Innovating Leadership:
Co-Creating Our Future

Maureen: This

This is innovating leadership,

Our Future. I’m your host, Maureen Metcalf, founder and CEO of the Innovative Leadership Institute, where we help leaders be future ready. Steve Daley, our guests leads the Principal based management group at Koch,

Steve: Inc.

Maureen: And he will help us on this mission. Today

Steve: We.

Maureen: be talking about how Koch’s Principle may. Beep. We’ll

Steve: We’ll,

Maureen: about how Koch’s principle-based management framework differentiates and contributes to its success long-term, making people’s lives better. So Steve, thank you for joining us. I.

Steve: thanks Maureen.

Maureen: Let’s

Steve: Let’s jump into

Maureen: Koch’s

Steve: management framework

Maureen: called Principle-based

Steve: management.

Maureen: What

Steve: What does it mean when you say your management framework [00:01:00] is based? Dan’s calling time. Yeah.

Maureen: I now I’m, I’ve got this thing in my mouth still. Okay.

Steve: You are just, you are just, you’re just trying to put me at ease, so.

Maureen: Is it working or you think I’m an

Steve: No, no, I know. Trust me, I’ve been filmed enough to know in front of the camera, we all go a bit, you know, or we, we become a little less articulate. It’s just kind of the way it is.

Maureen: Cook’s management framework is called principle based management. What does it mean when you say your management approach is based on principles? Whose principles.

Steve: Yeah, that great question. So first, when we’re talking about principles, we’re really referring to the principles of human progress, right? The principles we’ve learned through history from psychology, from economics, from science, that enable individuals, organizations, and societies to succeed. [00:02:00] And so at Koch, what we wanna do is we wanna learn from those principles and then apply them in the decision making and the actions we take.

Because they’re then guided by these fundamental truths or principles rather than rigid rules, like detailed rules. And so this approach, we believe is the best way to encourage innovation, critical thinking, and, and ultimately it’s about allowing employees to find the best solutions.

Maureen: So can

Steve: Can you give a.

Maureen: of examples? ’cause when I think of principle based, are a range of books and that talk about principles and I think they use different, very differing constructs with the

Steve: the name.

Maureen: So how does this roll through, how the culture is shaped?

Steve: So I’ll use, um, maybe I can use two examples, uh, to illustrate. So one principle that you see talked about a lot in the business literature is creative destruction, right? The idea that new products, new [00:03:00] processes are always going to, uh, replace, destroy the old ways, the old products. And so you can think about that as being something that we see in society, like we’re all.

Walking around with smartphones now compared to the modes of communication we used just a couple decades ago, and we attribute that to creative destruction. So you could say that’s made our lives better. But if you think about an organization to internalize that principle, are they driving innovation?

How are they finding new and better ways to do things? But it doesn’t stop there to really apply principles. You need to think about that at a personal level. How am I improving myself? So there’s an idea that is fairly widespread. Creative destruction. We talk about it a lot, but when you think about it as a principle that can be applied to improve results, you see how it’s applied in society.

You see how it’s applied within an organization or sometimes not in an organization because organizations become protectionist that would not be applying the principle or even at an individual level, people can become protectionist and they try [00:04:00] to protect the way they’ve succeeded in the past, but all they’re doing is really just walling themselves off from a future that would be better.

Maureen: So I wanna build on that. When we look at, uh, making change, we look at four different questions. What do I believe? So do I believe creative destruction is I. Appropriate, helpful, useful, whatever terminology you use, what behavior am I demonstrating that reinforces that belief? What am I doing in myself?

What am I doing in my organization? And then how does our culture that belief? And do our systems and processes reward and offer consequences? So reward people for, for innovating. And create consequences for not innovating.

Steve: Mm-hmm. So I’m gonna cheat a little bit, Maureen, I’m gonna skip the first one because I don’t think anyone’s gonna argue that we should go back to the Stone Age, right? Because creative [00:05:00] destruction is what’s enabled us to live in the modern world as we know it today. But if you get into the second question.

It means there needs to be an openness. We all need to be open and, and I think the danger is that when we become really successful at something, it’s easy to think about, this is the only way to succeed, but then that can wall us off for new and better ways that may be happening all around us. And so we’ve gotta maintain openness to the world around us and not just assume that we are the only.

Um, source of good ideas, which we sometimes see in the world today. And so then that translates into the culture. And so what do we see? Do we see a general acceptance of the change is not only necessary, but it actually drives improvement. Does it create discomfort? Well, there’s a reason why destruction is also a part of this principle of creative destruction.

But we need to recognize, and culturally we need to accept. That it’s the creative alternatives that actually drive the destruction. If you don’t have the better alternative, you don’t get to the destruction part. And so therefore, at a cultural level, you need people [00:06:00] to understand this principle that it’s going to create some personal discomfort, but the ultimate result will be better.

And then the last point you made about incentives, I’m, I’m an economist by training, so I’ve just packed that down to incentives. You’re absolutely right. Do we have systems that actually reward innovation? And if you think about, um, about America, one of the reasons that it has been so successful for the last few hundred years is it has had an environment that’s largely encouraged innovation and, uh, and creative destruction because it has rewarded the entrepreneurs who have actually come to market with alternatives and products and ways of doing things that people preferred to the alternatives.

