeling it a "national energy tax" that would increase energy costs for American families. Pence notably used a C-Span camera to directly urge viewers to contact their congressmen and halt the bill, invoking the idea that "the people govern".

Initially, Koch faced a setback as the Waxman-Markey bill passed the House and moved quickly to the Senate, while Obama's stimulus package directed funds to renewable energy competitors. Charles Koch, known for his relentless nature in past disputes (like with his brother Bill), responded by demanding detailed data and meticulously analyzing it.

Chapter 20: Hotter

During the Fourth of July recess in 2009, widespread protests erupted against members of Congress, with figures like Bob Inglis facing heckling and shouting at town hall events. Americans for Prosperity (AFP) played a crucial role in orchestrating these events, providing free chartered bus rides to rallies in Washington, D.C., and supplying protestors with boxed lunches and protest signs. This blend of local activism and centralized guidance from Koch's well-funded lobbying operations allowed AFP to mobilize "grassroots support" effectively.

Bob Inglis, a Republican congressman, endured enraged constituents at his town halls, who were angry about government bailouts, the stimulus, Obamacare, and even the Waxman-Markey cap-and-trade bill, despite his vote against it. Some protestors made outlandish claims, such as a woman insisting that the Obamacare bill mandated microchip implants for all Americans.

Charles Koch believed that the Republican Party was the primary issue, stating, "We’ve got to make Republicans act like Republicans". Koch and AFP aimed to shift the party towards the libertarian ideals of Austrian economists like Friedrich Hayek, attracting volunteers by targeting wavering Republican politicians. However, a study revealed that Tea Party activists were not purely libertarian, often supporting entitlement programs like Medicare and Social Security, differing from Koch's philosophy.

Glenn Beck, a prominent voice in the Tea Party movement, amplified these narratives on Fox News, creating "terrifying" stories of global conspiracies that prioritized "provocation" and "outrage" over understanding.

Koch Industries' broader strategy aimed to defeat the Waxman-Markey bill in the Senate. Steve Lonegan, AFP's director in New Jersey, instructed activists to "torment" congressmen through rallies, phone calls, and confrontations to signal to senators the high political cost of supporting climate change regulations.

The bill's assignment to the Senate Committee on Environment and Public Works, chaired by Barbara Boxer, seemed to favor its passage. However, the bill faced repeated delays, extending from September to October. This legislative stagnation, coupled with the Democratic Party's focus and resources being diverted to the Affordable Care Act debate, provided a crucial advantage to Koch Industries, as the Senate environment often favors those seeking to block legislation.

Koch became skilled at shaping political discourse through an "echo chamber" tactic, subtly seeding its ideas while obscuring its influence. This involved commissioning academic studies without claiming credit, channeling them through Koch-controlled think tanks, and then using them as ammunition for political campaigns. For instance, in 2007, Koch secretly funded the "Democratic-leaning" think tank Third Way to promote free-trade policies, which benefited Koch's global business operations, including its Pine Bend refinery's reliance on Canadian oil imports. Third Way published a report criticizing "neopopulist" opposition to free trade without disclosing Koch's financial support.

In 2009, Koch's "echo chamber" intensified. Koch lobbyists commissioned an economic report from the conservative American Council for Capital Formation (ACCF) to undermine the cap-and-trade bill, discreetly paying for it while getting the National Association of Manufacturers (NAM) to "sponsor" it. The ACCF study made dire predictions, forecasting 2.4 million job losses and a 50% increase in electricity prices by 2030 if Waxman-Markey passed. This report was then promoted by other Koch-funded groups, like the Institute for Energy Research (IER). Despite being an "outlier" in its negative assessment, Koch viewed the report as a "tremendous victory" because its viewpoint gained wide circulation without revealing Koch's involvement.

Despite these successes, Charles Koch felt continually threatened, seeing the fight as ongoing. He continued to host private gatherings for wealthy conservative donors, stressing the need to "stop—and reverse—this internal assault on our founding principles". These events were highly secretive, with strict rules against media presence or social media use. Charles Koch likened this strategy to "The whale that comes above sea level gets harpooned," emphasizing the importance of anonymity in his political operations.

