Charles Koch: Success Story

In 1961, Fred Koch called his son, Charles, and asked him to come back to Wichita to help him manage the family business, Rock Island Oil & Refining Company. At the time, the company could best be described as a medium-sized oil company.

With two years of experience under his belt at Arthur D. Little, Inc., Charles reportedly refused at first. That’s when his father threatened to sell the company if he didn’t come home.

Charles agreed, and joined Rock Island Oil & Refining Company as a vice president of the engineering arm. He was promoted to president of the engineering division in 1963, a title he retained until 1971.

Perhaps sensing the end was near, Fred Koch appointed Charles to the presidency of the entire company in 1966. Not long after, in 1967, Fred Koch passed away, and Charles was awarded the titles of chairman and CEO. At the time, the company had annual revenues of roughly $180 million, and was valued at more or less the same amount.

The next year, the Rock Island Oil & Refining Company was renamed Koch Industries, in honor of Fred Koch, and a new headquarters was constructed in Wichita. 

Charles quickly set to work. In 1968, he tried to buy an interest in Great Northern Oil Company, which owned the gigantic Pine Bend Refinery, from Union Oil of California. After lengthy negotiations, Koch partnered with energy magnate J. Howard Marshall II (best known for being married to Anna Nicole Smith for the last 14 months of his life) to buy the Pine Bend refinery. Control of the refinery, which is still the 14th-largest in the United States, cleared the way for Koch to diversify into new businesses.

The 1968 purchase of the huge Minnesota refinery allowed Charles to expand into chemicals, polymers, asphalt and commodities, such as petroleum coke and sulfur. To assist with the expansion of the business, Charles called on his younger brother David, who joined the company in 1970, first as technical services manager. He would go on to take Charles’ post as president of engineering in 1979.

In 1972, Charles Koch married, and he and his wife Liz since would go on to have two children. The 1970s and 80s also saw Koch Industries continue to expand into natural gas, building a massive fractionator in Oklahoma in 1971. Beyond that, the company continued to invest in real estate, coal, refineries, pipelines and fertilizer.

As the company grew, so did tension among the four brothers. All four had inherited a share of the company from their father, but Charles and David were responsible for running it. They bought out their two brothers, William and Frederick, for a sum that was reportedly between $950 million and $1.3 billion, in 1983.

Koch Industries continued to expand its core businesses, while branching out into venture capital and municipal bonds. As a privately held company, financial details are not abundant. One thing was clear, however – the company was thriving.

Throughout this expansion, Charles Koch employed (and still publicly espouses) a management style called Market-Based Management (MBM). The strategy calls for a relatively flat organizational structure, and a free flow of ideas among employees of all levels. An MBM organization encourages employees to take an entrepreneurial approach to their jobs, and seeks to reward them based on the value that they bring to the company, rather than how long they spend in the office or in the field. MBM proponents say this hones individual decision-making and problem-solving. But with business booming, the late ‘90s and early 2000s brought a string of challenges to Koch Industries, and to the Koch family.

In 1998, a major challenge came from within the family. William and Frederick Koch filed a lawsuit in which they claimed to have been cheated out of $2.3 billion by their two brothers when they sold their stakes in the family business in 1983. The bitter battle, which was staged in a Kansas courtroom, spilled out into the public eye as each side paid for television commercials, gave vitriolic newspaper interviews and hired private investigators to dig through each others’ trash. At one point during the trial, David wept openly on the stand.

Charles and David won in court. But the conflict was far from resolved, with only Bill agreeing to break bread with Charles and David in 2001, at a dinner hosted at Bill’s Palm Beach mansion.

A very public reversal for the company came in 1999, when an Amarillo court awarded the families of two teens killed in an explosion caused by a leaky Koch pipeline $296 million in damages. The two teens, Jason Stone and Danielle Smalley, both 17, were killed in 1996 when their truck ignited the fumes from the leak.

The Clinton administration, a longtime political foe of Koch Industries, went after the company on multiple occasions. The Federal Government sued Koch Industries in 1995 and 1997, claiming that pipelines owned and operated by the company were responsible for more than 300 oil spills. In those suits, it sought as much as $214 million in penalties. On Jan. 13, 2000, shortly before Clinton left office, the cases settled for $35 million in fines.

As it was leaving, however, the outgoing Clinton administration filed a potentially damaging 97-count indictment in late 2000. The indictment charged the company with covering up its discharge of illegally high levels of benzene, a carcinogen, from a refinery in Corpus Christi, Texas. In addition to penalties of more than $350 million, the indictment also included criminal charges that carried up to 35 years of prison time against four Koch Industries employees.

However, three months after George W. Bush took office, the Justice Department abruptly settled the case. In the settlement, the Justice Department dropped the criminal charges it had filed against Koch Industries and the four employees. In return, Koch Industries agreed to pay $20 million, and pled guilty to one count of concealment of information.

Koch Industries weathered the storm and thrived in the 2000s. Its continuous growth hit new peaks when, in 2005, it acquired Georgia Pacific for $21 billion. The Atlanta, Georgia-based company is a leader in the manufacture and distribution of paper, tissue, pulp, cardboard packaging and building products, as well as toilet and paper towel dispensers.

In 2006, Forbes named Koch Industries the largest privately held company in the world.