Reflective Practice in Conflict Analysis and Resolution

Introduction

In our brainstorming sessions as a group for the reflective practice theory presentation, one of the main themes that were commonly addressed by all members was how to reflect, through an integrated method, our personal experience at ICAR. As Adriana Salcedo indicated,

When we arrived in the field of Conflict Resolution, we carried different bags of knowledge and expectations that were based on our past personal and professional experiences. While our respective field experience had provided us invaluable practice and knowledge in the field, we understood that there was in fact a void in our theoretical knowledge/toolkit. Acknowledging this gap, we looked to ICAR as a space that could fill this void, and fulfill our expectations.

Adriana Salcedo was able to systematize our common reflection in what she has called, “Mirror Theory for Conflict Resolvers” through which:

We attempt to gain a better understanding of how we (as conflict students/practitioners) can better learn from our own experiences and adventures in the field of Conflict Resolution. It encourages a journey of self-discovery. This theory presents a number of features that conflict resolvers can use to assess their particular situation, to identify their potentialities, and to successfully implement them in the field at the end of their ICAR experience.

Furthermore, Adriana elaborated the main phases of the theory (a) and some of the advantages of applying the “Mirror Theory for Conflict Resolvers” to our professional life (b):

(a)

• Our past experiences (Pre-ICAR phase) – General Assessment

• Our present (as part of ICAR) – Learning and Training

• And our future (Post-ICAR phase) - Envisioning

(b)

• Encourages professional and personal development. (Self-coaching)

• Is a process in which we discover, clarify and align with what we want to achieve through conflict resolution.

• Produces elicit self-generated strategies.

• Holds us responsible and accountable for our acts and decisions.

The “Mirror Theory for Conflict Resolvers” will serve as the structural framework for me to reflect upon how my past experiences – Pre-ICAR - have influenced where I am presently – Part of ICAR - , and how these phases will determine how I envision myself in the future – Post-ICAR- .

1. Pre-ICAR phase – General Assessment

According to Adriana Salcedo´s “Mirror Theory for Conflict Resolvers”, in the first phase each of us should:

Reflect upon our general assessment of our unique pre-ICAR phase, and concentrate in answering the following questions:

• What were the main motivations that led me into the Conflict Resolution field?

• What are the main expectations that I attempt to cover through my journey at ICAR?

a) Motivations

“Conflict resolution, which is analytical and problem solving, is in the longer term a process of change in political, social, and economic systems. This is because it is a process that takes into account individual and group needs, such as identity and recognition, and the institutional changes which are required to satisfy these needs. The rationale for conflict resolution, as distinct from settlement processes within existing systems, is not idealism or value-orientation. It is political realism. The accomodation of individual and group needs in political, social, and economic institutions is a requirement of political stability and survival.”

Conflict Resolution as a Political System

-John Burton

While in Costa Rica before coming to GMU in 2007, my two main professional occupations were 1) trainer and mediator of community-based conflicts in an alternative dispute resolution center, and 2) President of a Libertarian Youth Organization of the Libertarian Party. These two occupations denoted my two main academic and professional interests: conflict resolution and political economy.

Reflecting on how I felt at that time, I perceived inter-group positioning between both occupations, and did not felt motivated to achieve a distinct social identity, but instead desired to weave both of my occupations, since I felt no actual membership to either social group. Therefore, I would agree with Tan and Moghaddan´s (1999) interpretation of the conceptual rigidness of social identity theory (Tajfel and Turner, 1979) in inter-group relations (pg. 180). More specifically, many of the people I was associated with in the alternative dispute resolution center (trainers, trainees, mediators, etc.) did not identify with the ideas of the libertarian party, which advocates for free markets, limited government and individual liberty to advance social progress and well being. In the other hand, the people I was associated with in the Libertarian Party advocated for an ideological position, in which “we” were right and the “other” political parties were wrong, thus not identifying themselves with the reach and powerfulness of mediated or facilitated processes–negotiating group identities–in the public arena to achieve common purposes.

