A new book on business management offers a useful framework for thinking about philanthropy.
The book is called The Science of Success, and it is written by Charles G. Koch, chairman and CEO of Koch Industries for the past 40 years. This Wichita, Kansas-based business has enjoyed extraordinary growth and today is America’s largest privately held company, with over $90 billion in sales. Koch Industries is a world leader in industries ranging from oil refining to pipelines to nitrogen fertilizer to chemical process equipment to commodity trading. It also produces such widely recognized consumer products as Stainmaster carpets, Lycra spandex, Dixie cups, and Quilted Northern and Angel Soft tissue.
Charles Koch is an MIT-trained engineer, and much of his company’s success is due to its research and development capabilities. However, Koch attributes his company’s remarkable growth primarily to the principles of what he calls “market-based management,” the application of economic laws governing societies to corporate decision-making. According to Koch, there are five dimensions to MBM:
“Vision: Determining where and how the organization can create the greatest long-term value. Virtue and talents: Helping ensure that people with the right values, skills and capabilities are hired, retained and developed. Knowledge processes: Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability. Decision rights: Ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable. Incentives: Rewarding people according to the value they create for the organization.”
These principles are as useful for philanthropy as they are in the corporate world. Koch writes that “an effective business begins and ends with value creation.” The same is true of philanthropy. And though long-term profitability is not the appropriate measure of value creation in philanthropy, as it is in business, the effective donor will focus on clearly defined charitable purposes that add long-term value for the community or society he serves.
Koch’s emphasis on integrity as well as talent is especially important in the choosing of foundation trustees. The most common way for foundations to lose their compass, and to stray from donor intent, is to choose trustees who do not share the donor’s core principles, who ignore their fiduciary duties and think of the foundation’s assets as their “own money,” or who abdicate to staff the responsibility for setting strategic direction.
Koch writes that “the ability to create real value depends on a principled, entrepreneurial culture in which the members are passionate about discovery.” This includes learning from and trading with others. It includes fostering experiments and tolerating failure so long as the size of high-risk bets are small. And it includes careful attention to measurement of results. Not necessarily short-term results—Koch thinks his company has benefited greatly by being privately held, and therefore freed from the occasionally perverse incentives of a focus on quarterly earnings—but rigorous analysis of long-term value creation. Effective philanthropists will similarly promote knowledge creation, experimentation, and disciplined measurement in the fields where they operate.
Koch Industries uses decision rights “to attempt to replicate the beneficial roles of property rights in society.” Decision rights similarly play two important functions in philanthropy. First is within the foundation itself, where grantmaking will be most entrepreneurial and dynamic if the key decision maker is the original donor—at least in setting forth the institution’s vision and mission. Second, the most effective donors tend to give decision rights to grantees—letting them make key decisions without philanthropic micro-management, while holding them accountable for performance.
A central part of Koch’s growth strategy is the identification of industries where the company can no longer add value. “We believe it is essential to drive creative destruction internally, otherwise creative destruction will drive us out of business.” Creative destruction is the term used by the Austrian economist Joseph Schumpeter to describe the upheaval caused by competition and innovation in market capitalism. Koch Industries rigorously applies this upheaval to itself, and has exited from 42 businesses.
Philanthropy can emulate this creative destruction in two ways. First, donors can establish sunset provisions for their foundations, anticipating that the field will be rejuvenated by the creation of entrepreneurial new foundations in the future. Second, and this applies both to term-limited and perpetual foundations, trustees can rigorously and routinely examine each of their foundation’s strategies to determine whether they are still the most effective way for the foundation to achieve long-term value.
Adam Meyerson is president of The Philanthropy Roundtable.