As executive vice president and CFO of Koch Industries Inc., the largest private
company in the United States, Steve Feilmeier enjoys certain benefits. “We don’t worry about our earnings,” says the former PepsiCo executive. “We care deeply what our earnings are, but unlike a public company that reports every 90 days, our earnings are flashed and that’s it. There’s no discussion.”
Instead, with $95 billion in revenues and 80,000 employees, there are plenty of other things to discuss, says the 46-year-old Feilmeier. These include which potential acquisitions to add to the commodity and financial conglomerate’s stable; how to coax the best talent to its Wichita headquarters; and how to apply the ideas of “Market-Based Management,” a philosophy espoused by CEO Charles G. Koch and recently outlined in Science of Success (John Wiley & Sons, February 2007).
That philosophy is based on allowing the free market to create long-term value, and it is executed by fostering internal entrepreneurialism. Says Feilmeier, “We’re much more interested in hiring people with the right values and beliefs than those with the right skills and knowledge, although you have to have both dimensions.”
How do you describe market-based management (MBM)?
Some might think of it as just good-old-fashioned common sense. But it’s much more than that. It’s how you take certain fundamental concepts — vision, virtues, talents, knowledge systems, decision rights, and incentives — and apply them consistently and holistically inside your firm. Take vision. A large retailer might say it wants to be the best, lowest-cost retailer. Our vision simply says that we want to take our capabilities and apply them to those opportunities that will create the greatest value for Koch Industries. As a private company, we don’t have to be in any specific industry. So we want to be only in those industries where we can apply our capabilities. It gives us many more opportunities to reinvest our capital.
How did your acquisition of Georgia-Pacific exemplify your capabilities?
When we bought Georgia-Pacific [in 2005, for $21 billion], people said, “That doesn’t fit you. You’re an energy company, and, at best, a chemicals and fibers company to [complement] that.” And we said, “No, if you look at our capabilities, what we do as a general construct, we process commodities through various large, complex, technologically advantaged plants. And then we go to market in bulk, typically with a trading capability.” So [if you compare] a refinery that processes crude oil with a fertilizer facility that processes natural gas with a chemicals plant that processes naphtha, a pulp-and-paper company that processes trees and goes to market in bulk has many of the same capabilities.
How does MBM translate in finance?
Let me give you an example [concerning] knowledge systems. One of our principles is to transfer-price everything internally at market-based pricing. So whether it is a headquarters function or a chemical plant that produces chemicals for another plant, we will always attempt to transfer-price those things at market. We believe that the alternative for any given asset should always be considered [in order] to best optimize the profitability of that asset. If you simply transfer price between two different divisions at cost, then you may be subsidizing your whole operation and not know it. If I can buy chemicals from a third party at a price that is less than what I can buy [them for] internally, I ought to know. It doesn’t mean that I will, but it’s certainly an important knowledge system to have.