Equal Rights: The Foundation for Stewardship at Koch
12 MIN
Koch’s approach to stewardship is different — and broader — than you might expect.
When Charles Koch began discovering principles of human progress in the 1960s, he immediately became eager to learn how to apply them. This proved to be more difficult than he thought and involved a great deal of trial and error. But as they increasingly helped him improve his life, he became dedicated to finding ways to help others do the same. Central to his transformation was internalizing the principle of equal rights, which, for him, required that everyone have the right to live their life as they choose, so long as they do not violate the rights of others.
Applying this principle in society is enormously difficult. Applying it in a business is also challenging. We’ve had many failures in learning how to apply it to get results, as we have with all our principles. To significantly improve our ability to eliminate these failures, we’ve created what we call the stewardship capability. For us, stewardship is acting with proper regard for the rights of others. It is the foundation for our environmental, safety, social and governance priorities.
“Everyone should have the right to live their life as they choose, so long as they do not violate the rights of others.”
Learning the Hard Way
In the 1990s, despite striving to apply this principle, we had three major environmental and safety-related incidents — the worst of which led to the deaths of two teenagers. These made it clear that we needed to improve our ability to practice good stewardship.
Those deaths resulted from a leak on one of our gas liquids pipelines and a subsequent explosion. The leak was caused by a rare form of bacteria that corroded the pipe. While only a few experts even knew of its existence and the bacteria had never been reported in the U.S., we hadn’t done enough to understand what could happen. One of the other major incidents occurred at our Corpus Christi refinery, where an environmental engineer knowingly falsified regulatory reports. This employee never made the required measurements; instead, he made up numbers without disclosing it to anyone. And at our Pine Bend refinery, numerous employees repeatedly failed to “stop, think and ask” when our storage tanks showed signs of leaking.
Although they paled next to the tragic losses of life, the consequences to Koch from these incidents were severe. When the pipeline explosion case went to court, the jury decided we should pay the largest wrongful death judgment in U.S. history. Government prosecutors working on the Corpus Christi case indicted and threatened to imprison four employees who had been brought in to correct the problem. (All four were later cleared.) The releases from storage tanks at Pine Bend that affected wetlands and then made their way into the Mississippi River resulted in the largest environmental fine in Minnesota’s history.
In each of these cases, we were upfront about admitting our failures, self-reported our discoveries to authorities and responded with urgency. We took ownership, learned what needed to improve in our operations and corrected our shortcomings. Today we use these examples during new employee training. They continue to be a powerful reminder of what can happen when we don’t fully apply our principles.
10,000% Compliance
In light of these failures to practice good stewardship, we heightened our emphasis on the importance of Integrity and Compliance — the first two of our Guiding Principles at that time. We created an operations excellence group and introduced the concept of 10,000% compliance, which we defined as 100% of employees doing the right thing 100% of the time. We hammered away at the message that compliance was everyone’s job and rolled out detailed rules and procedures. We believed that doing so would reduce bad outcomes, helping us better respect the rights of others.
In the early 2000s, even as we focused on continually improving our EH&S performance and becoming more responsible operators, our concerns about compliance grew following the acquisition of Farmland’s fertilizer business, INVISTA and Georgia-Pacific. These acquisitions increased our number of employees more than five-fold and added hundreds of operating sites. They also required that we address serious environmental, health and safety problems that existed prior to our ownership. The worst of these were at INVISTA. We addressed these long-standing deficiencies through a formal agreement with the U.S. EPA to improve equipment, technology and processes.
We responded to the INVISTA discoveries and others by doubling down on our compliance expectations and introducing even more rules. We created a risk management capability and established annual awards to recognize outstanding environmental, health and safety performance. We ramped up our efforts to communicate our framework and Guiding Principles by using a one-size-fits-all approach designed to reach as many people as possible as quickly as possible. This strategy unintentionally emphasized quantity more than quality. We failed to realize that our focus on 10,000% compliance was the wrong paradigm for practicing good stewardship.
It's true that our compliance programs provided some short-term performance improvements. We even earned high-profile awards from OSHA and the EPA. But our rigid approach actually hurt us in several ways. Instead of emphasizing the need to act with proper regard for the rights of others, we were layering rule after rule on employees.
This top-down, bureaucratic approach inadvertently focused on the prevention of violations rather than preventing serious harm. We had embraced a fallacy: that more rules will generate better outcomes. “In many cases, we substituted rules for the principle-based judgment of those doing the work,” observed Sheryl Corrigan, Koch’s VP of EH&S.
