What do Koch Industries’ “Market-Based Management” and Catholic Social Doctrine have in common? More than you might think.
This statement probably sounds pretty strange. After all, the Catholic Church is the bride of Christ, the earthly messenger of God’s kingdom, charged with leading all souls to heaven. Charles Koch, for his part, is an entrepreneur from Wichita, Kansas, who runs one of the largest private companies on earth, and Market-Based Management (MBM) is his business philosophy that has helped Koch Industries become so successful. I’ve had the privilege of working with him in many capacities, and I believe his business philosophy and the Church’s teaching have much in common. This is especially true in regards to Catholic Social Doctrine, which governs how the faithful approach economics, wealth, poverty and social justice writ large.
For both the Church and MBM, business is a noble pursuit designed to improve the world through entrepreneurship, innovation and service to our fellow man. The business leader, therefore, should focus on providing products and services that enable others to improve their lives — what MBM calls “Principled Entrepreneurship.” As a Catholic and a business leader myself, this is a message that inspires me every day. That is why, in conjunction with the Charles Koch Foundation, my wife and I recently responded to The Catholic University of America’s request to increase the educational and research options available to the school’s students and scholars, with a specific focus on Principled Entrepreneurship. The school — as the only pontifical university of the Catholic Church in America and the university that teaches a large number of our country’s bishops, priests and religious — is now uniquely suited to train the next generation of Catholic leaders to recognize the difference between destructive business behavior and the fundamentally positive role that business can, and must, play in our society. It is also a resource for the U.S. Conference of Catholic Bishops across the street and for Vatican officials who advise Church leaders on business and economic matters.
To understand why this is important, it’s worth digging into Market-Based Management and exploring its similarities with the Church’s social doctrine. In his latest book, Good Profit, Koch writes that the goal of business should be “maximizing the long-term profitability of the business by creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity.” When a business does this, it creates good profit. This doesn’t mean high margins or high return on capital or lots of profit by just any means. Rather, good profit comes about by selling goods and services that customers value and voluntarily choose. The businesses that do this are making contributions that enhance society. Compare this to “bad profit,” which is acquired through theft, political connections, cronyism and corporate welfare, or other immoral means that harm others and deny their innate dignity and worth. This concept is an outgrowth of Market-Based Management. This business philosophy revolves around 10 guiding principles, including Integrity, Respect, Humility, Fulfillment and the Principled Entrepreneurship that I mentioned earlier. It also relies on five dimensions that, when practiced, give a business the best chance of generating good profit — and, therefore, contributing to its community.
The dimensions are especially important, and they include:
1) A vision for how to thrive and create value for others in a way that helps them improve their lives.
2) A workforce possessing both virtue and talents.
3) An environment of knowledge sharing and processes that prizes respectful challenges and discussion.
4) Decision rights for individual employees based on their abilities, not job titles.
5) Incentives to motivate all employees to maximize their contribution, regardless of their role. Each dimension expresses a valuable truth about the nature of the human person — truths that accord with the Catholic understanding of man.
Vision is a simple concept with profound ramifications: Anyone involved in business must have a clear sense of what products and services they can provide that will help others improve their lives. This is foundational for the other four dimensions, because until you envision what your business should be and how it will create value for others, there is no way to know what else you need to do. Since the vision is tied to the needs and wants of the consumer, it necessarily has to remain open-ended as those needs or wants evolve and as new products are created. King Solomon’s words from Proverbs ring true: “Where there is no vision, the people perish.”
Virtue and Talents
Once the vision is set, recruitment of personnel is the next element to be addressed. The goal here is to fill various positions with individuals who are both virtuous and talented — with a special focus on virtue, as talents can be developed over time.
Innovation always requires creating, acquiring, sharing and applying knowledge. Koch calls the methods to do so “knowledge processes.” Such processes gather information on developments everywhere in the world, measure the feedback on how to improve the vision and make progress based on best information and discoveries. New ideas are encouraged, as are constructive disagreements. Within a company, everyone from the janitor to the CEO should be quick to share their ideas for improvement and be open to embrace the changes suggested by others.
