Full Transcript of Charles Koch’s Interview with Fortune

Here’s the transcript of the interview. It was lightly edited.

Fortune’s Alan Murray: Charles, thank you very much for being with us. You’ve been CEO of Koch Industries for fifty years. And during most of those years a conference staged like this would be the last place anybody would find you.

Charles Koch: With all these wonderful people? Are you kidding me?

I’m told you barely even went out for lunch. But in the last year you’ve started doing more publicly. Tell us why you are going from the very private Charles Koch to the new public Charles Koch.

Well, we grew to a size and gained enough notoriety that we had to. Because there were all these misconceptions about who we were, what we did, and why we did it, that we needed to.

And I said okay, I will do it as promotion of my book last year. And I’m sure all of you have mobile book copies and given hundreds to your friends. That’s why the sales was so good. But once I agreed to that, and then I had a great interview with Megyn Kelly, and then, kind of said, “Well maybe I’ll do more, if they’re all as good as that one.”

But you talked about the notoriety. In political lingo, you were being defined by your opponents.

Isn’t that how we’re all defined more or less?

Yes. So what was wrong with that picture?

I think it would be an easier answer to answer what was right with it. No, when they read about you in the media, what portion should I believe, is the question I get. And I’d say oh, about 10%.

That bad?

That bad. But I mean it depends on the publication of course. Some would be zero and some would be the majority.

Presumably Fortune would be on the high side but we won’t go there.

We would hope so.

So I want to come back to the notoriety and the politics in a little bit. But I want you to talk first about how you run this company. Because I think it’s very unique. Koch Industries, when Charles took over, had about $200 million in revenue. Today it has a $115 billion in revenue. We’re told the revenue doubles every six years or so. Could you have done that if you were a public company?

Well maybe somebody could. I couldn’t have because I would have been fired. Because I had these crazy ideas drawing from my interest in the philosophy of science, the scientific method, and my studies of how people can best live and work together.

And so I would say, okay, I’d like to take those ideas on what makes societies more innovative and progressive and productive than others. And let’s find out how to sue those inside an organization.

Why would that have gotten you fired?

Well, because most of the time it didn’t work. Because an organization’s different than a society, so you just can’t take private property; every employee owns their property and exchanges.

And you have internal markets. Well ,that doesn’t work. So you have to think through, and we did think through, what are the benefits. And then how do we duplicate the benefits? But we’ve got to use a different mechanism.

And I believe that most innovation comes from trial and error. And it’s not just trial and succeed; the error is there for a purpose. Like I say to our people, “If you think you’re experimenting and you never have any failures, you’re not really experimenting.” You’re not trying anything new. And so we went through quite a period where what I was doing was hurting the company. Because everybody was confused. And then we finally came up with an approach that really started to pay off.

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Can you briefly describe the approach and how it works?

It’s based on the philosophy of science, and we learned to boil it down into a framework of five elements called, vision, virtue and talents, knowledge process, decision, rights and incentives.

And each one is a package of dozens of principles, elements, and practices. And we find when all those are working together in an integrated reinforcing way, you really get performance.

Can you give us one example of how that works in practice that’s dramatically different from the way most public companies work?

In the experience of people we hire and the companies we acquire, we find that most [companies] hire first on talent and then they hope that the values are compatible with their culture.

We hire first on values. And we have ten guiding principles. Many companies have principles but we found also in many companies that there are some they stick in the drawer. It’s a poster on the wall. These principles are who we are as a company. They guide everything we do including who we hire. That’s one.

Another is the division of labor by comparative advantage. And what I mean by that is that rather than you have a vision, you need certain roles filled and you try to get the best person for each one. We try to optimize every person’s role according to what they’re good at and have a passion for. And this is not easy, as you can tell. This takes a lot of work and intensive care.

But we find when we get all that right, the right people in the right roles with the right vision and the right values, then we really have great innovations.

So choosing, getting the right people. Choosing the team comes first.

That’s first.

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Now I’ve told you it’s my theory that the reason you after being so incredibly private for 49 years have started to talk more publicly is because in the competition for talent, you feel like you have to get a positive story out there or people aren’t going to want to work for Koch Industries.