b) Expectations

I felt quite frustrated and therefore my expectation was to merge both of my occupations, and thought of looking for a Governance program in graduate school. Coincidently, I had researched about Conflict Resolution and found ICAR to be the program and style of institution where I wanted to learn more about conflict resolution, especially after I read Conflict Resolution as a Political System by John Burton. In the other hand, I came to the Institute of Humane Studies at GMU for seminars about liberty in 2004 and 2006, and learned how GMU offered classes in the departments of Public Policy, Public Administration and Economics which I identified with. Therefore, I was not able to find a specific program in Governance, but thought that a second best option was to apply to the Interdisciplinary Studies Graduate Program at GMU concentrating in Conflict Analysis and Resolution at ICAR, and take other classes related to Governance in the School of Public Policy and Public Administration. I thought that, although it wasn’t exactly what I was looking for, the intra-relationship of classes would give me a better grasp of how processes of Conflict Analysis and Resolution serve as tools to advance a freer society and thus social progress and well-being in the political realm, achieving Governance.

2. Part of ICAR – Learning and Training

According to Salcedo´s “Mirror Theory for Conflict Resolvers”, the main focus of the second phase is learning and training to become a self-reflecting Conflict Resolution Practitioner by:

Identifying the knowledge and skills that will help to achieve my goals, for example:

• My favorite theories for understanding the type of conflict that I am interested in studying

• The development of skills (mediation, facilitation, analysis, decision making, self-reflection, etc)

• The ethical values that guide my practice.

a) Theories, Skills and Ethics: The search for a nested theory of human action

An excellent way for me to understand and transmit how my Pre-ICAR phase merges with the classes I have taken, this class in Reflective Practice, and my present work as an intern at the Charles G. Koch Foundation (2008), is to analyze Dugan’s Nested Theory of Conflict Model as it relates to the work of Charles G. Koch.

i) An initial assessment of a theory of nested conflict

Maire Dugan´s Nested Theory of Conflict Model approaches conflict by identifying on what level its source lies, and stresses the extent to which these level are related, nested within one another. The author takes the position that the first step in determining how to resolve a conflict is to analyze at which source level it arises. Dugan explains a case in which a specific conflict at a school (symbolism of a confederate flag) stretches beyond the fight between two boys (issue-specific or relational level) into the realm of societal racism (sub-systemic and systemic structural level). As the model shows, the narrower types are nested within the broader types:

After proposing this model, Dugan indicates that there have been many attempts using violence, nonviolence, legislation and judicial challenges to address the injustice of racism, and that thus far it is still deeply rooted in our society. She ultimately concedes that the causes are complex and deeply rooted in our social, political, and economic systems and that her article does not shed light into specific solutions. Her attempt, therefore, is to place the solution of the conflict at the school not at the broad societal level, but at the sub-system level of the school as a social institution. Dugan then provides some relevant, but ultimately not very systemic or coherent answers to remove racism at the school, such as providing in-service training to teachers, changing the classroom study materials, and initiate a process called future invention to enable various members of the school community to engage with each other in grappling with the school’s racist heritage. Finally, Dugan suggests that the conflict resolver should address the other conflicts nested within the relational and issue-specific level by engaging the boys in mediation.

ii) A broader perspective of nested conflicts

After reading Dugan’s model, my reflection is that there needs to be a more systemic and coherent approach to solve nested conflicts. More specifically, what is lacking is a frame of reference from which the conflict resolver, through appreciate inquiry (as discussed in class in that AI searches for what works in organizations, in family, in community…) may understand what has actually WORKED at the societal, organizational and individual level to address the complex and deeply rooted social, political, and economic conflicts to achieve social progress and well-being. Case in point, Dugan does not address specifically how racism has structurally been addressed successfully in societies.

This means that a conflict resolver can (and should) better analyze how to implement solutions at the sub-structural level in organizations and institutions (and therefore at the relational and issue-specific level at the individual level) if he/she understands how societies (at the structural level) can best achieve long-term peace, civility and prosperity. Our work at the foundation does exactly that through what our founder has called The Science of Human Action¹.

