There was, however, one significant obstacle standing in the path of Charles Koch’s plan. It was a labor union.
Workers at the Pine Bend refinery had been organized in a union since the 1950s. The union was deeply entrenched and powerful. No sooner had Charles Koch purchased the Pine Bend refinery than he learned that he could not control it. Charles Koch had almost total authority over Koch Industries, but his authority was hemmed in at the Pine Bend refinery. The union set the rules in Pine Bend, and the union set the wages. Over the years, the labor contracts in Pine Bend became so favorable to the employees that even some of the union members thought that it was a little excessive.
In the late 1960s, most CEOs considered powerful unions to be a fact of life. The New Deal included pro-union laws, passed in the 1930s, that made unions almost indomitable. It was a losing game to take on unions; their power was too great to challenge. Most companies chose to accommodate organized labor.
Charles Koch faced this same choice, and he chose to fight. The battle against organized labor at Pine Bend was the first to test Charles Koch’s resolve. His first move was to find the right commander for the conflict. Charles Koch found his man in the spring of 1971, when he attended an industry conference in California and met an oil industry engineer named Bernard Paulson.
Paulson was living in Corpus Christi at the time and managing an oil refinery for Coastal Oil & Gas. Paulson was instantly impressed with Charles Koch. Like so many people who met him, Paulson was first struck by Koch’s intelligence. Paulson had met a lot of impressive people in the business—self-made millionaires and wildcatters—but even when compared against such characters, Charles Koch stood apart. There was nothing of the wildcatter about Charles Koch. He was not a flamboyant man who needed to impress strangers. He was an engineer by temperament, a man who questioned more than he talked. Charles Koch also seemed taken with Paulson—the two men quickly hit it off and Koch asked Paulson if he’d like to get dinner. Paulson agreed, and they talked a long time over dinner that night. Koch described his new investment at Pine Bend. The deal made perfect sense to Paulson. They talked about the oil refining business in-depth. Refining is the kind of hyper-complicated business that only two engineers could discuss in detail over dinner, and that’s what the two of them did.
After Paulson returned to Texas, Charles Koch called him. They talked more, and soon Koch offered him a job. It seemed to Paulson that he had one job qualification that was especially important: he knew how to handle unions. When Paulson was hired to run the Coastal Oil refinery in Texas, the company had narrowly avoided a vote to unionize its employees. Paulson took over the business, and a few years later there was another union vote. He worked hard to convince his employees that union membership only hurt them, and he bargained hard against unionized firms that tried to get contracting work at the refinery. When still another union vote occurred under his management, the union lost by a five-to-one margin. Paulson had proved that he was adept at keeping unions out of an oil refinery, no matter how hard they might fight to get in. During their conversations Charles Koch told Paulson how toxic the union was in Pine Bend. Koch Industries needed to regain control. Breaking the union would be a key part of Paulson’s job.
Paulson was, in many ways, the perfect man for this job. He came from tough circumstances—he was raised on a small farm in Michigan and educated in a one-room schoolhouse. He wasn’t sentimental about business, and he knew how to stick out a hard situation. One of Paulson’s heroes was General George S. Patton, the military hero who was best known for his rousing speeches that gave soldiers the courage they needed to head into battle. Patton had famously told his recruits: “Americans, traditionally, love to fight. All real Americans love the sting of battle. . . . Americans love a winner and will not tolerate a loser. Americans play to win all the time.” Paulson yearned to be a leader who had the kind of inner strength that Patton possessed.
In 1971, Paulson joined Koch Industries. He was transferred immediately to Pine Bend, where he took control as manager of the refinery.
He immediately began, in his words, “to straighten it out.”
CHAPTER 3
* * *
The War for Pine Bend
(1971–1973)
Public policy concerning labor unions has, in little more than a century, moved from one extreme to the other. . . . [Unions] have become the only important instance in which governments signally fail in their prime function: the prevention of coercion and violence.
—Friedrich A. Hayek, 1960
Married life ain’t hard when you got a union card,
A union man has a happy life when he’s got a union wife.
Oh, you can’t scare me, I’m sticking to the union,
I’m sticking to the union ’til the day I die.
—Lyrics of the folk song “Union Maid” by Woody Guthrie, 1940
Bernard Paulson arrived for his first day on the job at the Pine Bend refinery in 1971.
