Principle-Based vs. Rule-Based

For decades, Koch has emphasized the importance of understanding and applying principles of human progress.  Nobel laureate F.A. Hayek concluded that uncovering these principles was “perhaps the greatest discovery mankind ever made.”  When practiced correctly, they promote peace, civility, mutual benefit, opportunity, success and enable people to live a life of meaning.

Before this discovery, rulers throughout human history enforced a top-down and arbitrary rule-based system of control that made the human experience miserable. Nearly everyone was born in poverty, lived in poverty and died in poverty.  The average life expectancy hovered between 30 and 40 years.

It was only when principles of human progress began to be applied around 1800 that people’s lives dramatically improved.  As millions of people gained the opportunity to more fully live as they saw fit, they began applying their abilities and knowledge to improve their lives by helping others improve theirs.  While there will always be room for improvement, most people are healthier, wealthier and happier than ever before.

The application of these principles in societies has greatly improved well-being, but there has not been a similar transformation in organizational management.  Whether intentional or not, leaders who use prescribed, detailed rules and directives behave as though they don’t need to motivate their employees or benefit from their knowledge and ideas.  Those who think they have all the answers push only their own ideas and require standardization because they assume most people don’t have much to offer.

At Koch, principles of human progress guide everything including visions, strategies, policies, practices, partnerships, investments and performance evaluations.  These principles encourage entrepreneurship, discovery and transformation. They apply universally, whereas detailed rules and methods only work in specific applications under certain conditions, and even then tend to stifle motivation and creativity.

A principle-based approach is not an absence of rules.  But when policies, processes or procedures are necessary, they must be judged against general principles.  We expect them to be continually challenged and improved – or eliminated when they undermine progress.

In keeping with Our Values, we comply with all laws and regulations.  If, however, we find any of these rules to be counter-productive, we advocate for principle-based policies and try to persuade authorities to adopt them.  Regardless, we fully comply with existing laws.

Internal audits are an important example of how the same activity can look quite different depending on the approach.  Rule-based audits focus on enforcing conformity and finding violations.  When principle-based, the focus is on learning what works and what doesn’t so that both employees and the business can improve.

The transformation of Koch began by applying principles that gave our employees the opportunity to transform themselves.  We recognize, as Hayek did, that when we empower and motivate employees rather than try to control them, they are better able to contribute and transform Koch.  We believe everyone, regardless of education or background, has the ability and knowledge to contribute, each in their own way.

Setting expectations according to general principles without prescribed, detailed directives or rules is core to our culture and long-term success.  It frees everyone to think and innovate – to develop different methods and solutions – rather than mindlessly follow instructions.  It creates an environment where every employee has the opportunity to find the right role, knows what to do to maximize value creation and is motivated to do it without being told.  This is a primary responsibility of every supervisor at every level.