Market-based manager.

• Author: Doherty, Brian
• Position: Soundbite - Interview

Charles Koch is CEO of Koch Industries, the largest privately held company in America, and a longtime funder of libertarian causes. His new book, The Science of Success (Wiley), explains his concept of "market-based management" (MBM), which he says has helped his company succeed. This method tries to apply "the principles that allow free societies to prosper" within the firm, using ideas about incentives, knowledge, and the way markets function derived from thinkers such as F.A. Hayek, Ludwig von Mises, and Michael Polanyi.

Q: Your company is privately held. Can a public company effectively implement MBM?

A: The pressure on public companies to satisfy quarterly earning requirements often takes focus away from maximizing long-term value. When most public companies become diverse [as Koch Industries is], their stock price gets hammered. Also, we reinvest 90 percent of our earnings, and because we are private we can absorb more volatility.

The future is unknown and unknowable. You'll have blips, downtimes, uptimes.

But if what you are doing makes sense and you're proving your capacity to create value overtime, a public company could just tell people, "If you don't want that, don't buy our stock, because we are going to be practicing principled entrepreneurship and create real value and it won't be a straight line; it's a process of experimental discovery and creative destruction."

It wasn't always like this extreme emphasis on short-term quarterly earnings. Some dynamics changed in the market, and in the regulatory system, and with litigation, so it could change again.

Q: You write that MBM tries both to ensure every employee is adding value and to encourage internal entrepreneurship. How do these principles work together?

A: An entrepreneur can't just sit there and say, "Gosh, I want a certain revenue." You have to go out and find ways to create value. Hayek pointed out that the market economy is an experimental process for finding and delivering what people value, and inherent in experimentation is failure. A good trader might be profitable 55 percent of the time, and if the trader is following our principles and using good...