However, maintaining secrecy became increasingly difficult. Investigative reports, including Greenpeace's 2010 report Koch Industries: Secretly Funding the Climate Denial Machine and Jane Mayer's New Yorker article "Covert Operations" in August 2010, exposed the Koch brothers' extensive political involvement. This, coupled with the Citizens United Supreme Court decision, led to a widespread public narrative that the Koch brothers had not merely supported but created the Tea Party and were benefiting greatly from unlimited campaign donations. The "whale had breached," and "harpoons began to fly," manifested by over a thousand protestors at their January 2011 donor conference.

Charles Koch, who valued long-term thinking and effective incentive systems, viewed politicians as "victims of the system" caught in a dysfunctional environment. Despite the increased public scrutiny, Koch's business empire continued to grow "deep underwater," becoming even more powerful.

Chapter 21: The War for America’s BTUs

In late 2010, while the cap-and-trade bill was stalled in the US Senate, Koch Industries began a series of what might appear to be unusual business deals. For example, in March 2010, Koch announced a 25% expansion of its pipeline capacity in southern Texas, a region where oil production had stagnated for years. These investments were strategically made based on Koch's early recognition of the impending fracking revolution.

Koch's leadership team, including Brad Razook and Tony Sementelli (CFO of Flint Hills Resources), identified the Eagle Ford Shale in South Texas as a key area for new "tight oil production". They pitched a plan to Charles Koch to leverage this cheap crude supply for Koch's refinery in Corpus Christi, creating a "feedstock advantage" similar to what made Pine Bend a "cash cow" for decades. Koch then actively acquired and built new pipeline networks, terminals, and crude-gathering operations in South Texas and Corpus Christi, aligning with the surge in production.

Beyond direct investments, Koch engaged in targeted lobbying at the state level, such as in Kansas. They opposed mandatory renewable energy standards, advocating for free-market energy policies. State lawmakers, like rancher Tom Moxley, were influenced during legislative sessions.

By 2014, Koch Industries further solidified its control and presence by expanding and renovating its headquarters in Wichita. This involved rerouting Thirty-Seventh Street into a large semicircle around the campus to accommodate a new 210,000-square-foot office building for 745 employees, symbolizing the company's growing physical and operational footprint.

Chapter 22: The Education of Chase Koch

Chase Koch, Charles Koch's son, initially seemed challenging to teach, but his father dedicated Sunday afternoons to imparting his "systematic view of human behavior and how best to organize human society". Charles used educational videos by economists Ludwig von Mises and Friedrich Hayek, pausing them to question Chase and his older sister, Elizabeth, on their understanding. Charles also personally assisted Chase with a school paper on Aristotle, highlighting the philosopher's idea that "the goal in life is to be happy and to be happy you need to use your natural ability".

As part of his upbringing, Chase was sent for a summer to a Koch Beef Company feedlot in Syracuse, Kansas, where he spent ten hours a day, seven days a week, shoveling manure and picking weeds. Though initially bitter, he eventually appreciated the experience, which instilled in him a sense of accomplishment and the understanding that he "had really earned something". This summer job helped him grasp the lessons from his father and Aristotle. Chase also developed an intense, seven-day-a-week tennis regimen focused on outworking opponents rather than relying on inherent genius. Despite his dedication, he was unable to defeat Matt Wright, a consistent state champion.

In September 1993, at the age of sixteen, Chase Koch was involved in a fatal car accident that killed twelve-year-old pedestrian Zachary Seibert. Police reports indicated Chase ran a red light. Charles and Liz Koch immediately acted to protect their son while also ensuring he faced the consequences. Don Cordes, Koch Industries' general counsel, served as the family's spokesman, downplaying Chase's culpability by stating Chase believed the light was yellow and was not speeding. However, the Kochs also instructed Chase to visit Zac's parents, the Seiberts, to take responsibility. Walter Seibert, Zac's father, felt that while Chase was visibly distraught, he did not fully "own up" to the details of the accident during their private conversation. The Koch family attended Zac's funeral, a deeply "emotionally wrenching" experience where they were the focus of "every eye in that church". Chase later pleaded guilty to vehicular homicide, receiving probation, community service, a curfew, and payment for funeral expenses. The accident left a permanent mark on Chase, who stated, "I can’t forgive myself for what I did. And I don’t expect anyone else to".

