World Changers

When Herb Kohler Jr. walked away from his family’s business, there was no reason to expect him back. It was, after all, the 1960s, and Kohler was in his late teens and in full rebellion. He grew his hair long, stopped communicating with his father, and even joined the circus at the age of seventeen, where he learned how to walk a high wire sixty feet above ground and how to be a catcher on the flying trapeze.

He became a poet, dropping out of Yale University after a distracted year, only to enroll as a theater major at Knox College in Illinois, a liberal arts school founded by social reformers. In the ultimate act of rebellion for the offspring of a father who ran the country’s most famous maker of sinks, faucets, and bathtubs, Kohler even developed an aversion to washing. One of his friends dubbed him “the first of the great unwashed.”

In short, he did everything he could to separate himself from his father and the family business back in Sheboygan, Wisconsin. “My father and I were not close at that time at all because I was in a period of rebellion against everything he stood for,” recalls Kohler. “He had prescribed an educational path for me and one that led directly into the company, and I decided I had to discover what this person Herb Kohler Jr. was all about. His path was a little too suffocating, so I went off and did a lot of crazy things.”

His father was a formidable man. He had been on the Yale wrestling team and had also been an officer in the U.S. Cavalry during the First World War. When he gulped back a glass of beer or wine with friends, his customary toast was a loud and firm “Mud in your eye, soldier.” “He was very competitive,” remembers Kohler. “He was strong. But underneath a number of layers, he was a very sweet man. He was two generations ahead of me so it was not easy for us to have a close relationship.”

Nonetheless, the road back began unexpectedly when Kohler tried out for the part of the samurai in the Japanese play Rashomon. “When I looked at the casting list, I found out I was chosen to play the notorious bandit who kills the samurai and rapes his wife,” remembers Kohler. “I was the rogue and the renegade. I asked the director why and she said: ‘Herb, for heaven sakes, it’s typecasting.’”

By the time the play closed, Kohler had fallen in love with his director, and married her in 1961. “Then, I realized I better sober up. I reapplied to Yale and in I went to major in business administration. It was a total about-face.” But the rift with his father remained unresolved. “I didn’t go out of my way to let him know where I was or to visit him or see him or anything of the sort.”

It wasn’t until six months after Kohler picked up his Yale diploma that he received a phone call from his father, who asked him to come back and work in the family business. Junior insisted that if he did, he would have to be treated like any other employee. A promise was made (and kept), and the young Kohler finally went back to Sheboygan to work for the family business founded by his grandfather in 1873. “It was the last thing [my father] expected, but he must have been thrilled,” says Kohler.

He started as a research and development technician, then a schedule coordinator, a supervisor of packing and shipping in the warehouse, until finally becoming manager of factory systems. It was while he was still in this job that the company, then doing some $150 million in sales, fell into a major leadership crisis in July of 1968. The nonfamily president died of a heart attack at the age of fifty-six. One week later, Kohler’s father passed away at the age of seventy-six from a heart attack as well.

“In a matter of one week, the company was left without its two senior executives,” recalls Kohler. “For a small privately owned company, it was a severe blow.” His father had run the company from 1937 to 1968. Two weeks after the funeral, three remaining executives sat down with the younger Kohler for an emergency meeting to decide what to do. When the session broke up, the company’s vice president of labor relations was named CEO and chairman, while the company’s treasurer was named president. Kohler became vice president of operations. “On that day, the man to whom I reported in the morning reported to me in the afternoon.”

Kohler was twenty-nine years old. “Obviously, I made a lot of mistakes, but it was the greatest learning experience of my entire life. I absolutely loved it.” Within a year and a half, he was made executive vice president over manufacturing, engineering, and sales. In 1972, Kohler was elected chairman and chief executive. Today, Kohler is one of the largest privately held companies in the United States, with annual revenues of more than $5 billion.

The dominant player in things like commodes, sinks, showers, and tubs, Kohler also makes furniture under the brand name Baker and McGuire, plumbing, kitchens, engines, and generators. All told, there are more than twenty companies on four other continents. The grandson has built ten plants alone in China, where 90 percent of the output stays in China and where Kohler is recognized by the government as one of only five companies to be called “a famous brand.” “If someone copies us in China today,” Kohler says with a laugh, “we take out our certificate, show it to the magistrate, and you would be amazed at how many copy cases we can get resolved real quick.”

Though Kohler Junior is obviously not the founder, he has so completely put his own stamp on the company that it is synonymous with him. Under his leadership, the company has nurtured an entrepreneurial culture that has made it an innovation champion. And at the age of seventy-two, he’s still in charge as chairman and chief executive. His only son, David, is president and chief operating officer. His two daughters, Laura and Rachel, are both company executives. We spoke just two weeks after he took his entire family on a five-day white-water rafting trip on the Salmon River in Idaho.