In the Model of the Science of Human Action (detailed above), Mr. Koch² details how he has applied the dimensions of the Science of Liberty (vision, virtues and talents, knowledge processes, decision rights and incentives) to his company through Market-Based Management (MBM) and made it the world’s largest privately-owned company, and how MBM has made him perform better at the individual level. Adapted to Dugan’s Model, Mr. Koch has been able to analyze the dimensions that make a society prosper at the structural level, and how these dimensions have successfully been transferred at the organizational (sub-structural) and individual (relational and issue-specific) level. In other words, how the societal dimensions nest the organizational and individual levels, and therefore by understanding how societies prosper we are able to understand how organizations and individuals prosper. I have developed a new model that merges Dugan´s theory with Koch´s model, called “A NESTED THEORY OF HUMAN ACTION”. It is included in APPENDIX 1.

iii) Dugan´s Nested Conflict Case through a New Reflective Practice Model

By envisioning a new way to solve nested conflicts at the structural (system and sub-system), relational and issue-specific level through the basic structures of the Science of Liberty, MBM and Individual Performance correspondently, we are able to analyze the conflict of the boys fighting at school over the symbolism of the confederate flag in a more systemic and coherent way:

A New Assessment:

To be as reflective as possible, I will use my experience facilitating a session about The Role of Academia in the Local Prince William Immigration Debate last semester, and relate it to the conflict of the boys fighting at school over the symbolism of the confederate flag (in Dugan’s article) through the structural lens of the model of the Science of Human Action.

Vision:

I agree with Dugan in that the school community cannot address all racial problems at the societal level and therefore should approach it at the organizational level. Thus, Dugan tries to address the conflict by suggesting that leaders (parents and community) meet with teachers to provide in-service training, and that classroom study material should be changed. But the question then is what kind of training and what kind of classroom study material should be changed?

Therefore, all parties involved should formalize themselves under some sort of organizational network and seek a common vision of what this training would entail and how the study material will be changed, determining which party has a comparative advantage at addressing their vision, and determine as well achievable and measurable goals of what success would look like.

I facilitated an immigration session structured in the format of a “community-based working group” where interested parties from George Mason expressed their concerns towards how immigration was being handled in the Prince William County community and what should be the University’s role in it. I would suggest for them to use a similar process, and that a first step for the parties to achieve a common vision is by following what Dukes calls an “exploratory” process, moreover a facilitation which opens the floor for an open public dialogue, more adept to inclusiveness, understanding and mutual agreement.

Virtue and Talents:

In the same facilitation process, parties should also establish common beneficial rules of just conduct and norms of behavior amongst them, so that public commitments assures parties will comply with agreements in the long-run. This means that parties should establish clear and transparent “ground rules”, which include what guiding principles should be enforced in the relationships between parents, teachers, community leaders, and children. In the immigration facilitation, we sought to determine the roles and responsibilities of the different groups addressing the immigration issue at GMU.

Knowledge Processes:

Dugan does a good job of suggesting processes that ensure that knowledge is optimally acquired, shared and applied, such as future invention at the organizational level and mediation at the individual level. It is imperative to ensure that these processes actually open free speech among all relevant and interested parties, in order to decentralize the power structures through a vertical system of decision-making.

In the case of the immigration issue, our network was not dominated by the facilitators or any department at GMU. We sought to establish an open space for the parties to express their concerns and establish shared responsibilities in addressing immigration in the future.

Decision Rights:

Agreements should clearly establish decision rights, meaning who is responsible for each task and how each is going to be accountable for it. For example: if a parent compromises to use its knowledge to change a classroom study material because he/she has specialized knowledge about it, this person should clearly determine how he/she will do it and how will he/she be able to measure its success.

Incentives:

Parties must establish an incentive-system that accompanies decision rights. Why? Parties need to establish not only how and what they are going to do, but also why they are willing to do it. Good intended plans need to be accompanied by incentives (monetary and non-monetary) to assure good results. Therefore, it is imperative to determine how each party is going to be rewarded according to the value they create for the organization. For example: if the parent who developed the new classroom study material is able to reduce racism in the school by an accorded measure such as the children attribute (by a survey or any other written account) a reduction of racial tension due to the new study material, the parent should be rewarded for the value created.