Chase's career at Koch Industries began with various high-level rotations, including roles in the development group, where he analyzed company valuations and identified market opportunities. He also worked in tax and accounting, becoming proficient in navigating the complex and financially lucrative American tax code. This work highlighted a tension in Charles Koch's philosophy: his belief that taxation was "state-sanctioned theft" (echoing libertarian Murray Rothbard) contrasted with his demand for "10,000 percent compliance" with all laws. Koch Industries utilized a complex network of offshore entities, like those in the Cayman Islands, to legally minimize tax liabilities, as revealed by leaked documents. Chase developed a "granular" understanding of the company's trading operations in crude oil and natural gas and became a public face for Koch, speaking at groundbreakings for major projects like the Enid fertilizer plant expansion.

In contrast, Charles's daughter, Elizabeth, pursued a different path, becoming a writer and publisher in New York, with her relationship with her father described as "limited and strained" in her personal essays.

In 2012, Chase was promoted to lead Koch Agronomic Services, dealing with specialty chemicals and venture capitalists. He eventually became CEO of Koch Fertilizer, a multi-billion dollar global division with 3,000 employees. He expressed confidence in the division's future, driven by growing global demand. Despite this success, Chase became "miserable" due to the exhausting, "wall to wall" meetings that left no time for strategic vision, impacting his personal life. He sought advice from David Robertson, a potential successor to Charles, who diagnosed his mistake as taking on too much responsibility. Chase ultimately decided to step down from the CEO role, opting instead to spin off Koch Agronomic Services as an independent company that he would lead, a less prestigious position but one he insisted on.

Despite this apparent step back, Chase Koch was still considered the "heir apparent" for the CEO position. He later established Koch Disruptive Technologies (KDT), focusing on investments in new technologies and venture capital firms, including an Israeli medical devices company. In this new role, Chase appeared more "comfortable in his own skin," quiet, focused, and authoritative. His father's gift of old notes about Aristotle reinforced the importance of finding meaning through accomplishment.

Chapter 23: Make the IBU Great Again

Steve Hammond, a union official for the Inlandboatmen's Union (IBU) at the Georgia-Pacific warehouse in Portland, dedicated himself to improving working conditions, reining in the Labor Management System (LMS), and securing pay raises. He spent 75% of his time handling complaints from the approximately 100 warehouse employees, who constantly pressured him to file grievances and negotiate better contracts.

Confidential company data, unknown to Hammond, indicated a consistent increase in worker injuries at Georgia-Pacific, including burns, amputations, and deaths, as Koch prioritized maximizing profits and production. Hammond observed the intensifying pressure on workers firsthand. A "weird dynamic" emerged where union members viewed IBU officials as a "second layer of management," expecting them to resolve disputes, rather than recognizing that union strength derived from member solidarity and willingness to strike. Hammond believed this perception was "exactly backward".

Jim Hannan, Georgia-Pacific's CEO and a "rising star" at Koch, attributed the company's success to Market-Based Management (MBM). However, workplace injuries jumped from 545 in 2011 to 584 in 2012. Koch attempted to mitigate safety risks by implementing complex, extensive "work standard" documents (some over twenty pages long) that detailed precise procedures, but employees often struggled to follow them and were cited for violations.