As he drove to work, Paulson traveled down two-lane country roads that passed through a sparsely populated landscape of rolling corn and soybean fields. The refinery is located near the tiny town of Rosemount, Minnesota, about twenty miles south of Minneapolis and Saint Paul. Good-paying jobs were scarce in this place. The local kids were raised on farms, and when they graduated from public high school—if they graduated from high school—they didn’t have many job options other than farming. There was a smattering of industrial plants throughout the area: an ammonia plant near Rosemount and a paper plant across the river in Wisconsin, for example. But these jobs didn’t pay a lot. The best source of jobs throughout the 1960s was at the Great Northern Oil Company, which had just recently been renamed the Koch Refining Company. Jobs at the refinery were sought after. They were union jobs, with union benefits. A guy could get hired at the refinery right out of high school and soon make the kind of steady wage that supported a mortgage and a family.
The refinery played a towering role in the local economy, and it dominated the landscape as well. As Paulson drove nearer to the refinery, he would have been able to see this for himself. The refinery became visible on the horizon many miles before Paulson arrived there, and it was an arresting sight. After passing many miles of rolling hills, small farmhouses, tractors, and grain silos, the refinery came into view and looked very much like the skyline of a small city. But there was something alien, even ominous about this skyline. The towers in the skyline didn’t have any windows. They spewed clouds of white steam and gas, and some of them, on the south end of the refinery, spewed columns of flame into the sky. The gargantuan torches burned so steadily that airline pilots used them as a landmark when they approached the local airport.
To reach the refinery gates, Paulson drove along a highway that ran roughly parallel to the Mississippi River, which was hidden behind a dense stand of pine and oak trees. Great Northern was smart to locate the refinery where it did, near a big, wide spot in the Mississippi called Pine Bend. In this part of Minnesota, rivers are not scenic waterways but industrial transit tools. The river afforded passage for giant barges toting mountains of grain or coal, or, when they were loaded at Koch Refining, crude oil and asphalt. The barges took these commodities down south at a much cheaper rate than either rail or road, at least when the river wasn’t frozen over during Minnesota’s brutal winters.
Paulson pulled off the highway onto an access road that led to the refinery’s front gate. At the base of the giant towers, there was a squat office building made of beige bricks, just north of a parking lot where Paulson steered his car. This was the refinery’s main office, where Paulson would work. As he drove into the lot, he noticed that the parking spots were marked by signs with employees’ names on them. The spots were apparently reserved for individuals, and he saw that the best parking spot, the one nearest the sidewalk to the office door, had his name on it. Paulson had arrived early, as he always did, and most of the parking spots were empty. He pulled in to the best spot—the one
marked with his name—and turned off his car.
Paulson walked down the sidewalk and into the double glass doors of the office building. One of the first things he told his assistant that first day was to get rid of the reserved parking spots.
“I said: ‘If you want the best spot, you get here early.’ ”
* * *
Bernard Paulson often wore cowboy boots to work. They were a parting gift from his employees back in Texas, and he wore them with pride because they reminded him how well he’d gotten along with employees in the past. He considered himself a good leader, and a fair leader, even if he was tough.
He saw very quickly that Charles Koch had been correct. Paulson’s leadership skills were needed, and needed desperately, at the Pine Bend refinery. Paulson saw this when he started doing the rounds at Pine Bend. Unlike most managers, he came to work on Saturdays. He arrived early on the weekends, just like he did on the weekdays, and he walked the grounds to inspect operations firsthand. What he saw often appalled him. He came across employees who were sleeping. He stopped and watched them sleep next to the large machines where superheated petrochemicals passed through pipes under extreme pressure—enough pressure to cause an explosion if a problem went undetected for too long. Paulson woke up the employees, and he didn’t do it gently.
Sleeping on the job in an oil refinery is not like sleeping on the job at a car factory. The Pine Bend refinery covered seven hundred acres, and it was a landscape of winding pipes, giant tanks, and looming towers with walkways between them. This was a dangerous landscape, a massive circulatory system full of inflammable liquids under high pressure. The refinery was divided into different “units,” or different machines that each had a unique function. Each unit, in turn, had a team of operators who oversaw it. There were usually three operators per unit, men who would sit for long shifts—sometimes ten-hour shifts, sometimes longer—babysitting the complex and dangerous chemical reactions happening inside the machinery. If everything went well, it was a mundane job. If things didn’t go well, it could quickly turn into a disaster.
Oil arrived at the refinery by pipeline, and it was stored in giant, white tanks. This crude oil was then moved into the giant “boiler” units, which were giant furnaces that heated the oil to around 700 degrees Fahrenheit. Running the boilers is a dangerous and vital job. When a young man named Lowell Payton was hired at the Pine Bend refinery, he noticed that there was a tall, thick wall around the boiler. He asked what that wall was for, and he remembers his boss telling him: “That’s so if the boiler blows up, your body won’t be found fifty miles away.”