In the immigration issue, we did not establish decision rights or incentives, and thus the network has not continued its efforts.

3. Post-ICAR - Envisioning

The final phase of Salcedo´s “Mirror Theory for Conflict Resolvers” focuses on envisioning the future - Post-ICAR phase – by connecting analysis to intervention, answering the final questions:

• How do I see myself in 5-10 years? What are the “theories” of action and skills that I envision myself applying towards my professional life?

• How will I be able to connect analysis with intervention in my professional life?

• Finally, my practice of self-reflection.

Self-Reflective Appreciative Inquiry

Appreciative Inquiry is grounded in the theory of social constructionism. An understanding of social constructionism can give us a basis for the scientific research (much of it done in the current paradigm's pure science method) that points to the power of images and the way we use them to create our own realities and our own futures. Only through a solid grounding in these concepts will practitioners be able to co-create the organization change processes congruent with the needs of a particular client.

- Watkins and Mohr

The best way for me to represent how I envision myself in the future is by creating an initial business plan draft of how I see myself as a practitioner in 5-10 years.

Therefore, I see myself working in a non-profit organization structured in the following manner:

Center for Sustainable Governance

Executive Summary:

The Center of Sustainable Governance offers a formal networking service to members of the non-profit, for-profit and government sectors, providing the various actors with an opportunity to come together and resolve their common issues by reaching market based resolutions. While we would initially launch the organization as a non-profit organization, we would eventually look to reorganize it as a for-profit organization. At that stage, our clients, who are members from the aforementioned sectors, would be billed for our services.

An organization involved in formal networking service for the various actors involved in public policy, as well as Market-Based Management training, currently does not exist. However, the everlasting frustration experienced by those involved in public policy and recent cases demonstrate the need for such an organization. Though there is a natural tendency for these organizations to come together, our formal network would allow for this to occur at much lower transaction costs and would more efficiently align the different actors under a more uniform vision. A joint venture partnership between the Center of Sustainable Governance and the Charles G. Koch Charitable Foundation would ideally form the base of the organization.

The management team of the Center of Sustainable Governance—CSG—is headed by former Charles G. Koch Charitable Foundation former employee Alejandro Beeche, who has extensive market-based management training and brings to the table a broad spectrum of experience which will be greatly beneficial to the center, such as background in law, psychology, political economy, and conflict analysis and resolution.

Vision Statement:

The Center for Sustainable Governance – CSG – , is a non-profit organization committed to developing long-term sustainable governance by formalizing existing or developing networks of public policy leaders in the for-profit, non-profit and government sectors that are currently using or are willing to use market-based mechanisms to manage and solve public policy problems at the inter-organizational level. 

CSG carries out its vision by achieving the following Goals:

1. Benchmark and market for networks in which market-based mechanisms are currently used or could be used by leading individuals and/or organizations in the for-profit, non-profit and government sector to solve public policy problems;

2. Formalize, train and align members of the network in the philosophy of Market-Based Management (MBM)³

3. Facilitate understanding among the members of the network by using the tools of the MBM problem solving process framework⁴.

Guiding Principles: 

In achieving these goals, CSG follows the guiding principles of the Charles G. Koch Foundation (CGKF)⁵, presented under the MBM philosophy, as well as the following:

• Sustainable Governance: long-term peace, civility and prosperity through networking, management and problem-solving

• Networks:

  • Inclusiveness: Integrate as many possible stakeholders from all sectors of society into the networks

• Management:

  • Common Ground: align stakeholders under a common management philosophy

• Problem-solving

  • Collaboration: use problem-solving frameworks to achieve understanding among stakeholders

 Target Market: 

CSG fills a niche in the current market by crafting sustainable governance through formalizing inclusive networks of stakeholders in the public policy arena who are willing to align under a common management philosophy to collaborate amongst them to solve public policy problems.