Herb, you were a hippie who has been called the “reluctant prince of porcelain.” I can only imagine how happy your father was to have you return home and work in the company he loved. But I wonder, how did your rebellious behavior inform your later business judgments and the way you led the company over all these years?

It gave me much more confidence in understanding who I was. When I came back I felt that I could reach far in anything I explored. And I had a strong curiosity for many things. My period of rebellion really helped me to develop a sense of confidence and this ability to reach and discover new things.

You’re one of only two entrepreneurs in this book who actually wasn’t the founder of the company. But you’re clearly one of the world’s great entrepreneurs, given how you’ve led the family business over all these years. Do you actually consider yourself a “professional manager” or an “entrepreneur”?

It’s really a mix. I consider myself a professional in the sense that we maintain the disciplines of a publicly held company, but I think of myself as an entrepreneur because we have maintained the freedoms of a privately owned company. We really emphasize entrepreneurial pursuits. Our first guiding principle is to live on the leading edge of design and technology in product and process all the time. With thirty thousand people that becomes a little more difficult, but it is possible and to a large extent we are able to get it done.

But I see this mix. We never talk about quarters at Kohler. We don’t even have quarterly reports. We have bimonthly board meetings. And we take probably a little more time investigating projects than some publicly held competitors, but when we are ready to go on a project we do it very thoroughly. And when we invest it’s for the long term.

Never. Never. Never. Never. In my lifetime, we never will. And I don’t think in my kids’ lifetimes, they will. Privacy is an amazing benefit. Not because you are concealing anything. Internally we are very transparent. Concealment is not the issue. It’s a whole different set of rules. As a private company, you can sustain a project in periods of adversity that our competitors would quit. We keep going most of the time. Our thinking in managing and operations is at least for a year, not the quarter. At the top, we’re thinking as long as five to ten years out. And 50 percent of my life is very different because we’re not public. I can think more creatively instead of trying to appease twenty-two-year-old graduates on Wall Street.

We have five guiding principles. I mentioned the first one. The second is to invest an average of 90 percent of our earnings each year back into the business. Only 10 percent or less goes to the shareholders. That’s the juice that has allowed us to invest at a proper rate. Accordingly, we have a record during my tenure as CEO of 10.7 percent average compound growth in book value a year. The S&P average over that same time is 7.5 percent. That difference I attribute to the fundamental differences between managing a public versus a private company.

Another is to maintain a single level of quality in all product categories regardless of price point. Along with the principle to be at the leading edge of design and process, if you practice these two in particular it has an enormous impact on your reputation. Maintaining a single level of quality is really important. We have price points in most of our product and service categories that go from the lower end of the mid-market to the higher end of the mass market. So that’s a very broad range of prices. Our prices differ because of differences in function, material, and design detail. But we try to never let it vary in quality. The quality is always impeccable. Our ability to maintain that and at the same time stay on the leading edge and never copy is what really does the job.

And we have two other guiding principles that are very important. The next one is to provide a consistently quick delivery to the end user. That ability across a variety of product lines becomes more and more important. The last one is to employ service-minded people who enjoy solving problems, are passionate about their work and the business, who take ownership and are accountable. We put these five principles together and they have really enabled us to make progress on a continuing basis on our mission to contribute to a higher level of gracious living for those touched by our products and services.

Sell more than something costs. For us, it’s those guiding principles. That’s what we know. That’s what we live. And that is what has produced an extraordinary record of growth over a long period of time.

You also have a measurement tool of sorts called the “vitality index” to ensure that the company is innovating a significant portion of its product mix every year. Can you explain how that works?

Absolutely. Vitality plays no small part in our success. We take the sales volume of all new products developed and sold in the last three years and divide by the total sales of any business you are trying to measure. For any manufacturing business in a fashion-oriented industry, we really drive to maintain a long-term average of not less than 20 percent per year. If you do that, you should be very successful. If you don’t, you’re looking around for reasons why you’re not doing it. Lo and behold, it’s because you haven’t developed enough new product.

Every successful year makes it harder the next year. But if you can consistently deliver on the vitality index or come reasonably close and then combine it with that business of living on the leading edge, now you’ve got a real powerful combination in establishing a reputation—and that’s what has made Kohler tick. That’s the secret sauce. Then, when you reinvest 90 percent of your profits back into the company, that really keeps the energy going.

We measure it for each business and that’s one of the few things people have to report out on. In addition to the vitality index, I’m also a gatekeeper. I review many of the new product endeavors before they go to market and that causes a lively interchange about why we’re doing something or why we’re not pursuing something else. Interestingly, though, I am a person who doesn’t believe in vision.