That’s a good part of it. No question. As usual, you have great insight Alan.

Thank you. And is it working? You have this sort of notoriety that was created by the press, in part because of your political activities. I wonder by the way, did your political activities in that sense hurt Koch Industries?

It’s not measurable. We have a lot of boycotts against us. And then we have a lot of people who write and say, “we’re going to start using all your products.” So I don’t know what the balance is. But we can’t measure it. I would think overall it’s positive.

You never thought, we should just shut this down and focus on doing our business?

Shut it down? As I like to say, I’d rather die for something than live for nothing. So there’s no alternative for me. This is who I am.

So since we’re on this topic, talk a little bit about what you have spent literally hundreds of millions of dollars, probably more than that. You spent a fair amount of your fortune trying to change the political system.

You’ve raised other money as well. Talk about what you ere trying to achieve with that.

Well we see, or I should say I see that the country headed towards a two-tiered society. A society increasingly based on control, dependency, and cronyism. Which is pitting individuals and groups against each other.

And my dream would be to move us toward a society that maximizes peace, mutual respect, and well-being for everybody.

Well, most of that is obviously not in politics because it’s hard to find politicians who are really working, trying to change the trajectory from where it’s going, to where I believe it could go. And so most of it has been on education, community programs, things of that sort.

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But you’ve spent a fair amount in politics. You’re one of the largest givers.

We are?

Yes, you are.

Okay, well I’ll take your word for it.

How do you feel about the progress you’ve made in the political arena?

Generally that means less regulation.

I want to come back to the anti-innovation point but before we do, since we’re on politics can you talk about what you see in the current presidential election?

But the day may come where you have to make a choice, for one of them.

Why do I have to? Are you going to put a gun to my head?

No, but I can tell from talking to you that you’re a conscientious citizen who will want to cast a vote in November.

And can you tell us which is cancer and which is heart attack?

Oh, I get confused on that issue. I just don’t want them both at the same time.

But what about Donald Trump, what’s your problem with Donald Trump?

For example, if we’re going to put on a 40% tariff, the Smoot Hawley was 60% increase in tariff. And it caused a reduction in world trade by 70% and lead to worldwide depression. So I think that’s a monstrosity.

No. And there are a number of others. But we don’t have time to go through all those.

No. It’s like I rode up in the elevator with Charles Barkley at the Barcelona Olympics. And he was being attacked, and I said something and he said, “yeah, the media never lets the truth get in the way of a good story.” And that’s it.

I’m here to let you tell the true story.

Okay. So the deal is – what I said is, would you ever support her? I said it’s possible if she totally changed everything she stood for. And they spun that around to I might support Hillary.

Let’s talk about innovation for a minute. Because this conference is really created around innovation. And we’ve already had a lot of conversation today about the perception that the speed of innovation is faster than it’s ever been.

Absolutely.

And yet you have concerns about what our culture is doing to squash innovation.

And to me, this is frightening because I think if we had permissionless or open innovation, the growth rate in this country could be beyond what anybody believed. Because that’s the driver of improvement.

And if we had the same precautionary principles on getting innovations like that improved. Particularly things that are unsafe as airplanes and automobiles, there’s no telling how long and how much money that would take.

But what we try to model our company around is what a philosopher scientist [Michael] Polanyi called “The Republic of Science.” And that is where all the people working on a problem share knowledge. You try to bring the best technology and ideas from around the world and you integrate them, and you challenge.

Nobody has the best answer. You challenge at every level. And so we have a number of mechanisms to do that. The first one is who we hire. We try to hire people who are open, who want challenge, who have humility. They don’t have all the ideas that none of us know very much. No matter how smart or knowledge we think we are.

And then to combine that with other people’s knowledge. So if we’re in a field, we try to constantly gather all the relevant information. Not only in our fields but other fields that could benefit us. And then we share knowledge internally.

And I love it. I [say], “here’s an idea of something we ought to do and here’s how I think we ought to do it.” And the last one I got six different attacks. I don’t mean just, oh that is wrong.

They do that?

Oh yeah.