The chapter highlights several fatal accidents at Georgia-Pacific in 2014:

• Sam "Sambo" Southerland, a contractor, died after falling 30 feet into a chemical digester at a Pennington, Alabama plant, sustaining multiple fractures and chemical/thermal burns.
• At a plant in Corrigan, Texas, a fire in a wood dust silo led to an explosion, burning 7-9 employees. Charles Kovar and Kenny Morris, both Georgia-Pacific employees, died from their injuries weeks later.
• Lydia Faircloth was killed after being crushed by machinery.
• OSHA imposed minimal fines for these deaths (e.g., $5,000 for Wesson, $14,000 for Kovar and Morris, $35,050 for Faircloth), significantly less than the $30 million fine Koch received in 2000 for pipeline leaks.

Koch's response to the safety crisis involved reemphasizing Market-Based Management, using military-like language such as "Engage Hearts & Minds" to describe efforts to reverse dangerous conditions. They questioned whether there was "too much emphasis on 'we are improving' versus we are not satisfied with where we are". The company set an ambitious goal of achieving "zero significant incidents" by 2035, estimating that a 10% decrease in serious incidents would yield $5 million to $25 million in profits. A "Georgia-Paci�c 20 Year Bet" chart, designed in the MBM style, focused on changing workers' "hearts and minds" to transition "From Have To—To Want To" in terms of safety compliance. Despite these efforts, workplace accident rates continued to accelerate.

In 2016, IBU members, determined to fight for better conditions, tasked Hammond and his colleague, the "Hammer," with challenging Koch's management. Hammond's increased daily drinking reflected the immense stress of his role. The union discovered that their pension fund had been severely impacted by the financial crisis, facing potential insolvency and dramatic cuts to retirement benefits. Koch Industries took a "hard line position," refusing to contribute to shoring up the pension unless employees also paid from their paychecks, a stance "no other company took".

Koch's proposed contract significantly limited the IBU's ability to honor picket lines, effectively undermining union solidarity by making it a fireable offense to refuse to cross. This mirrored a growing trend in labor contracts nationwide. In December 2011, a "defeated" Steve Hammond reluctantly advised IBU members to vote for the contract, acknowledging they had "no better options". The members reacted with "rage" and "contempt" toward their union officials, feeling that the union had failed them.

Chapter 24: Burning

In early 2017, warmer-than-usual weather signaled that 2016 was the hottest year on Earth since reliable record-keeping began in 1880. Scientific data from NASA confirmed this warming trend, attributing it largely to "increased carbon dioxide and other human-made emissions," with atmospheric carbon concentrations reaching 407 parts per million, far exceeding the threshold for avoiding radical climate change.

Charles Koch's political network, Americans for Prosperity (AFP), actively attacked the Republican-led attempt to repeal and replace Obamacare, the American Health Care Act (AHCA), in March 2017. AFP organized busloads of volunteers to Washington, D.C., where they protested with placards demanding that Congress fulfill its "You Promised" pledge for a "real repeal" of the health care law. Mark Meadows, chairman of the conservative House Freedom Caucus, opposed the AHCA due to provisions like tax breaks for health insurance and fines for dropping insurance, which he viewed as perpetuating Obamacare's mandates. President Trump pressured Meadows and other lawmakers to pass the AHCA, emphasizing the need for a political "win".

The Republican Party also had a chance to overhaul the American tax code. However, the bill drafted by Paul Ryan and Kevin Brady, which included a Border Adjustment Tax (BAT), directly opposed Charles Koch's interests. Koch opposed the BAT ideologically as a new tax and strategically because it posed a significant threat to Koch Industries' profits. A Koch-funded study by the Brattle Group, initially intended to be secret, predicted negative economic impacts from the BAT.

AFP spearheaded the opposition to the BAT, characterizing it as a "new tax on the American people" that would primarily hurt low-income individuals by increasing import costs. This "seven-figure effort" included extensive lobbying, ads, and mobilizing volunteers. Koch's network successfully pushed Ryan to abandon his deficit-reduction platform for a tax plan that would increase national debt, demonstrating the effectiveness of Koch's "block-and-tackle strategy". Marc Short, Trump's legislative affairs director, collaborated closely with Tim Phillips of AFP, agreeing to remove the BAT and personal deductions to simplify the tax code. On July 31, AFP publicly celebrated its success in defeating the BAT, attributing it to its powerful political network. Mark Meadows, initially hesitant, became a vocal opponent of the BAT at an AFP event, urging swift passage of the new tax cut plan.