Maureen: So Steve, I love the idea of creative destruction, and I assume there are other principles that accompany that, that create safety within the organization, that I’m not gonna work against my own personal interest frequently. So if I’m creating something that destroys my job, I [00:07:00] wanna make

Steve: Make sure that I,

Maureen: have a way to pay my house payment.

Steve: yeah, no, that’s, I mean a very good point. I mean, that’s why if you think about the way most of us are paid, there is a base salary and you, you’re given sort of some responsibilities and you know, we may or may not talk more about how Coke is different in terms of how it thinks about an individual job and as someone’s responsibilities.

But I think the key is you’ve gotta recognize. That every single person can contribute, and so we’re back to the very first point. If we’ve got just generic job descriptions and we expect people to just be cogs in a machine, then you could argue in some ways that’s safe. But you know what? I would argue that long term it isn’t safe at all.

Maureen: Right.

Steve: really want people to bring their, their skills, their aptitudes, their interest to work, and then it’s the responsibility of the business to provide opportunities for them to be able to work in roles where they can create the greatest value for themselves and the business. But they also need to recognize there are gonna be things that we aren’t certain about.

We need to have an [00:08:00] appetite. For experimentation where not everything works. In fact, I’ll give you an example. We bought a business a number of years ago, and I was working with one of the, the, the business units. And, uh, the, uh, business leader had talked to me beforehand. He wanted us, us to work together to improve experimentation in the group.

So as we got together as a group, one of the questions I asked is, how is, how are we as a group at experimenting? And someone answered right away, said, oh, we are great at experimenting. I said, oh, okay. That, that was not the answer I was expecting to hear. So I said, anyone else with a perspective? And so someone else chimed in and said, yeah, we are really good.

We think we are the best in our company at experimenting. And so we were getting further away from where I thought we were gonna go based on what the leader’s briefing was. And uh, so as I was working with the group, the, the thought came, I need to ask a different question. And the question was, how do you know you’re good at experimenting?

And then this was the answer because our experiments almost never fail. And I said, oh, well that’s easy then you’re not experimenting at [00:09:00] all. But that, that was the mindset, right? So we are experimenting. They don’t fail. That’s a good result. No. And so we really unpacked what the principle of experimentation is about in that you need to be failing on some margin or you are not learning quickly enough.

To be able to improve and really, uh, grow the economic value of your business. And so that led to, I think, a very profitable conversation. In fact, the punchline I kind of coined coming outta that session is they weren’t experimenting. They were just succeeding really, really slowly because they would do something they were pretty sure would work, but at a very small scale instead of immediately going to ramp up something that ended up working.

So we talked a lot about where were the areas of uncertainty that they actually needed to engage in more aggressive experimentation. Obviously framing it appropriately, having a hypothesis, knowing what they were testing, but then recognizing the success of an experiment isn’t whether it just worked or not.

It’s really the value of the learning that helps us then determine the next best step for the business.

Maureen: [00:10:00] I love that we talk about leaders having the mind of a scientist, and it is absolutely, I have, we live in a time that is so uncertain I, I, or any other astute leader is not going to have all the answers we have to form a hypothesis. We have to talk to people with different points of view, even if we don’t like to hear different points of view, have to experiment.

And, and I, I have had the good fortune to work with some medical researchers and one of the ones I loved her comment, she was working on implants for people who are hearing impaired and unable to hear, and, and her point was, the quicker we. Prove or disprove our hypothesis, the quicker we get to help people hear. So it’s not that I don’t, that my experiment has to succeed. I have to prove or disprove my hypothesis and make progress without blowing up the business or [00:11:00] myself.

Steve: Yeah, absolutely. And that is so difficult because really smart people often fall into the trap of overestimating their ability to make something work or make it better. So you develop a hypothesis. You do exactly what this scientist is talking about. You have a hypothesis, you think it’ll work, you think it’ll help patients.

You start to do it and then you start to get these, uh, results that indicate, oh, it’s not gonna work, or it’s not going to really close the gap we were hoping to close. And what does a smart person do? Said, I think I can fix it. And so what do they do? They go to work to try to justify instead of saying.

You know what? There’s an opportunity cost of me continuing to work at something that has a really low probability of failure and may not work at all because the early returns are not promising. And so instead, taking their effort and putting it somewhere else that could be very profitable. And to the, the domain you’re talking about, bore lifesaving.

Maureen: So you said the word opportunity, and I wanna jump to the next question on my mind. Uh, [00:12:00] as we look at the news and everything that’s happening in the world right now, it appears chaotic. Uh, and a lot of people are kind of frozen in action or frozen in place and not acting. From your vantage point, both the experience you’ve had at Koch and the person you are, Steve, what opportunities do you see at this point in time that effective leaders can their organizations move toward?

Steve: Well, I mean, it’s a great question and uh, there’s probably not enough time in the day to really sort of unpack that, right? I mean, because it’s challenging and I don’t know if I have a definitive answer, but maybe I can share just a couple of thoughts. One is. I think as it relates to the amount of change we’re seeing in the world, people need to be explorers.