I love it. Are you kidding me? Because those people who don’t want criticism of their ideas because their ego’s too fragile? Well, how about if you implement it and you fail? Talk about a fragile ego at that point. Your career is ruined. So they can keep me from a disaster; I love it.

It’s like Edison said on inventing the light bulb: It had 3,000 or more failures. And a friend said gosh, “I’m so sorry you had all those failures.” He said, “I haven’t had any failures. I’ve learned 3,000 things that don’t work.”

You need to start with the toughest problem first, and then try to disprove what you’re doing. Because it’s like when we used to do oil exploration, what I used to hope for was a clean dry hole. If we weren’t going to have a gusher, the next best thing is to have a clean dry hole.

Why do I say that? Now we’ve got to test another reservoir. Maybe drill another well to prove there’s —

It’s fail fast.

None of us know very much. So our obligation is to try to disprove it. And the author needs to try to disprove it and get challenges to make them think about what could go wrong. And then if you can overcome that, then you can have something you really can go with.

I’ve got a lot more questions but I can tell already that there are a lot of questions out there. And I’ll start right back here and then come up front.

John Vane: Thank you. My question is do you believe in anthropogenic climate change? And given the risks of being wrong, don’t you think it might make sense to err on the side of caution?

But I don’t think anybody knows how much. I don’t think science is settled. I mean how could it be? The people who are projecting, or who have these models, okay, if we do this the other could be increased by one and a half degrees to four and a half or six.

But you’ve been very outspoken about subsidies to renewable energy.

Some of which you get.

Oh yeah, so we make a lot of money off of it as any established company because it’s endemic in the economy. But what I object to is not studying – I think there ought to be more study. It is not the scientific method to criticize and try to silence those who are challenging it.

If we want to have more progress, we need to welcome just as we do in our company, welcome challenges to this rather than name calling and trying to shut them up.

Well that would be good. I would hope so. I haven’t seen I have a lot of clout but I’m looking forward to that day.

We’ll take that question here and then can we bring a microphone up here to the second row please? Go ahead.

Jason Rapp:Hi sir, Jason Rapp from Science Inc. A follow up: if you were spending a lot of money to influence policy, if you were put in charge of climate change policy, how would you approach that? How should a government which is supposed to look at economic externalities, public will overall, how should government approach that issue?

They even under all the models; they will make very little difference in the future on what the temperature or the weather will be. And instead I would break back all the barriers to innovation and trying new things. New forms of energy, and let people be free. That’s what’s caused progress in the world is free people; liberated people are ingenious. Those people who are trying to silence, enslave, over-regulated or not, that’s our future.

But there is a market problem here, right? If you believe that carbon is contributing to the warming of the Earth, there is no cost on emitting carbon, so there’s no market incentive that takes that into account.

Because your customer wants it.

Because your customer.

Do you think that’s sufficient?

So we’re doing that. No subsidies or anything. But we have a huge undertaking.

Based on pressure from customers?

Well no, this is based on what many people want. So we’re going to do it, if we can do it economically. But we’re not going to go seek subsidies or advocate subsidies for that because we think that’s counterproductive.

Well I think that’s the biggest one. And then that comes from my study of history. The slogan I like best of countries is Holland in the 17th century, and it was listen, even to the other side.

And not only in economics, in art, in everything. And that’s my dream to move our country and every country that would toward that. And then this gets rid of the divide. The divide comes – if you control the political system, you do well and the people who don’t you punish.

This is going to have to be the last question in the back.

Forrest Collier: My question is you had an incredibly successful career with a wide range of manufacturing companies. Have you or are you interested in investing in any of the kind of technology companies that are here?

We have. We’ve invested in a number and then we bought Molex, which is specialized in connectors. And just our philosophy on acquisitions is we want one hand to wash the other.

They’re working with all our business groups to find how to make all our products and processes smarter. We don’t have tie ti go into that. And then we’ve expanded their vision to not just make connectors but make systems and apply economic thinking moire thoroughly to everything they’re doing.

So if these people have companies they want to sell to you, they should meet you in the Green Room after this.

Yeah, well, or send me an email.

Thank you Alan, appreciate it.