Market-Based Management does not rely on a top-down culture of decision-making. That’s incompatible with the uniqueness of every individual. That’s why Koch Industries empowers each employee with the authority to make decisions that are appropriate for their roles.
The last of Koch’s five dimensions of Market-Based Management deals with incentives and how to align them in a beneficial way. MBM argues that whenever individual employees create more value than their leaders, they are compensated more than their leaders, despite whatever title they may hold. Crucially, compensation must always be tied to results and relate back to the vision, with rewards going to those who best make a contribution to helping others improve their lives.
When these five dimensions are implemented and practiced in a holistic way, the results can be astounding. Simply look at Koch Industries. It has grown from a value of $21 million when Charles joined the company in the 1960s to more than $100 billion today — a growth rate that’s 28 times higher than the S&P 500. More importantly, people have benefited from what the company does. Last year, Koch Industries supported more than 200,000 good-paying American jobs by creating and delivering products that can help people improve their lives.
Catholic Social Teaching
This leads us to Catholic teaching. Market-Based Management bears many similarities to Catholic Social Doctrine. The central pillar of Catholic Social Doctrine is the Church’s proclamation that respect for the dignity of the human person is the foundation of its moral vision for society. She holds that every person is precious, that people are more important than things and that the measure of every institution is whether it threatens or enhances the life and dignity of the human person.
While the motivation for respecting the human person is more developed in Catholic Social Doctrine, Market-Based Management is rooted in recognition of respect for others. It provides products and services that the customer values, works to match the employees’ individual aptitudes with their roles, encourages those employees to work as a team and allows them to contribute new ideas and even constructive criticism, and finally gives value to shareholders, customers, suppliers, distributers and communities. All of these efforts recognize the dignity of every individual at every step of the way.
Human dignity is closely related to work and workers. Here, the Church teaches that businesses must serve people, not the other way around. Work is not just a way to make a living: It is a form of continuing participation in God’s creation. We thus must strive for a system that respects workers, treats them with dignity and offers them opportunities for productive work, good wages and personal fulfillment.
The second pillar of Catholic Social Doctrine is solidarity. As Pope St. John Paul II expresses it in his encyclical On Social Concern: “Solidarity is not a feeling of vague compassion or shallow distress at the misfortunes of so many people, both near and far. On the contrary, it is a firm and persevering determination to commit oneself to the common good; that is to say, to the good of all and of each individual, because we are all really responsible for all.”
This principle of solidarity is reflected in the term I discussed earlier, “Principled Entrepreneurship,” which Koch describes as “everyone in business helping themselves by helping others to improve their lives.” Again, this is all about making a contribution that enhances society, from employees to the client to the public community.
Related to this is the Church’s strong emphasis on the principle of subsidiarity, which in the context of business concerns giving the employees authority to make decisions on their own without explicit directions or overly detailed rules. Koch’s approach to teamwork and decision rights would reflect this principle.
The final pillar of Catholic Social Doctrine is the promotion of the common good. As the Fathers of the Second Vatican Council said in their constitution, Gaudium et Spes (The Church in the Modern World), “The common good comprises the sum total of social conditions which allow people, either as groups or as individuals, to reach their fulfillment more fully and more easily.” Again, the Market-Based Management value of helping individuals reach their human potential, as well as helping customers, makes a definite contribution to human flourishing and the promotion of the common good.
The Catholic University of America now has additional resources to explore the proper role of business in society. In addition to my wife and me and Charles Koch, many other donors have joined together to give $47 million to The Catholic University of America’s School of Business and Economics — the largest set of gifts in the university’s 130-year history. We are all pleased to expand opportunities for students and scholars on campus.
It is my hope that the school will take the idea of business as a noble vocation to a new level of both practical and spiritual understanding. Through this idea, we come to understand that the gifts that God has given — and we all have different gifts — are to be used for the benefit of others. In doing so, we co-create with God in providing goodness for others, our families, our customers and our communities. That is what every person involved in business — Catholic or not — should aspire to achieve.
Tim Busch is the founder and CEO of the Pacific Hospitality Group in Irvine, California.
He is the chair of the board of visitors of the Busch School of Business and Economics at
The Catholic University of America and chairman and co-founder of the Napa Institute.