SWOT analysis:

Strengths:

• No other organization currently provides services in the area of sustainable governance, particularly within the three sectors we focus our efforts.

• There already exists a set of institutional tools at the CGKF to (1) build MBM leadership and talent development, (2) MBM training and (3) MBM problem solving.

Weaknesses:

• Public Choice Concern: It will be difficult to draw a crowd with such conflicting incentives; however, we believe that an overall win-win desire to reach a collaboratively agreeable solution will motivate the various actors to not solely strive for zero-sum solutions.

Opportunities:

• There are presently a number of market-based organizations that specialize in the areas of leadership and talent development (Atlas Economic Research Foundation and Charles G. Koch Foundation), management (Charles G. Koch Foundation) and problem solving (Charles G. Koch Foundation and Mercatus) who would serve as natural partners.

• There are dispersed stakeholders in the public policy arena who have a common market-based vision but who don’t have the institutional capacity to formally align themselves to more efficiently solve public policy problems.

 Threats:

• There is a political decision-making process external to our organization (in Executive, Legislative and Judiciary government bodies) that may affect the decision-making process internally.

• Inclusiveness vs. Efficiency: There is a need to include as many relevant stakeholders as possible to achieve sustainability, which can threaten the possibilities to align parties under common goals.

Value Creation Strategy:

Theory of Social Change:⁶

Market-Based Management (MBM) and its tools (such as the MBM Problem Solving Process) were first systematized in the for-profit sector, noted by Charles G. Koch (2007) in that, "Market-Based Management built the world's largest private company"⁷. Then, it has been one of the main purposes of the Charles G. Koch Foundation to impart the systematization of this knowledge to non-profit organizations. Now, it is time to impart this knowledge on to government agencies, as well, if we are to advance social progress and well being by solving public policy problems at the inter-organizational level. Consequently, our objective is to analyze how the traditional paradigm of government as public administrator is shifting towards a new governance framework denominated "third-party governance", in which non-profit and for-profit stakeholders are solving public problems alongside government.

Accordingly, we believe this requires a renewed commitment on the part of the market-based public policy community to account for this new governance framework. Therefore, the new management model of problem solving in the public arena is taking place through these new governance networks, and ultimately it is these networks that should be the focal point of our new MBM model of sustainable governance. Notwithstanding, these networks are still not coherent systems under a concerted management design with common basic dimensions to enable them to solve public problems. As a result, new sustainable governance should come into effect to achieve these aims.

CSG STRUCTURE OF SOCIAL CHANGE:

To create value we consolidate the process under a common vision of MBM and reduce transaction costs

FINDING LEADERS IN PUBLIC POLICY

(In all sectors: for-profit, non-profit and govt.)

ALIGNING THROUGH MBM

IMPLEMENTING PUBLIC POLICY

THROUGH MBM PROBLEM-SOLVING PROCESSES

Operational Plan

Location: CSG will be strategically set-up its headquarters in the Washington DC Metropolitan Area.

Organizational Structure:

Networking: Leadership & Talent Development Team:

The Leadership & Talent Development Team will be formed by marketing specialists who benchmark and seek organizations and individuals in the for-profit, non-profit and government sectors with an understanding of market-based mechanisms to solve public policy problems, and who will ultimately create a network amongst them to achieve their goals. We will replicate the logistical work of the Leadership & Talent Development Team at the CGKF.

Management: The MBM Academy Training Team:

Training specialists in Market-Based Management integrate our Management Team. Our team will mainly use the training material in the Participants Guide of the MBM Academy and compliment it with the on-going training work gathered of the Koch Internship and Associate Programs.

Problem-Solving: The MBM Problem-Solving Process Team:

Our Problem Solving Team is integrated by facilitators specialized in Market-Based Management. Our team of facilitators will mainly use, to solve public policy problems at the inter-organizational level, the MBM Problem Solving 5-Step Process Tool, and complimentarily the MBM Decision-Making Model and other frameworks developed in the Conflict Resolution, Public Policy, and Third-Party Governance fields, as needed.