The company became overly reliant on its compliance programs and procedures to manage risk. This wrong-headed approach was a barrier that kept our employees from transforming their ability to contribute. They were forced to spend their time complying with highly prescriptive procedures intended to reduce risk. In other words, checking the boxes on yet another list. “That was a problem,” Corrigan said, “because respecting and empowering everybody to apply proven principles is what gets results.”
DEI and ESG
During the following decade, two global trends emerged that complicated things further by directly challenging Koch’s principle-based framework. Those trends were the widespread push for DEI (diversity, equity and inclusion) programs and the pressure to submit to ESG (environment, social and corporate governance) requirements. What both of these initiatives had in common was a unilateral, top-down focus on checklists, quotas and rules that focused on superficial changes. In contrast, we apply a bottom-up approach of mutual benefit, innovation and a respect for individual rights, which leads to genuine progress toward diversity, inclusion and EH&S performance.
Proponents of DEI pushed for a greater percentage of underrepresented groups in management and new hires, and publicly shamed corporations that failed to meet their demands and quotas. Many businesses responded by sponsoring affinity groups that identified and elevated the interests of some over others.
Instead of wrestling with the conflicts caused by affinity groups, we use our principles to guide us toward diversity and inclusion that is mutually beneficial for employees and the company. We celebrate the uniqueness of each individual and encourage building relationships with people outside our normal circles or comfort zones. In fact, we believe it is disrespectful to judge a person — positively or negatively — based on group identity. Characteristics such as heritage (ethnicity, race, nationality, language), gender, sexual orientation, religion and many others often inform an individual’s experiences and perspectives, and can help them contribute. But no single characteristic should be used to define another person.
Rather than stereotyping and lumping employees into groups, we respect them as individuals and value the unique contributions that each one can make. This is the essence of our Stewardship principle: Acting with the proper regard for the rights of others means we promote equal rights for everyone rather than favoring one group over another. For decades, treating individuals with dignity and respect has been ingrained in what we now call Our Values. These are a subset of the principles of human progress that define our culture.
“Rather than stereotyping and lumping employees into groups, we respect them as individuals and value the unique contributions that each one can make. This is the essence of our Stewardship principle.”
This approach was put to the test during the summer of 2020, a period of widespread social unrest. Several Koch employees and constituents called for us to “do something” given that other companies were launching DEI policies, positions, initiatives and targets. Instead of succumbing to these pressures, we took an approach that was consistent with our culture. We applied the principles that have led to human progress — including openness, bottom-up and respect. Our leaders sought out conversations with employees, seeking to learn by better understanding their personal experiences and concerns and where they saw opportunities and gaps. These interactions enhanced communication between employees, supervisors and leaders, and furthered an understanding of how the application of our principles leads to better outcomes.
Others are beginning to realize the inherent problems with a rule-based approach to DEI. As the Harvard Business Review reports, the typical DEI initiative “purports to end inequity but instead sustains it at great cost to marginalized populations.” In 2023, Tesla CEO Elon Musk observed, “The point was to end discrimination, not replace it with different discrimination.” It’s not surprising that many major companies, including Google and Meta, are now making big cuts to their DEI programs. Even my own alma mater, MIT, has taken a small step in the right direction by no longer requiring candidates for faculty positions to write a statement about how they would enhance DEI.”
Proponents of ESG sought to advance their social and political objectives by remaking businesses — especially with regard to the environment. Many businesses — including several important customers of Koch — responded to this pressure by embracing and publicizing specific ESG commitments. ESG became a litmus test for many investors, reporters, regulators and customers.
The dangers of these misguided trends became apparent in 2021, when several Koch companies were given ultimatums by customers to adopt ESG commitments. These demands put sizeable segments of our businesses at risk. Our challenge was to effectively communicate why our principle-based approach provided much better results than these rules-based initiatives.
Molex, for example, resisted pressure from an important potential customer to “check the box” and sign on to the customer’s ESG commitments. (Making an ESG commitment had become one of its requirements to qualify new suppliers.) But instead of “going along to get along,” Molex made the extra effort to truly address that potential customer’s needs.
The Molex team started by seeking to understand the what, why and how of the customer’s ESG commitment. Molex spoke with a number of that company’s leaders to understand what was important to them. Molex learned that what the potential customer really valued was increasing the percentage of renewable energy used for manufacturing its products. Molex also sought to understand what alternatives might be acceptable and how success was to be measured.
Having done this homework, Molex was able to demonstrate how it could provide products that would help the customer achieve its renewable energy goals. The result was a win-win. The customer would be able to reflect this increase in the use of renewable energy in its supply chain and Molex was approved as a vendor.