And unfortunately with technology, I, I don’t see a lot of exploring. I see a lot of playing. And, uh, I’m not, I’m not talking about video games. I’m just talking about people will tinker with [00:13:00]technology and uh, and I think for us to really figure out what’s possible, we need to become explorers. Because explorers have purpose and they recognize that in their exploring, there will be some wrong turns, but they learn from it.

And, uh, they’re not afraid to either go back, retrace their steps or chart a new course, but as, as we see so much change, what it does is it increases the return to disciplined exploration because there is so much change. It creates a myriad of opportunities to someone who’s willing to actually do that exploring, to figure out what will work.

What will make my life better? What will make other people’s lives better? And I always find it interesting when we talk about change in our current day. There’s a quote that I love and it’s a couple thousands, um, before Christ, it’s about 2000 BC and I, I don’t have it with me, and so I’m paraphrasing.

But it’s really quite entertaining because it says that politicians are corrupt, children are disrespectful of their elders, and you know, the whole world seems to be sort of [00:14:00] ending. And, uh, that was about 2000 BC and I’ve, I’ve used that before when I’ve talked to groups and I’ve said, so when do you think this was said?

And some people say, well, yesterday, and they say, oh yeah. Reported in the news yesterday. So I think I, I think it’s true that there’s, there’s so much change going on, but we’re always going to feel that. In the moment. But I think it creates opportunities not just for businesses to, to embrace technology for businesses, to find new ways to, to solve people’s needs and, and challenges, but I think it just makes our lives better.

I think, uh, back on my life in high school, the thing that I wanted most was a Walkman. So don’t laugh. But, but, but I, that Walkman was really valuable to me, but I had cassettes. I wasn’t even at CDs yet. And so when I wanted music, I needed to buy the cassette. I mean, that, that’s how the whole music industry worked.

And then I went to CDs, obviously, and, and now, uh, my kids laugh at me when they think about the way I used to [00:15:00] consume music. So I, I think that we have a lot more opportunity than we realize right at our doorstep. To see our lives improve even further. But I think we get timid and therefore we engage in, you know, um, I think concern for that rate of change.

We try to stop it because we’re worried about bad consequences because we fail to really use our imagination and see that it could be significantly better, just as we’ve seen in the last 30, 40 years. Not everything’s improved, but many things have, and I think that path will generally continue so long as we have the conditions.

That hit on some of the points you made earlier, that we have a culture that respects the fact that change can make our lives better, and that we reward innovation appropriately, that encourages it, and it’s innovation that makes people’s lives better.

Maureen: And I would add one to that, and that’s guardrails to protect against kind of bad actors.

Steve: Well, I think that the, and I, I think the way I would would say that [00:16:00] is we need to have incentives such that people are rewarded when they benefit other people. They work in a mutually beneficial way. Right, as opposed to I benefit at your expense. If you’ve got anybody that’s benefiting at someone else’s expense, then that, that should actually, um, not be something that the system tolerates.

Maureen: I like that. So you talk about Abraham Maslow being an important thought leader. How does his work influence Koch Industries?

Steve: Well, a couple ways I think are really important, that sort of really baked into who we are and, uh. So one of the ideas I, I, I think I just need to acknowledge most people will talk about the hierarchy of needs, and I think there’s some value in understanding that, but I think most people’s understanding of Maslow ends there.

If you pick up a management book, you’ll see Maslow’s. Pyramid in there. Interestingly, Maslow never actually drew the pyramid that was drawn later. And so sometimes there’s a rigidity applied to Maslow’s [00:17:00] hierarchy of needs that he himself didn’t apply particularly later in his life. But some of the ideas of his that are really important to us, uh, I might lead with, um, the idea of contribution motivated verse deficiency motivated.

It’s this idea that. People can be motivated to contribute and, and what that means is they wanna make a difference for other people. And what really characterizes contribution motivation is really individuals knowing what they are and are not good at. It’s them seeking responsibilities that align with how they can contribute the most.

And they work in a mutually beneficial way to drive long-term results. And that’s contrasted with deficiency motivated individuals who really are. Overconfident in their abilities. So they’re not grounded in reality. They’re extremely sensitive to feedback and they measure success in comparison to others.

Right? Zero sum mindset. So you, you used the phrase bad actors before, but you think about someone that only believes they can benefit at someone else’s expense. That would meet the definition in my [00:18:00] mind of a bad actor. That’s not someone you want to work with or you can trust. So Maslow sets up these sort of types, if you will, of contribution motivated and deficiency motivated.

But no one is all of one or all of the other. You can actually grow your contribution motivation. And, uh, in fact, he has this great expression, I, I’ll just have to paraphrase it, it’s something like that. He’s talking about growth and fear, and he says that, you know, a dozen times a day, you have to make a choice about whether you’re gonna grow or make a choice based on fear.

And so what he says is that when you make the choice to grow a dozen times a day. You’re actually moving a dozen times a day towards self-actualization. So as a company, we’ve tried to make that a part of who we are. We want to select and we want to retain people who have a contribution motivation, recognizing not all of us are perfect, but that is the, the.