Stages of Implementation:

1^st Stage: Our first step is to recruit and develop talented leaders in the for-profit, non-profit and government sectors that are informally working together to solve public policy matters. Our Leadership & Talent Development Group will market for leaders who, in general terms, apply in their professional and personal lives the Guiding Principles of the CGKF, and who more specifically are willing to be a part of a formal network of public policy leaders to solve public policy problems through knowledge processes to find common visions, assign decision rights amongst them according to their virtues and talents and establish incentives according to the value they create for the network.

 2^nd Stage: Our second step is to train these leaders in Market-Based Management (MBM). We understand that each leader will still be a part of their original organizations, but it is our objective to formalize this once informal dynamic structure into a formal network under a common management framework. As a result, this new organization will establish itself by using knowledge processes to find a common vision, assign decision rights amongst them according to their virtues and talents, and establish incentives according to the value they create.

 3^rd Stage: Once the leaders are trained in MBM, our third step is to employ the MBM Problem Solving Process tool within the network to solve public policy problems. As well, public policy leaders will use the MBM problem-solving process tool to solve public policy problems through knowledge processes to find common visions, assign decision rights amongst them according to their virtues and talents and establish incentives according to the value they create

Conclusion

It is important to clarify that the way I envision Sustainable Governance being applied could be executed through MBM or any other management philosophy. The important thing is to structurally align parties by 1) first having a network, 2) second align parties under a common management philosophy, and 3) third use problem-solving processes in order to understand each other and be able to reach sustainable agreements.

References

Burton, John W., CONFLICT RESOLUTION AS A POLITICAL SYSTEM, Working Paper No. 1, Reprinted August, 1993

Charles G. Koch Charitable Foundation, accessed at: http://www.cgkfoundation.org/

Dugan, Máire A. 1996. A Nested Theory of Conflict. In A Leadership Journal: Women in Leadership – Sharing the Vision. Volume 1, pp. 9-19.

Koch, Charles G., The Science of Success, John Wiley and Sons, Inc., 2007

Salcedo, Adriana. 2008. Mirror Theory for Conflict Resolvers, Draft

Tan, Sui-Lan, and F.M. Moghaddam. 1999. Positioning in Intergroup Relations, Chapter 13, pp. 178-194. In Positioning Theory: Moral Contexts of Intentional Action. Harré, Rom and Luk van Langenhove, Eds. Oxford: Blackwell Publishers Ltd. ISBN: 0 631 21139 X.

Watkins, Jane Magruder and Bernard J. Mohr. 2001. Appreciative Inquiry: Change at the Speed of Imagination. San Francisco: Jossey-Bass/Pfeiffer. Chapter 2 “Appreciative Inquiry : History, Theory and Research.”

APPENDIX 1

A NESTED THEORY OF HUMAN ACTION

APPENDIX 2

1. Integrity - Conduct all affairs lawfully and with integrity. Honor donor intent.
   
   

2. Compliance - Strive for 10,000% compliance, with 100% of employees fully complying 100% of the time. Ensure excellence in tax, safety, and all other areas of compliance. Stop, think and ask.
   
   

3. Value Creation - Create real, long-term value by advancing the Science of Liberty. Understand, develop, and apply Market-Based Management^® to get superior results. Eliminate waste.
   
   

4. Principled Entrepreneurship™ - Demonstrate the sense of urgency, discipline, work ethic, accountability, judgment, initiative, economic and critical thinking skills, and the risk-taking mentality necessary to generate the greatest contribution to the Science of Liberty.
   
   

5. Customer Focus - Understand and develop relationships with those who can most effectively advance the Science of Liberty.
   
   

6. Knowledge - Seek and use the best knowledge in decisions and proactively share your knowledge while embracing a challenge process. Measure effectiveness in advancing the Science of Liberty wherever practical.
   
   

7. Change - Embrace change. Envision what could be, challenge the status quo, and drive creative destruction.
   
   

8. Humility - Practice humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create real value and achieve personal improvement.
   
   

9. Respect - Treat others with dignity, respect, honesty, and sensitivity. Appreciate the value of diversity. Encourage and practice teamwork.

