Christopher Leonard’s new book Kochland: The Secret History of Koch Industries and Corporate Power in America tells the story—the good, the bad, and the ugly—of one of the world’s most successful and most controversial companies. Koch Industries, like all large companies, has both ethical bright spots and low lights on its resume. Think of Johnson & Johnson, which acted so laudably in the Tylenol debacle—recalling all the containers at great financial cost, but has more recently often stubbed its ethical toe, compiling a string of product safety scandals. Notably, it paid more than $2.2 billion in criminal fines and civil settlements in 2013 over its marketing of the drug Risperdal for unapproved purposes and was ordered to pay $572 million in 2019 for its role in the opioid crisis.
According to Leonard’s book, a series of missteps that led to record fines for pollution and other problems caused Koch Industries’ leader, Charles Koch, to institute a “10,000 percent compliance” policy. Employees are supposed to comply with 100% of laws 100% of the time (100 x 100 = 10,000). The company’s legal record since the adoption of this policy is commendable, made a little less so by Koch’s constant and extensive application of political pressure to ensure that laws are not too onerous for the firm.
The 10,000 percent compliance policy is a bright spot. A low light happened in the 1980s, when the company stole oil from Indian tribes and government lands by underreporting the amount of oil that its truckers took from well sites. This is a scandal worth analyzing because it represents such a classic manifestation of the phenomenon of obedience to authority and how it can lead good people to do bad things.
As told by Leonard, the opportunity for theft arose when the truckers (called “oil gaugers”) pumped oil from tanks on the well sites into their trucks. With oil being a slippery substance, it was difficult if not impossible to precisely measure exactly how much oil was being taken from the site and delivered to Koch. The American Petroleum Institute had published a suggested standard approach, but Koch did not follow it. Instead, its oil gaugers used techniques called “cutting the top,” “bumping the bottom,” and others, to ensure that with each tank they filled they could be “long” by delivering to Koch ten to twelve more barrels of oil than they reported taking from the site. Again, it was virtually impossible to measures the oil taken with exact accuracy, but by using these techniques that all the Koch oil gaugers learned, they could all be “long,” which was important. Koch managers didn’t have to instruct the oil gaugers to steal. It was more subtle than that. “If a gauger was consistently under, his manager would grill him and ask what was wrong. If a gauger was consistently over, then he had no problems.”
The same was true up the line. Regarding a regional manager, Phil Dubose, Leonard reports:
Every month, Dubose received a packet of information mailed from Wichita. It was the statistical report compiled by the computer whizzes at headquarters. This was Dubose’s report card, the number that he focused on more than any other, was the overage that he reported. Dubose knew that if his region came in over, he would be praised, promoted, and well paid. If his region came up short, then he would be questioned, sidelined, and ultimately fired. “I lived and died by that” monthly report, he said. “They put it on your desk, and you just stared at it for a couple of hours before you even opened the sucker…. That’s how you kept your job with Koch. By coming out over. You could not come out short at all.”
By setting up and enforcing incentive systems, corporate leaders can clearly signal what they want from subordinates. They need not explicitly order wrongdoing (although Koch did some of that also). Subordinates can anticipate their superiors’ desires and work to meet them both because people have a tendency to be obedient to authority and because such conduct obviously advances their self-interest by enabling them to keep their jobs. (See our video on the self-serving bias.)
According to Leonard, the gaugers knew they were stealing, but invoked rationalizations:
- “[Phil] Dubose adapted. He knew in the back of his mind that he was effectively stealing oil. But it was only a little bit at a time. He took comfort in the fact that measuring oil was an inexact science. No one ever got it perfect.”
- “’You’re programmed to think and believe you take a little from this man, and it won’t hurt him,’ [Ricky] Fisher said from the witness stand.
And this illustrates one way that good people end up doing bad things.
Bryan Burrough, “The Truth About Koch Industries,” New York Times, Aug. 15, 2019.
Ben Goldacre, Bad Pharma: How Drug Companies Mislead Doctors and Harm Patients (2012)
Jan Hoffman, “Johnson & Johnson Ordered to Pay $572 Million in Landmark Opioid Trial,” New York Times, Aug. 26, 2019.
Koch Industries, “Our Deeply Held Values Create Value for All,” https://www.kochind.com/responsibility/organizational-ethics.
Christopher Leonard, Kochland: The Secret History of Koch Industries and Corporate Power in America (2019).
Jane Mayer, “’Kochland’ Examines the Koch Brothers’ Early, Crucial Role in Climate-Change Denial,” New Yorker, Aug. 13, 2019.
Jane Mayer, Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (2016).
Daniel Schulman, Sons of Wichita: How the Koch Brothers Became America’s Most Powerful and Private Dynasty (2014).