And the majority of what a person is motivated by, we want it to fit more into that contribution side of the scale. And I think that’s been very, very important to us as a company. Another [00:19:00] idea from Maslow that I, I think is probably just as important is this idea that you need to realize your potential.

You need to be all you can be. And we are a different mix of aptitudes and interests, and we are gonna be really unhappy if you are working at something, even if you got paid a lot. But it wasn’t aligned with those things that are interesting to you. I mean, he has the phrase that a painter needs to paint, right?

So there are things that we enjoy doing that when we’re able to do those things, it becomes more fulfilling and interesting to us. And when those interests align with what will help make other people better off. So you’re now back to contribution motivation, then I think you’ve got a situation where an individual grows, develops, and actually is on that path to self-actualization and living a meaningful life, right?

They’re making a contribution. They’re not just making money, they’re doing things that matter for themselves and other people. And so Maslow for decades has been an a very important, um, thinker that’s influenced how we think about the culture that we have as a company.[00:20:00]

Maureen: I, I love that we, um, in our book, the AI Leadership book, talk about an abundance mindset that’s. but not the same as of the contribution motivation, but the idea that I am able to move from. A, a sense of being pulled towards something that matters rather than moving from a place of fear. as soon as I’m moving from a place of fear, my opportunities close down. If I’m moving from a place of I’m excited about the future I’m creating, then. I can create beyond, I can create out of many of the problems we face, but that’s only the case if I’m living in a, in a context that allows me to innovate and fail and [00:21:00] be motivated to make a better world.

Steve: I, I think that’s a really rich point, Maureen, and, you know, hopefully this doesn’t do violence to it, but I, I’m gonna simplify a little bit because sometimes people will come, uh, chat with me and it’s, you know, they’re a little bit younger in their career. They want some career advice and, uh, I think the advice I give them oftentimes is very aligned with what you just said at a meta level, which is.

You need to toward, you need to move towards a new opportunity or a new job, not be so focused on just moving away from where you are now. Because anywhere is better than a bad situation you think, but you don’t know if it will be better. You need to have a vision of something that will actually be better and then move towards it.

I think what you did is you kind of took that principle and just explained it more at a societal or an organizational level, which I think is very appropriate.

Maureen: Thank you so. How say you hire me at Koch, how do I learn the principles and how are your leaders it? sense [00:22:00] is if I’m working and I’ve only heard a few of them, if I’m working in your

Steve: Organization.

Maureen: I’m gonna have a very different experience than I would have in many of other companies of similar size and scope.

Steve: Yeah, we, we have, um, I think very interesting experience here at Koch because we’ve bought, uh, publicly traded companies and taken them private as. They’ve become a part of Koch Inc. And, uh, one of the things that, uh, we have to, uh, grapple with is they bring their own culture. And so we really start at the ground floor of what are we all about as a company.

Um, I could, I, I could tell you lots of interesting stories, but let me start with maybe just two principles and then may maybe a story, but. Two things that you would notice right away that would be very difficult if you came from a large publicly traded company to Koch. Um, that would almost be shocking to you given that Koch itself is a large [00:23:00] business, is, um, the way we individualize roles and then the way we approach compensation.

So let me just say a little bit about both. So individualizing roles, we do not use generic job descriptions. In fact, the, the Harvard Economist, you know, Gardner, he talked about how we’re all smart and dumb in different ways. And so if you really believe that, then why would you have generic job descriptions across the board for your organization?

What you would do is you would actually focus instead on designing the roles to fit the person. Obviously in the context of what you need that group or that business to be working on what capabilities it has to create value in society. So you’re, you’re bounded by what that business is charged with doing, but you have a lot of freedom to actually design the role to fit the person as opposed to keep trying to fit people into pre-designed or oftentimes centrally designed roles.

So that would be one thing that, quite frankly, is a bit shocking. It’s like, what do you mean? I mean, it’s gonna be really difficult to assess people if their roles are so individualized. Well, that’s the work of a supervisor. So you asked about what leaders [00:24:00] need to do. Leads need to do the work of understanding how their individuals are contributing.

So then the second thing I mentioned was compensation. So one of the, the things that’s vitally important to us when it comes to compensation is that that compensation, your total compensation, so your base pay and any bonuses or other compensation you receive needs to be commensurate with how you’re contributing in the business.

So it’s often the case that many businesses. Use a very formulaic approach. And uh, it’s not uncommon for an employee to know at the start of the year what their total compensation will be at the end of the year. There may be a little bit of rounding based on maybe the overall business results, but for many employees that they’ll kind of know at Koch, we would say, how could we know at the start of the year until you’ve actually contributed?

And so we are going to do that work at the end of the year to assess their contribution. If someone’s really contributed in a very strong way, then they may be paid much more. In terms of that bonus, we don’t have, uh, pay bands where we say a role will get, you [00:25:00] know, zero to 10% or 20 to 40% of its space and bonus.

That’s not our approach at all. Our approach is to say, what have they already paid, been paid for the year? What do we think is appropriate, commensurate with how they’ve contributed? And then we are going to pay that, that difference so that their total contribution matches what we think of as their total.