Stewardship: Regard for the Rights of Others
This principle-based approach catches many of our customers by surprise, because it is profoundly different than the top-down focus of others. But when they see our results — including our dedication to experimenting and innovating, expanding opportunities for individuals, and responsibly creating more value while consuming fewer resources — their perceptions change. They become convinced that our words and our commitments matter and understand why we will never intentionally act in ways that are inconsistent with our principles.
In retrospect, these serious challenges to our principle-based framework were enormously helpful for Koch. They drew attention to the many perils of a rigid, rules-based approach — which was how we had been dealing with compliance. We had neglected our own framework and forgotten the importance of Harrington Emerson’s advice: “The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.” Yes, following rules can be important, but only when it helps people improve their lives. It was time to change the way we communicated this principle to employees.
When Koch’s Compliance principle was updated to Stewardship & Compliance in 2018, we explained the change by pointing out that “our focus on safety and the environment is driven by our regard for the rights of others.” Furthermore, we believe every employee has a responsibility and a role to play in being a good steward. (We also changed our Decision Rights principle to Comparative Advantage, noting that it results in superior application of each individual’s abilities, among other benefits.)
In 2022, MBM was renamed Principle Based Management. This important change was part of our effort to more fully apply principles of human progress across the whole organization. This enabled us to consistently address all three areas of ESG.
A Principle-Based Improvement for Leak Detection
In keeping with our stewardship principle, we look at environmental performance holistically and have developed some transformative solutions. One of our most remarkable examples is mRegz™ AirCompliance, a breakthrough monitoring network developed by Molex and Flint Hills Resources under a formal cooperative research and development agreement with the Environmental Protection Agency.
Like most industrial facilities, FHR’s plants have millions of valves, flanges and connectors that require ongoing emissions monitoring as part of the EPA’s leak detection and compliance program. Those components require periodic, manual monitoring and inspections. EPA, Molex and FHR collaborated to develop, install and test a leak detection sensor network that was designed to replace the labor-intensive monitoring required by regulators.
As part of the product, Molex developed an innovative algorithm to enable detection of emissions at levels that are much lower (parts per billion vs. million) than those detected by the required methods. They also created an easy-to-use app that gave operators the ability to respond immediately and share information in real-time. Based on the ability to detect leaks sooner than the regulatorily required leak testing frequency, emissions from leaks where mRegz has been installed could be significantly reduced.
Our test results for this sensor network were so promising, we installed mRegz at Pine Bend as well as other Koch sites. We can now quickly identify and respond to emissions from leaks with the potential to affect our employees or others in the surrounding communities. Because the mRegz system is sensitive enough to pick up very small variations in air quality, we’ve also been able to alert neighboring sites of their emissions before their own manual monitoring detected them. This is an unexpected, but significant, benefit for us and our neighbors.
This experiment led to another cutting-edge product from Molex: an application that can quantify corrosion on pipes before failures occur. Innovations such as these have greatly improved our sites’ capability to operate safely and responsibly. They have also created a new business for Molex.
Applying Stewardship in All We Do
Koch’s success at applying its stewardship framework to the challenge of energy management has resulted in scores of meaningful improvements. The EPA has recognized these by awarding Koch its highest honor: ENERGY STAR Partner of the Year. This achievement is no fluke. Koch’s sustained excellence has earned it this award four years in a row.
In the arena of governmental regulation, we also strive to comply with all laws and regulations — whether we agree with them or not. If we find any of those rules counterproductive, we advocate modifying them to become principle-based in keeping with Our Values — all while fully complying with existing laws.
Time and time again, we have found that our principle-based stewardship approach has generated far better outcomes for us and our constituencies — the people we serve or are involved with. Many who advocate for top-down programs may be well-intentioned, but intentions don’t matter, results do. Does anyone really think endless rules will somehow enable us to contribute more? They won’t. There are already more than a million federal regulations in the U.S. and several times that many at the state level, with thousands of new regulations added every year. In contrast, a bottom-up, principle-based approach works much better.
We’ve learned the hard way that compliance alone is never enough. It’s only when leaders establish the expectation that everything we do is principle-based rather than rule-based that individual awareness and opportunity increase, and equal rights are acknowledged and protected. When every individual at every level of the company understands and applies principles in ways that lead to long-term success, things really get better — for you, Koch and everyone.
Give It a Try
The power of these principles happens through application. There’s no substitute for learning as you apply.
- Our Values insist that we “act with proper regard for the rights of others.” List three ways you think we can do a better job of that.
- What are the differences between a rule-based approach to stewardship and a principle-based approach?
- What do you believe is the most important measure for stewardship success in your area of the business?
- What are some ways a business or plant could be fully compliant but not be a good steward?