10. Fulfillment - Produce results that create value to realize your full potential and find fulfillment in your work advancing social progress and well-being.

APPENDIX 3

MBM^® Problem Solving Process

MBM^® as a Problem Solving Framework

Proposed Definitions

• Problem: A disparity between “should” and “actual” where the cause is unknown, and it is important to find out the reason.

It is something that has already happened. Someone who can do something about it must feel strongly about this.

• Symptom: An event or characteristic that is caused by the existence of some other event.

Something you can see that is not desirable. Observable occurrence. Usually more than one. What do we see inside and around the organization (from our perspective and others) that is related to the problem?

• Root Cause: A key driver that is significantly responsible for the existence of “undesirable effects.” It is often in the design of the process, system or structure. There may be multiple causes, but usually only one or two root causes.

When are we at the Root Cause level? This is a difficult thing to know - our goal is to target solutions at the process, system or structure level. We are looking for aspects of the 5 Dimensions that can be modified that will significantly reduce or eliminate the problem.

• Overall: There is usually a linkage (cause and effect relationship) between the root cause(s) - symptom(s) - problem. Analyzing the linkage helps you determine what to do to fix the problem.

APPENDIX 4

• Vision: Our approach to Vision is based on concepts drawn from the Austrian School of Economics, such as uncertainty, experimental discovery, creative destruction, comparative advantage, and real value creation. Therefore, we constantly seek opportunities for which our capabilities will create the greatest value, and exit those that don’t prove out.

• Virtue & Talents: Virtue and talents covers what Koch seeks and expects in its employees. We have found that virtue is at least as important as talent. Accordingly, we believe long-term business success requires embracing certain core values. Our core values, what the Austrian economist and Nobel laureate Friedrich von Hayek called Rules of Just Conduct, are articulated in our Guiding Principles. Many companies have something similar, but they too often remain paper principles. What makes us different, if not unique, is that we take the difficult steps to ensure that these principles reach the hearts and minds and change the habits of every employee. We ensure that they affect every aspect of an employee’s career – whether he is hired and retained and how he is rewarded. We also evaluate all policies to ensure that they lead to a culture of initiative and responsibility rather than one of entitlement and unaccountability.

• Knowledge Processes: This dimension is rooted in the concept that market economies are highly effective at anticipating and communicating what people value and how best to satisfy those values. Similarly, we strive to help our people better anticipate and deliver what our customers value. We do this, first, by ensuring employees know how the Company creates value. Then, we ensure that our financial statements reflect economic reality. We measure profitability wherever practical. We encourage a strong challenge culture to provide discipline and stimulate thinking. We also give our people tools to help them create value. Having widespread economic thinking skills is vital to our long-term success, so we teach the application of economic thinking throughout the company.

• Decision Rights: Decision rights can be thought of as property rights within the firm. This dimension is based on the fact that, in a market economy, control of property (property rights) is constantly earned by people who make decisions that create value and lost by them when they no longer do so and incur losses. In our Company, decision-making authority is set, not automatically by hierarchy, but more by proven knowledge and comparative advantage. Employees develop a written statement of their Roles, Responsibilities, and Expectations so they know what they are responsible for and can be held accountable.

• Incentives: Finally, we attempt to replicate the way incentives work in the marketplace, in which entrepreneurs are rewarded by getting to keep a portion of the value they create in society. Likewise, our philosophy is to pay our people a portion of the value they create for the Company. Our emphasis is on long-term value. The key is a system in which employees can only promote their individual interest by promoting the general interest. We have found MBM^® to be extremely powerful, but also extremely difficult to implement. We must constantly fight the tendency toward form over substance. Learning to do so is a key part of making MBM work. We at Koch Industries owe a huge debt of gratitude to the giants who created the Austrian School of Economics. They developed principles that have enabled us to gain an understanding of how the world works. This understanding, applied within our businesses, enabled us to develop tools from these principles that helped us succeed beyond our wildest dreams. Koch’s success in applying market concepts internally may be instructive for other entrepreneurial organizations and for society as a whole.