Sorry, their. Total compensation matches what we think of their total contribution. Now, that’s completely foreign when you come from an environment where pay is handled in a very rigid formulaic way. In fact, it’s not uncommon for people to tell us when they’re first exposed to this as our approach. Say, well, this will never work in our complex business.

Or, boy there, this is just. This is just gonna be too time consuming. But we think that this is the role of leaders, uh, particularly to make sure that employees are getting the right feedback, that they understand how they’re contributing and when they’re not contributing, that they’re also getting that feedback and that their compensation reinforces the messages they’re receiving about how they’re contributing.

So that way we get more of what [00:26:00] is valuable, less of what isn’t, and that ultimately the employee over time will be happy because they’re getting a very strong signal about how they’re contributing. And how they can increase their contribution so that way they can increase their compensation

Maureen: Just for our listeners, for scope and scale, you have about 120,000 employees and you’re $125 billion roughly enterprise. Across several industries.

Steve: and yes, and we’re in 60 countries.

Maureen: So individual job descriptions and managing that is not a small feat there. There must be a stacking of complex processes so that you can predict how you’re gonna operate as a business and remain profitable, and all of the things that businesses do.

Steve: So I, this is where it gets a little messy, right? Because oftentimes people will say, well, that’s a lot of work and it’s not gonna be perfect. Well, we don’t think the [00:27:00] alternative of a rigid system is gonna be perfect either. We’ve embraced the trade off of doing the work to talk about the individual, and so, you’re exactly right, Maureen.

There’s a lot of work. Often the word I will use here is rather than saying a process. I’ll often talk about as having discipline, because we have principles we wanna apply and we wanna apply those principles, which may mean that times you get very different outcomes, but if those outcomes are driven because of good application of the principles, we’ll embrace that.

We’re not looking for uniformity of outcomes. What we’re looking for is, I, I almost hesitate to use the word uniformity, but a consistency in the application of these principles and then, and then working towards the results that that drives.

Maureen: So I’m gonna test my understanding of what you just said. At one point in time, I taught statistical process control and we talk about a process being in control or out of control. Uh, and so I’m within a certain amount of standard deviations. [00:28:00] Of the expectation and you’re not expecting rigid, tight control.

You’re expecting some level of control that you specify depending on the situation.

Steve: Yes. And so I think, and then I’ll give you a compliment, a piece to that as well, right? ’cause you’re talking about things getting out of bounds. What you really want is a resilient system. And so the more that employees understand and can apply these principles. Over time, you’re gonna get much better results.

So if you go into a statistical process control environment, you know, there’s been a lot of work the last few decades in understanding weak signals. So sometimes there are weak signals in the system that haven’t yet come out of bounds, but, uh, a precursor of something really bad happening. And sometimes what happens when people are too focused on just conformity of process, they say, well, that weak signal, uh, we can ignore it.

It’s in bounds. It’s not a bad outcome. But what it is doing is it’s giving you an indication of something that could happen. Quite terribly later. So what you need is you need people who are [00:29:00]thoughtful rather than just blindly following a process. And so that could be whether you’re running complex machinery, it could be whether you’re dealing with people.

But the same foundational idea works. Are we applying good principles to the situation?

Maureen: So how did the principle based come about? Because it does sound like or one of the key differentiators of all of Koch Enterprises or Koch, Inc.

Steve: Yeah. So, uh, you know, one of the. The things that someone could do if they wanted to learn a lot more about the, the genesis of, uh, principle-based management is they could read, uh, one of Charles Koch’s books. A good profit would be a good source, but at a high level, Charles, when he joined the company in the sixties, uh, was very fascinated in what led to success in society.

And as a result of him also being the business, he wanted to understand what leads to a thriving, you know, successful business. And he found. You know, over time that the same principles [00:30:00]would work in both settings. And so he continued to try to apply these principles in the business. When he saw opportunities, we were a much smaller business, but as we continue to grow, there was a need to formalize or bring these principles together in a way, codify them in a way that then more employees would have access to them.

So in the early nineties, we, uh, we, we brought it together and we, we developed a, a consistent framework and we began to call it market-based management, a term that. Charles had coined back then. We recently changed the name to Principle Based Management. To really emphasize what we’ve always been interested in is applying principles, and so even principle based management, the set of ideas we use today continues to evolve and change as we learn what works, what doesn’t work, as we try to help our employees understand and apply these ideas.

Maureen: So that gets to another question

Steve: Question.

Maureen: I was curious

Steve: about

Maureen: is how, uh, again, very dynamic time and I, I take the point that. We’ve always been in [00:31:00] dynamic times. The, the scope and scale seems to be a bit larger right now. are the principles changing to accommodate his 60 year trajectory with this construct? I.

Steve: I, I think, uh, it’s a, it’s a great question. I, I think the important thing for us is we’ve always been open to adjusting and changing them. And so I think that sets us up well in that we are not waiting for some terrible event to all of a sudden say we’ve done something completely wrong with our principles.

So, for example, what we used to call our guiding principles, you know, most people will talk about our values or whatever that is, that a company says, these are our core values. Every three to five years, we actually put that on the table and expand the conversation with hundreds of employees about these principles.

