|
Printable Version |
Send this release to a friend
Atlanta Journal-Constitution: THE GEORGIA-PACIFIC / KOCH DEAL: Free-market management style on way
Atlanta Journal-Constitution
Home Edition - Sunday, 11/20/2005
Business
Q1
THE GEORGIA-PACIFIC/KOCH DEAL: Free-market management style on way
PATTI BOND / Staff pbond@ajc.com
There's nothing like a dose of Austrian economics to juice up the getting-to-know-you process.
Georgia-Pacific, meet Charles Koch, a Midwesterner on a mission to take some of corporate America's longest-held principles and turn them upside down.
Part philosopher, large part tycoon, Koch has wasted no time introducing himself to the new recruits at Georgia-Pacific. Just two days after privately held Koch Industries announced its eye-popping plans to acquire the Atlanta Fortune 500 company, there was the professorial chairman, at the head of a class, schooling 70 Georgia-Pacific executives in the ways of his Wichita, Kan.-based empire.
Let other companies have their Six Sigma and one-minute managers. Koch Industries is sticking to a homegrown style that's grounded in the free-market principles espoused by economists Ludwig von Mises and Friedrich von Hayek.
Add a little psychology and science to the mix and you've got what Charles Koch calls "Market Based Management, " a trademarked set of business principles that he credits with making Koch Industries the $60 billion private powerhouse it is today.
Boiled down to the simplest terms, Koch's philosophy pushes people to think like entrepreneurs, to constantly question themselves and each other.
Forget the old top-down, command-and-control stuff. Koch contends his company is more like a free nation, where the native language is spoken in terms of "comparative advantage" and "spontaneous order."
Although no one's saying exactly how the Koch way will play out at G-P --- the deal's not yet complete --- employees can expect a lot of focus on individual performance.
For example, Koch Industries puts a lot of emphasis on measuring profit or loss --- even at the lowest levels of business, management experts say. Although it's not always possible, the company aims to break down the various bottom lines across its sprawling segments by each and every employee.
"If a business unit has a successful year, the ideal is that you could analyze what each person's contribution was and reward them accordingly, " said Koch Industries spokeswoman Mary Beth Jarvis. "That's very difficult to do, though. It's one of the hardest parts of Market Based Management."
Mystery company
With 30,000 employees in 50 countries --- and growth of 1,600-fold since 1961 --- Koch Industries must be onto something, even if it's not a household name, noted Georgia-Pacific Chief Executive Pete Correll at an employee meet-and-greet last week.
"Koch Industries could possibly be the largest and best-managed company that you never heard of, " Correll said.
The mystery won't last long. By midweek, the Koch mantra had made its way onto coffee tables, desks and other surfaces at Georgia-Pacific's headquarters, manifested in stacks of Koch-themed articles from business publications --- including one titled "Creative Destruction 101."
Correll, who has been beaming since Koch came to town on Sunday, cautioned executives that they were merely getting a "glimpse into the future" last week. For the time being, he said, it's still business as usual at Georgia-Pacific.
The Koch business philosophy is still somewhat of a work in progress, evolving with the spidery diversification of the Koch family business, owned mostly by Charles Koch, 70, and brother David, 65. The roots of their beliefs began with the political and economic leanings of Charles Koch's father, Fred, an MIT-trained engineer and ardent anti-Communist who co-founded the company in 1940 as an oil refiner.
Life-altering reading
As the Koch story goes, one fateful day in 1962, Charles, also an MIT engineer, plucked a book from his father's library on the free-market principles of the so-called Austrian school of economics. "The experience changed my life, " Koch wrote in a 1998 article for Chief Executive magazine.
After Koch took over the company when his father died in the late 1960s, he spent the next three decades knocking down the "command-and-control" tenets of traditional corporate structure and replacing it with more of an "intellectual framework."
It's no surprise that Koch was a co-founder of the Cato Institute, a Washington think tank that espouses free markets and limited government.
Financially, Koch has been busy in recent years expanding those free-market ideas on a big scale. Last year, Koch Industries paid $4.2 billion for Invista, a DuPont synthetic fibers subsidiary known for the Lycra and Stainmaster brands. That acquisition involved 18,000 employees, 50 plants and operations in Kennesaw.
Koch's holdings today range from pipelines and carpet fiber plants to cattle ranches.
Changes on way
The proposed Georgia-Pacific purchase dwarfs all others, though.
Georgia-Pacific, the largest tissue products maker in the world, has 55,000 employees and $20 billion in annual sales. Although Koch Industries has said it will keep Georgia-Pacific's headquarters in Atlanta and run it as a subsidiary, changes are inevitable. The first major switch will come soon after the deal is formalized: Koch plans to name its own CEO, and that will likely kick off the rollout of Market Based Management to the masses.