In a parallel effort, David Schnare, a former EPA employee funded by the Koch-linked Donors Trust, was tasked with creating a plan to essentially dismantle the entire EPA. His "Agency Action Plan" focused almost exclusively on eliminating regulations burdensome to the fossil fuel industry, such as Obama's climate agenda, CAFE Standards (fuel efficiency mandates), and methane rules, which were also top priorities for Koch Industries. EPA Administrator Scott Pruitt was responsible for implementing these policies but rarely engaged directly with agency staff.

The Koch network leveraged its long-standing relationship with Vice President Mike Pence, a close ally of Americans for Prosperity. In June 2017, Charles Koch held a private, unlisted meeting with Pence to discuss Trump's legislative agenda, including tax cuts and healthcare. Koch's network committed to spending between $300 million and $400 million in the 2018 midterm elections, ensuring its significant influence in the political landscape of Trump's presidency.

Chapter 25: Control

Charles Koch's daily routine in Wichita began early, driving himself to Koch Industries headquarters, a "universe that he, primarily, had authored". His office and the corporate boardroom, with their unchanged decor, symbolized his enduring control and legacy. A bust of his father, Fred Koch, served as a monument, but the narrative Charles controlled emphasized his own achievements in building Koch Industries and its influential political network far beyond his father's initial enterprises.

In 2018, as Charles Koch oversaw his corporation, it appeared to validate his core beliefs. Massive, highly profitable divisions like Georgia-Pacific (generating over $1 billion in annual profits) and Koch Fertilizer (billions in revenue annually), which did not exist in 2000, were thriving. Long-standing "cash cows" such as the Pine Bend refinery and the trading division continued to perform strongly, capitalizing on opportunities like the fracking revolution. The company continuously grew and transformed, entering new industries and adapting to market changes.

A key observation was the deep institutionalization of Market-Based Management (MBM). Senior leaders consistently used MBM's specialized vocabulary ("mental models," "discovery processes," "decision rights," "challenge processes") in their presentations to Charles Koch, indicating that adherence to this intricate philosophy was non-negotiable for employees and a prerequisite for advancement within Kochland. New recruits underwent day-long training sessions to memorize this vocabulary and learn MBM's rules, as Charles Koch demanded total commitment to the philosophy.

However, the real-world efficacy of MBM was presented as "less clear" than Charles Koch's unwavering faith in it. Invista, a major acquisition from 2004, remained "deeply troubled," with empty offices and job cuts, suggesting MBM was insufficient to address its market challenges. Similarly, despite MBM principles, workplace injury rates at Georgia-Pacific stubbornly persisted at elevated levels since 2012.

The author posits that the American labor market mirrored Kochland's structure, with unsteady pay tied to bonuses, and the majority of Americans holding only "shadow stock" in the enterprise, reflecting a significant disparity in wealth and political power. Research from political scientists showed that the "economic elite" and "special interest groups" (like lobbying organizations) had the best chance of influencing policy outcomes, while the impact of "median-income Americans" was "near zero".

Charles Koch's son, Chase, remained the "heir apparent" for the CEO position. He carved out a new role leading Koch Disruptive Technologies (KDT), a division focused on identifying and investing in risky new technologies and venture capital firms, including an Israeli medical devices company. Chase appeared more confident and authoritative in this role. A note from his father about their past work on an Aristotle paper reinforced the idea that meaning and happiness come from striving and accomplishment.

In 2018, Charles Koch himself found meaning largely in his "book project," a private passion that reportedly brought him a new sense of "contentment". He had already published two books on MBM, but his new book aimed to expand on his philosophy, proposing it as a "guidebook not just for operating companies, but for operating entire societies," essentially envisioning American society in the "shape of Kochland". Charles Koch acknowledged that this vision would be a long and contentious path, but he operated on a "very long timeline," measuring his success over decades.