What’s working? What are we doing well? What doesn’t make sense? You know, what could we improve to help clarify those things that we want? I. For example, one of those principles is [00:32:00]humility. So that principle has been a constant for a number of years, but the way we’ve talked about it, the way we’ve described it is we’ve tried to emphasize the things that we need to do better as a business to help us be successful.

So you’re right, the rate of change, it does continue to accelerate. Um, but we think that we’ve hopefully developed some muscle where we’re always looking and always trying to figure out what could be better that hopefully will enable us to continue to, um, evolve and change and grow. Uh, as we continue to see the, the change in society, and hopefully that will be more than mirrored by the change that we will see within the business.

Maureen: Interesting. So we wrote chapter in a book. Now about a decade ago called Leadership 2050. It, uh, in conjunction with a futurist, and we were looking at the mindsets required to help leaders be future ready. And it’s not wait till 2050 and then build this stuff that’s like waiting till I’m [00:33:00] 70 and then starting to do balance exercises. the first one was professional humility and, and that. I, I use the example of Dr. Fauci during the pandemic. He would state something reflecting what science knew at that point in time, and then back to our mind of a scientist as we, being the governor, not me, uh, uh, as our scientists learned more about the um, illness. The guidance was refined or modified or changed. Uh, and it took a level of professional humility in my view to say, okay, this is what we said. This is what we’re changing. This is why we’re changing it on a regular basis. And that willingness to [00:34:00] change, and again, this is not intended to be a political commentary at all, but the willingness to change that in and of itself. a level of safety that isn’t present if I’m hiding and protecting my mistakes.

Steve: Yeah. So I’ll share, I, I, I think you’re exactly right. We need to be open. We need to admit when we’re wrong. We need to be willing to learn from others and, uh. You know, I’ve seen this happen in science a lot, right? When I went to school, there was a period of time when the textbooks we were studying out were ac actually wrong, right?

Because I remember reading a textbook and it said The electron is the smallest, you know, particle that we know of where, I mean, I was studying that in the textbook at a time when signs had just kind of. Uh, reach that next level and we continue to learn, right? So it, it’s never really in a sense, settled, right?

Science is just doing the best it can today. And, uh, so, you know, on a more sort of a [00:35:00]personal note, I mean, I, I, maybe this is that example in practice. So one of our businesses a few years ago went through a significant ERP upgrade and, uh. A lot of work kind of going through that. I think any large business has got its own trauma stories related to ERP implementations.

And, um, so this, one of the senior leaders in that business was visiting one of the sites after we’d gotten past stabilization and was talking with their employees and, uh, just asked, how’s it gone? And one of the employees said basically, well, you could have asked us before you did it. ’cause there’s some things with the work we’re doing, they’re a little harder now and.

It led to this really productive conversation and, and that leader to his credit, came back and shared in, in a, in a leader forum discussion that we have every couple months and shared that example right in front of his peers. So, um, on the one hand, you could say, and this is absolutely true, we failed to apply our own principles as we were going through that ERP implementation.

But if there’s a silver lining, you know, the employee was willing to be honest with a leader in their business. And that [00:36:00] leader was willing to come back and share that example and say, we kind of missed it. We were, we were so interested in the time to value because that’s kind of how these projects are sold.

And so this isn’t quite being wrong, but it’s always being open that we may think we’ve got the best answer. But if we sought input and feedback from others, and in fact, may I just, this came to mind too though, personal personal experience with Charles Koch. Uh, so I had. I was at George Mason University where Charles has been involved for years.

And so I left George Mason University once, once I’d finished school there to come to Koch and I’d been here just a couple of weeks and there was a conference on the theory of the firm that Charles was going to, and it was at George Mason. So I just got here and then we went back there and Charles spoke for 90 minutes at the conference.

And uh, and as we were driving, as we were leaving the conference, he asked me, he said, so, do you have any feedback? Uh, for me on, um, on, on my talk. And here I am, [00:37:00] I’m a two week employee and this is Charles Koch, the CEO. Um, his name is on the building. I mean, and he just said, so, do you have any feedback for me?

And I said, well, I kind of mumbled, like, well, no, I thought it was, uh, pretty good, Mr. Koch. And so he just kinda looked at me. No, he did, he just looked at me straight in the eye and he said, so you don’t have anything that will help make me better. And I said, oh, well, if you’re gonna frame it that way, I don’t, I don’t know if it’s a correction.

I said, but let’s talk about something that you said that I wasn’t, I wasn’t sure, was connected to, you know, some of the theory that some of the academics were sort of very tied to. And we ended up having this really rich conversation as we were driving to the airport that I wouldn’t have had if I’d just remain silent.

But I’ve also learned, and I’ve seen this pattern over all of my years here at Koch, is that. Charles gets a lot of credit as being very, very bright and intelligent, and he absolutely is. But he’s also the first, in my experience, to seek out the input of others, and he values people who [00:38:00] will give him different opinions, especially from his own, because he knows that’s how he’ll get to better decisions.

Maureen: Beautiful. I’m gonna beep for a second. You’re hitting your table and I hear

Steve: Oh, oh, sorry. I was excited, huh.