New hires typically attend Koch's "Market Based Management academy, " which consists of two days of classes and exercises, Jarvis noted.
Students learn about reacting to change in the form of "creative destruction." At one Koch plant, for example, employees pumped up efficiency so much that they were able to cut the maintenance crew by 50 people. Koch contends that instead of firing those workers, managers offered them the chance to create jobs elsewhere in the plant. They did --- forming an in-house construction crew that outbid the plant's outside contractors.
Koch Industries employees also learn about "decision rights, " an authority that has to be earned through a track record of spending and managing in the Koch spirit of profit.
'Value-added' ideas
Implementing Koch's management style at Georgia-Pacific will be more of a gradual undertaking than an overnight transformation, notes Jarvis, the Koch spokeswoman.
"There are literally dozens and dozens of models and basic economic concepts in Market Based Management, " Jarvis said. "We'll need to find appropriate ways for all employees to get appropriate-sized bites."
It may not be a complete shock to the Georgia-Pacific system, she noted. Correll, who frequently portrayed the company as a maverick in the commodity-driven lumber and paper business, has already instilled some of the "value-added" ideas that Koch so dearly loves, she said.
"There are a lot of similarities in our watchwords and principles, and that was one reason why the deal came together in the first place, " Jarvis said. "I think Georgia-Pacific employees will see a lot of congruence."
Performance-based pay
Some things will have to change quickly, though, once Georgia-Pacific ends its life as a public company. No more stock options, for one.
"One logical area that Georgia-Pacific leadership will have to focus on initially is incentives, " said Jarvis, who noted that there's plenty in the Koch playbook to keep motivated people happy.
Koch promotes performance-based pay, doled out in the form of bonuses and other incentives to people who "create value, " and thereby, profit. Top executives can pull down million-dollar bonuses, but Koch will share the bottom-line love with secretaries, janitors or anyone who comes up with a way to make the company some money.
When a team of pipeline operators in Minnesota took it upon themselves to figure out how to change pump pressures to boost capacity by 15 percent instead of spending tens of millions of dollars on expanding the pipeline, Koch cut each worker involved a check averaging 15 percent of his annual pay.
"Koch is known for rewarding people, " said financial economist Mark Skousen, who used Koch Industries as a case study in a management class he taught last year at Columbia University in New York. "Koch is very focused on having and hiring the right kind of people --- hardworking people who are comfortable with this idea that creativity comes from the bottom up.
"But that cuts both ways. People who are just rolling along probably won't make it, " Skousen said.
Job cuts already are on the horizon at Georgia-Pacific under a previously announced restructuring in the tissue division that makes products such as Brawny paper towels and Angel Soft bathroom tissue. Georgia-Pacific said last month it plans to lay off 1,100 people in North America and Europe.
Blessings of being private
Koch Industries has to be careful to strike the right mix of idealism and reality with its labor relations --- Georgia-Pacific operates a lot of mills with unionized workers. Current contracts won't be changed, Jarvis noted.
Of all the virtues Koch sees in his free-market philosophies, none may cut closer to home at Georgia-Pacific than freeing the company from the frustrations of Wall Street. Georgia-Pacific stock has languished --- hamstrung, Correll contends, by the fixation on asbestos litigation.
The litany of Sarbanes-Oxley regulations and disclosures hasn't made public life any easier either.
Koch company literature, on the other hand, extols the blessing of being private.
With no pressure to live quarter-to-quarter, Georgia-Pacific can now focus on long-term goals, Koch told employees in announcing the deal. Rather than paying out dividends, Koch typically reinvests 90 percent of profits into the businesses where they are generated.
Koch told Georgia-Pacific executives Tuesday that he's still learning quite a bit himself about Market Based Management, likening it to the North Star.
"You know you'll never actually reach it but you still use it as a guide because it moves you in the right direction, " he said.
ID: 0003942988
Type: Photo
Name: BIZKoch5 nw1115.1.col
Date: 11/20/2005
Page: Q1
Edition: Home
Pub: AJC
Caption: DAVE WILLIAMS / Wichita Eagle
Charles Koch of Koch Industries espouses a management style that evolved from the principles of Austrian economists.
ID: 0003940363
Type: Photo
Name: 235054_BIZ_KOCH bz1120
Date: 11/20/2005
Page: Q7
Edition: Home
Pub: AJC
Caption: DAVID JOLES / Milwaukee Journal Sentinel Georgia-Pacific said last month it plans to lay off 1,100 people, many of them at its facility in Green Bay, Wis. (above). The new managers say they won't change existing union contracts.
Reprinted by permission.
Signup to receive Koch News Releases
|
