Chief Investment Officer
BirdsEye Viewthe good profit
Charles G. Koch wrote an interesting book named The Good Profit. Koch, the CEO of Koch Industries, is an extremely successful entrepreneur. The key takeaways from his book are listed below. Reflect upon them. There is so much wisdom in what he wrote.
Adversity is inevitable. How you handle it makes all the difference. Learning how to handle failure and how to grow from it are key to success both in business and in life. Failure has within it the seeds to future success and character building. It’s the best teacher of all. Failure and reinvention are the cornerstones of innovation.
Koch believes that, while failure is inevitable, it also needs to be managed to ensure it is not catastrophic. This is why risk management is so important; it scales failure to manageable proportions. Since failure is an important business and personal growth tool, employees should not be penalized for taking appropriately scaled risks.
2. Corporate handouts and tax subsidies obscure the free market and negatively impact the economy.
Good profits require no government intervention such as bailout and tax subsidies. Koch uses Solyndra, a solar panel manufacturer, as an example. The company defaulted on a $535 million provided by the Department of Energy. While the intent behind the loan was good – supporting green energy – the actual loan was not. Solyndra would not have been successful in the free market, and its loan default affected taxpayers and investors alike. This type of propping up bad companies distorts reality and prolongs misbehavior. Let the market push companies to innovate and provide new solutions to meet customer needs.
3. Customers should not be cheated for a profit. Good profit arises from a win-win combination for both the company and the customer.
We should never forget that without customers none of us would be in business. If life is relationship-based, so should business be. I have always advocated creating win-win-win solutions in banking, where the customer, employee and shareholder all win. Making business more than about money is good business, and should have positive impact on the customers’ lives. Making a profit while contributing to the customers’ well-being is a good thing!
4. A company’s vision and mission are the cornerstone of good management.
The Market-Based Management strategy (MBM) begins with the vision of the company. For Koch, for example, the vision was providing competitive products and services that are better than the alternative and efficiently use resources. They strive for profit by benefitting their customers and society as a whole.
The vision is also essential to successful and sustainable companies. It calls for maintaining a core purpose of values that do not change very often, while utilizing strategies that can and do shift to be successful in an ever-changing world. The vision ties these two elements together and creates stability and common purpose while facilitating change – without losing the company’s identity.
5. Companies must hire by identifying people with the characteristics that align with their vision. Talent has less to do with technical skills and more with the aptitude and strengths the employees offer.
It is harder (I maintain it’s impossible) to teach values and characteristics than skills. Skilled employees with poor values or even values that are simply divergent from the company’s are destructive. CareerBuilder found that 41% of its 2012 survey-participating companies experienced a $25K loss per single bad hire; 24% experienced a $50K loss. These negative hires add up, and also sap corporate financial and emotional resources. The same survey found that 60% of the hires were bad because they couldn’t fit into the company’s culture.
Hiring for values has never been more important, Koch maintains. Koch industries has a complex and thoughtful hiring process, involving multi-interview selection. Koch doesn’t hire for long resumes and the “right” schools, but rather for the right value system.
6. Strong, open communication is essential to success.
Companies do best when knowledge is plentiful and accessible. Real-time knowledge sharing is powerful. Joseph Grenny said in his Harvard Business Review article: “You can approximate the effectiveness of the team – or even the entire organization – by measuring the average lag time between when problems are identified and when problems are brought to the open”. Many people don’t speak up, be it due to deference to authority or fear of reprisal or even just reluctance to rock the boat. But encouraging open communication, especially from front-line people, is the best MIS one can get.
7. One way to improve accountability and results is to make employees feel as though they are responsible for their work and have agency.
Strong companies have employees that are truly invested in their company. If they feel ownership and believe they can make an impact, they will likely take action and contribute more to the company and its shareholders. Employees enjoy autonomy, room to grow, a sense of purpose and a feeling that their work is meaningful and lasting. Given those, they will be most productive for you.
8. Creating thoughtful incentives both in the long and short term as well as financial and nonfinancial ways, where each employee has unlimited potential to earn, motivates employees.
Most existing compensation programs are not motivational and do not promote a sense of ownership and self-reliance by the employees. Too many companies pay bonuses to employees who do not contribute their fair share (Towers Watson estimates the number at 24%). A frightening 18% of companies do not correlate bonus to performance at all. Plus, many pay teams and ignore individual performance. Incentives should reward better performance both short- and long-term, and they should not be solely financial in nature.
9. MBM needs to be adopted wholesale and system-wide to be successful.
Consistency of management philosophy, values and vision are essential to marshal the entire company’s resources toward the same direction. It is the ethos that keeps the company together. Management philosophy only works if it is truly adopted from the ground up; it is rarely perfect and requires much trial and error.
I appreciate Koch’s management principles and hope you will find them useful as well. My personal view is that, so long as you offer products and services that perform and are priced effectively for both shareholders and customers while rewarding your employees fairly, you will be successful.