Maureen: I,

Steve: That that’s the

Maureen: we need to rerecord anything or you can fix

Steve: fix it.

Maureen: Okay.

Steve: I, I could just say that was just, that was the police knocking on the door coming to get me.

That it, that’ll be us at 12. That’ll be our, oh, no, no, our, sorry, I take it back. Ours is Monday. Monday at 12. So we missed it. So, sorry. I, yeah, I did get a,

Maureen: but

Steve: but I mean maybe if you want me to say that again, [00:39:00] I could probably say it a little less long-winded, but that was, uh. It was a formative experience, right?

I mean, to be here two, basically two and a half weeks and have the boss tell you, oh, so you don’t have anything that will make me better. Wow. I mean, that’s like, here’s the bar buddy. Are you gonna meet it or are you gonna just sort of hide in your corner? I’m like, well, no. I actually, I thought I came to play.

I just realized the bar was a whole lot higher than I’d been thinking.

Maureen: It.

Steve: Sorry, I.

Maureen: at my questions. Um, it, it is amazing for a leader at that level to consistently ask how do I, uh, improve and also to invite employees to, to

Steve: Provide feedback to

Maureen: the

Steve: the.

Maureen: principles that have been. Proven over time, but as as our context changes may also [00:40:00] benefit from being slightly refined.

Steve: Well, let me give you, uh, maybe a different example that illustrates what we try to do. Uh, when we bought one of the, the businesses that had been publicly traded, it was in a large building. It had a top floor where all of the management were, and they had a private dining room. And, uh, if you went up to have a meeting with them, you had to have a shirt and tie on or business dress right?

As opposed to the rest of the building was business casual and, uh. This is, this is troubling to us because it’s management as royalty, and that that is just not appropriate. I mean, we just think that’s wrong. And so if you think about then how we apply it, it shouldn’t surprise anyone to realize. Every employee at Koch, including Charles Koch, gets a performance review every year.

Charles gets a performance review. How did he contribute? What does he need to do better? What are his improvement opportunities? And he takes it seriously. What he actually does is he shares his [00:41:00] improvement opportunities with the whole senior leadership team. ’cause that’s largely where the feedback came from.

But he’s signaling very clearly. I hear the feedback and I’m gonna work on it. And one of the great things about I. Getting to work closely with him as you see him actively work on improving in those improvement opportunities because he doesn’t think it’s one rule for everyone else and a different rule for him.

These principles have to be applied across the business, you know, far and wide, top and down. And so in that business that I referred to. We, um, we got rid of that private dining room. We turned that whole top floor into meeting rooms and some of those, those management leaders, as we put new leaders in, they ended up being on the floors close to their team.

Some of them are all together, so ’cause they need to be there as a team, but some of them ended up moving to the floors where their teams were. Because we don’t believe management as royalty. We believe that everyone plays a role where they can contribute. We’re just in different roles if we believe in individualized roles.

Then it’s recognizing that everyone has the opportunity to contribute. We need to put them in roles where they have the [00:42:00] chance to do that.

Maureen: As I’m listening to how you talk about it, it sounds from my vantage point, given my theoretical grounding, idyllic as a place to work. Uh, and yet I also assume there are all of the daily ups and downs and challenges of being in a large complex business.

Steve: Yeah. So we are not perfect. I mean that we try, we aspire to be great. Uh, but I mean, there there’s a number of areas where we just fall short of even applying our own principles. I mean, the example of the ERP, I mean, we, we make those kind of mistakes, I think where, where we are. Actually do, did I do my beep?

Do, did I beep, beep, beep, beep, beep, beep, beep. Sorry. Let me, I’ll, I’ll start differently on that one. So

Maureen: Okay, and we’re coming to wrap up, so this

Steve: yeah, this is [00:43:00] good.

Maureen: up comments.

Steve: Um, yeah, we aspire to be great, but we employ people, so of course we’re imperfect. We don’t expect perfection, but we do expect progress and that means striving to learn and better apply these principles.

Uh, you know, I can give you a couple of pitfalls that we’ve seen over the years. One of them is that because there is a little bit of effort required to learn these ideas and to internalize them, it’s easy for people to think that somehow it’s something separate and so therefore they don’t actually apply the ideas and they bring their own.

It or their old management models with them, because everyone has management models. They just maybe never have made them explicit before a Coke. We try to make them explicit through these principles and then communicate them broadly, but then that causes people to make the mistake, oh, this is something separate to do.

But if instead of calling it principle based management, we called it, you know, the K way of doing business, then it wouldn’t make any sense for someone to ever say, I don’t have time to do it, the K way of doing business. I just need to get something done. But [00:44:00] sometimes you do hear people say, I don’t have time to do PBM ’cause I’ve gotta get this job done.

So that’s one hurdle we have to get over. The other that we’ve fallen into and I’ve been a party to is when we allow efficiency to kind of take, um, priority over effectiveness. So sometimes we’ve put more emphasis on training people, equipping them with the vocabulary without giving them the time to really soak and learn and internalize.

And so as a result, you get a little bit more lip service than you would like or. People actually start to substitute in the new language, but continue to do what they used to do. And then of course, there’s the human failing. We get pressure, we get busy, and we fail to actually meet the expectations. And where we see that as being most detrimental is when you have supervisors who don’t actually strive to become supervisors the way we expect them to be.

