Lessons from a History of Misconduct at Koch Industries

Koch Industries clearly tells all of its employees around the world that integrity is the company’s No. 1 value.

Posted by Joe Gerard in on October 12th, 2011

Where there’s smoke, there’s usually fire, as one newly appointed ethics and compliance manager at Koch Industries found out when she was hired to investigate some pay anomalies and discovered a mountain of bribery and misconduct. A recent Bloomberg Markets Magazine article “Koch Brothers Flout Law Getting Richer With Secret Iran Sales,” by Asjylyn Loder and David Evans, outlines the history of misconduct at the company dating back to the early 1990s. For the sake of this blog post, I’m going to focus on two of the more recent events identified in the article:

  1. Bribery
  2. Sales to Iran

Under Investigation

Koch Industries didn’t want to get involved in a bribery scandal, as Siemens had done in 2006. During an investigation in 2008, it had been discovered that bribes had been paid by Koch-Glitsch to win business in Algeria, Morocco, Egypt, Saudi Arabia and Nigeria. The article outlines the widespread bribery at the company:

Internal company records show that Koch Industries used its foreign subsidiary to sidestep a U.S. trade ban barring American companies from selling materials to Iran. Koch-Glitsch offices in Germany and Italy continued selling to Iran until as recently as 2007, the records show…U.S. companies have been banned from trading with Iran since 1995, when President Bill Clinton declared it a threat to national security.

The article noted that the Justice Department has declined to say whether or not Koch Industries is being investigated for the alleged FCPA violations.

Lessons Learned

1. Document Employee Performance

In 2008, Ludmila Egorova-Farines was hired to take on the role of compliance officer and ethics manager. When she was hired, she was responsible for investigating a company subsidiary in Arles, southern France, where it was rumored that managers were inappropriately handing out raises. Early in the investigation, Egorova-Farines uncovered widespread bribery and immediately reported her findings to her bosses in the US. The article reports that after her discovery:

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Koch Chemical promoted her to a permanent position after her trial period expired in mid-2008, court records show. She was dispatched to offices in Germany, Russia and Switzerland, she says.

“I worked hard to drive cultural change to make these units compliant,” she says.

Egorova-Farines was hospitalized for seven weeks starting in February 2009, according to the decision in her lawsuit against Koch-Glitsch for wrongful termination.

The company fired her on June 16, 2009, saying later in court that she didn’t have the skills she’d listed on her resume and that she had failed to share documents with others at the company, according to the court record. She contested Koch’s arguments.

This should send a message to employers to always document employee performance and explain to them why they are being terminated. Even though the court sided with Koch Industries, firing someone for ‘lacking skills’ shortly after giving them a promotion or a permanent position doesn’t look so good.

2. Compliance is Mandatory

Whether the law is established to promote fair business or keep workplaces safe for employees, companies are responsible for meeting specific standards. In the article, they discuss a quote from a book Charles Koch released in 2007. In the book, Koch admitted that Koch Industries struggled to meet changing regulations:

“We were caught unprepared by the rapid increase in regulation,” he wrote. “While business was becoming increasingly regulated, we kept thinking and acting as if we lived in a pure market economy.”

When new laws and regulations are established, companies need to ensure that proper measures are in place to comply with those laws. Today there is little tolerance for companies who disregard the law.

3. Corporate Culture is Important

A company’s corporate culture can make or break it. Sure, there are successful companies that have less than flattering corporate cultures, but do people want to work there? Are their employees happy? Do they have retention problems?

Corporate culture begins with those at the top. Your employees listen to the words you say, but more importantly, they watch what you do. If your actions aren’t in line with the words you speak, how can you expect them to believe you?

In the article, George Bentu, a sales engineer from 2001 to 2007 for Koch-Glitsch said “he felt dismayed because Koch Industries clearly tells all of its employees around the world that integrity is the company’s No. 1 value.” Finding loopholes in the law and other shady business practices are no way to demonstrate integrity to your employees.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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