Obviously, I have some strong ideas about what I want to get done, but if I were to prescribe a vision for each of our major businesses I feel I would restrict how they develop. So we strongly encourage development in product processes within the confines of the business. I don’t want to narrow it or alter it. I don’t want to wipe out significant alternatives. We have a pretty thriving development community as a result.

No. Fundamentally, people are measured on their overall management of the operation, and bonuses are paid on the basis of stakeholder return on investment. That stakeholder return is heavily influenced by their success on the vitality index.

You always have some nonbelievers who try and contain their costs by not investing in the R&D as they should, and you always have to be on the alert for that. But the people who are investing and producing for five or six years in a row find that their stars just continually rise. They separate themselves from the pack. Their competitors simply can’t keep up. When you employ those first two guiding principles and have a strong vitality index, competitors don’t have a prayer.

One of the very first was one of the most exciting things for me. I made a decision and I guess it was because of my background in factory systems. I wanted to pull the company out of the arcane world of manual processes in making cast iron. If we were going to drive this material long into the future, I had to find some automated processes that would enable this and produce a much more consistent level of quality. I hunted around and finally found this little firm in Herman, Pennsylvania, and together we designed the largest molding system ever created in the world. It could produce more tonnage per hour than anything currently available, and we built this thing for bathtubs, kitchen sinks, and lavatories on this machine.

Just after I had made the decision to invest we went out for a public debenture which had a greater than 10 percent interest rate on it (this was in late 1972). At the time, the executive vice president of American Standard, which was number one in the industry, gave a speech in which he said cast iron is an obsolete material. It’s too heavy. It’s made with manual processes. It’s time that it be totally replaced with synthetics.

And here I am having put the company on the line as the new CEO. I am right on the edge of my seat. Talk about betting the store. That was it. Damn, if it wasn’t that decision and our persistence in pursuing it—it took five years to get it to work properly—but by the time we did in 1978 it was the primary factor that allowed Kohler to surpass American Standard in the industry. It was an amazing experience.

When you take your first steps, you are always a little bit anxious. We had quite a history of exporting around the world. We were selling into China in the 1930s before the revolution. It was absolutely amazing. One day in the seventies, I had an amazing experience of taking my family to an interior city of China. We visited a building that was used as the Communist headquarters. It was a house designed by a French Vietnamese architect in the thirties and this house had Kohler plumbing from top to bottom.

In the early nineties, we made our first investments in China. We have ten plants today and are building a plant a year. We have a compound growth rate of over 28 percent for the past ten years, and this year we’ll run at 32 percent.

Many entrepreneurs are often faced with the decision to have family members involved in the business. In your case, all three of your own children work for the company in very prominent roles. Your son, David, became president and COO in 2009. Your oldest daughter, Laura, is vice president of human resources, and your youngest daughter, Rachel, is president of the company’s furniture business as well as a boutique plumbing business. Has it been a difficult transition to bring your children into the business?

My father said that any Kohler could work in the company, but to get a promotion you had to prove yourself about twice as much as anyone else. That weeded out a lot of Kohlers. I never talked to my children about the company as they were growing up, unless they inquired. I didn’t want them to go through the same rebellion as I did.

None, because we never talked about the business. They could pick schools of their own choosing and do their own thing. Two went to Duke; one went to Princeton. One went for a master’s in fine arts at Catholic University in Washington; one got an MBA at the University of Chicago and the other got an MBA at Kellogg. The first developed her own theater company. The second one became a consultant for Booz Allen and a very good one. And the third one became a manager at Dayton Hudson in Minneapolis. He was the boy.

When I happened to have a job that might fit their interests and skills I would call them up out of the blue and tell them about the job and the pay level. One by one, each came into the business.

The family knows that whenever there is a conflict between the interests of the family and the company, the interests of the company come first. All three of them are quite different, but all three are clear leaders in their fields. And yet for some reason or another a couple of years ago, the girls independently decided that the boy was to be their candidate as my successor. I sort of balked at that initially, but finally accepted their judgment. He has been on a pretty good learning curve.

I’ll tell him to live our core competencies and follow our guiding principles. We have four competencies in this company and we ask everyone in management down to the foreman level and on up to become somewhat expert in them. The first is to build trust. The second is to set a high standard of performance for yourself personally and for your team—and especially before someone else comes along and tries to do it for you. The third core competency is continuous improvement, and we do mean continuous. We say thank you very much for what you did yesterday, but today is a new day. And the fourth one is to always focus on the end customer, his or her needs and requirements. Yes, your immediate customer, the trade, is important, but you really have to deliver and improve the quality of life for the end customer.