Where they are actually vitally interested in helping their employees develop, contribute, and grow. And when we have supervisors that are more interested in either looking good [00:45:00] or getting their stuff done and see their employees as a distraction or a nuisance, we need to get them out of those roles.

And to your point about, you know, we aspire to be great, we fall short. Sometimes we leave people in those roles way too long. I. It doesn’t mean that they can’t be good employees, but it doesn’t mean they can’t be good supervisors. So we are willing to change their roles, get them in individual roles, assuming that they are aligned with our values at a personal level, and they’re striving to apply these principles.

They just perhaps don’t have the aptitude or the capability to be a good supervisor. We need to get ’em out of those roles.

Maureen: So I’m gonna try to summarize what is incredibly content rich and. Also acknowledging that I have a very incomplete understanding of the full set of principles my lens on implementing organ organizational change. thing I hear is that [00:46:00] leadership team has to. Understand the principles live them. So believe them and live them. That when I show up, I am an explorer, that I am contribution, motivated, uh, of the, that I’m interested in creative destruction and believe that if I engage in that, that I will be safe

Steve: Professionally. Yeah, I would. I wouldn’t necessarily use the word safe professionally. You’ll have the opportunity professionally to make a difference. And, uh, be able to grow in that role. So, um, safe isn’t a word we normally use. I, I’m very comfortable with the concept of psychological safety, but we would often talk about the supervisor needs to create the conditions where an employee can speak up and disagree.

And in fact, we talk about leaders not only need to tolerate, but they need to expect and insist on people sharing their ideas, especially when they’re [00:47:00] different from the boss. And if the boss isn’t comfortable with that, then we’ve got the wrong boss.

Maureen: I love the idea of C, creating the conditions, fill in the blank for success, for different points of view, for experimentation. ’cause I can’t make someone experiment, but I can create a context in which they can be successful experimenting and unsuccessful if they don’t.

Steve: Yeah. To me that is what the intent of psychological safety is, is that it’s really creating the conditions where an employee can actually become, we’re back to Maslow. All that they can be. You know, Maslow says somewhere else that the, the role of management is to create the conditions where the goals of the individual merge with the goals of the organization.

And that’s so that it becomes mutually beneficial. It’s not about one sacrificing for the other, it’s about them working together in harmony. Right? So in the same way that we want businesses to provide value for customers so that it’s mutually beneficial. We expect that same [00:48:00] principle to be applied in the business.

A supervisor and an employee relationship should be mutually beneficial, right? The employee isn’t there to just serve the supervisor and the supervisor isn’t there just to lord it over their employees. They have a role together to help each other be successful.

Maureen: And to serve the mission of the company.

Steve: That’s right. I mean, because that’s ultimately what they’re united in purpose in doing, right? Which is hopefully making people’s lives better. I mean, that’s the role of a business to use resources responsibly in a way that makes people’s lives better.

Maureen: Steve, this has been an incredibly insightful conversation for me. wanna thank you for your time and also ask you, where would people learn more? You gave Charles Koch’s book as a reference. Do you have other references where people can learn more about this? Because it seems that would take us many hours to truly unpack the framework.

Steve: They can [00:49:00] go online@principalbasedmanagement.com. We have a website. It has a number of resources that, it’s the same resources we use internally. But they’re out there on the web, so anyone can have a look at them. They’ll find a library of 42 principles where we have a brief description of what that principle means to us, and, and, and oftentimes how we try to apply it.

So that’s a good resource. They’ll also find some other materials on there that explain more about our approach, and they’re welcome to, to review them, look at them, use them to the extent that it’s helpful, because we believe that if more of what we did in society was based on principles, that we’d all be better off.

Maureen: I wholeheartedly agree. Um, where would people connect with you? Do you blog or do you post on LinkedIn?

Steve: Uh, I don’t, um, uh, I have, there’s some folks, uh, in our group who do Chase Koch. So Charles’s son who works in the business, he does post [00:50:00] regularly. Um. You, you may have inspired me. Maybe I’ll need to start. Uh, there are some blogs I do consume, uh, and some podcasts I certainly enjoy listening to. But, uh, I may, I may need to, um, you may have spurred that.

Um, I’m not sure how many people will read it, but at least my wife I’d have an audience of one. Thanks Dan. So we’re up to two or three, so, um, but, uh, no, I think, uh. No. So I think the website, chase Koch is a great person to tap into because he’ll post regularly about some of the things that the Kochs have done from a Phil profit perspective as well as things about the business.

Maureen: Beautiful. Thank you so much for your time and insights today.

Steve: Thanks, Maureen.

Maureen: Oh, and I’ve gotta read my, sorry, beep. I have to read my closing statement. We’ve updated our process. Thank you for joining us today on Innovating Leadership Co-Creating our Future. Are you interested in elevating your leadership, the innovative leadership? [00:51:00] Institute offers best in class leadership development, executive advising, and organizational transformation services. Send me a note at inquiries@innovativeleadership.com. The world’s most successful leaders are created here. I.

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