After the oil is heated up, it undergoes a series of chemical reactions that seem to border on alchemy. Oil looks like nothing more than shiny black goo, but it contains a remarkably diverse set of chemicals. The heat unwinds the chemical chains that kept these riches together and breaks free a rainbow of compounds like gasoline, butane, kerosene, propane, diesel fuel, and an almost countless array of petrochemicals that are used to make everything from clothing to lip balm and plastic building material. This chemical unwinding happens inside the most visible part of an oil refinery: the giant towers. The towers are called fractionators because they break the crude oil into fractions, or its component parts. The heated crude oil is pumped into the bottom of the towers, where it is vaporized. The oil vapors float up through the fractionating tower like smoke through a chimney. Along the way, the different components of oil are captured on a series of trays inside the tower. One tray separates out kerosene, another gasoline, and so on. Vaporized crude oil is like the apocryphal buffalo that the Plains Indians used to hunt: every piece is used, nothing is left to waste. One of the biggest skills for oil refining is figuring out how to squeeze every possible drop of every possible petrochemical out of the crude without wasting anything to evaporation.
Paulson knew this business very well, and he was obsessed with running the refinery as efficiently and profitably as possible. But he wanted order among the men who worked in the units. Paulson was tall and imposing, and when he toured the refinery grounds, he walked like a navy admiral inspecting the deck of a battleship. He was often trailed by two assistants, and he wasn’t shy about barking orders or using crude language.
This might have been intimidating, or even frightening, to many employees. But the refinery employees were not afraid of Bernard Paulson. They were not afraid of anybody, in fact. They had the union to back them.
Employees at Pine Bend were organized under the auspices of a powerful labor union called the Oil, Chemical and Atomic Workers Union—or the OCAW, for short. They belonged to a local chapter called the OCAW Local 6-662.
Men took an oath when they joined the OCAW. They raised their right hand and they pledged allegiance to the union. More specifically, they pledged their allegiance to their fellow union brothers and sisters. For these men, it was union first, company second. The OCAW men gathered for meetings in rented halls, where they held votes on union contracts and discussed their problems with certain supervisors or managers. They drank regularly at a little bar south of the refinery called the House of Coates, which was built to look like a log cabin or large hunting lodge.
The union president, Joseph Hammerschmidt, was known for drinking heroic quantities of alcohol at the House of Coates and then talking at very high volume about the refinery’s management and what he planned to do to that management. Hammerschmidt was a union man down to the level of his DNA; he was a “hard case,” as his fellow workers called him. Everybody at the refinery knew that it was Hammerschmidt who led contract negotiations with a nearby company called Red Wing Pottery, which also employed OCAW members. During the negotiations, Hammerschmidt refused to believe that Red Wing Pottery was really in the financial trouble it claimed to be in. Even when Red Wing showed him the company books, Hammerschmidt refused to believe the books were genuine. The OCAW couldn’t reach a contract agreement with Red Wing, and Red Wing’s owners were forced into bankruptcy. Hammerschmidt seemed proud of this fact. It was like a scalp on his wall. No damn company was going to boss around the OCAW.
Hammerschmidt carried himself like a provincial governor while he belted back shots of whiskey with his union friends at the House of Coates, and he had reason to act like that. Like a governor, Hammerschmidt had real power. The OCAW was a strong union in itself, but maybe even more important was the fact that the OCAW was located in a heavily unionized state. This was important: the OCAW didn’t just draw power from itself; it drew power from an interlocking web of loyalty oaths with other unions in the state. The police were unionized, the truckers were unionized, the teachers were unionized, the newspaper reporters were unionized, the chemical workers were unionized. The OCAW men were loyal to their own union, and the union was, in turn, loyal to other unions in the state. If one union went on strike, the other unions would support it. Men like Hammerschmidt could put a company out of business if they felt like it. Red Wing Pottery was proof of that. And the OCAW wasn’t shy about using this power to its members’ benefit.
During the 1950s and 1960s, the OCAW negotiated a framework of rules at the Pine Bend refinery that did far more than provide higher pay and benefits for the union members. The rules gave the OCAW a large measure of control over the refinery’s operations.
Paulson saw the fruits of this arrangement shortly after he took over as the plant manager.
When an OCAW employee found a broken valve while inspecting the refinery, for example, that employee didn’t fix the valve. Instead, he sat down and radioed for help. The union had broken the workforce down by specialty skills—or by “trades,” to use the union terminology—and the men only performed work that fell within their trade. When an employee found the broken valve, he called someone whose trade was insulation to come and unwrap the insulation around the pipe. Then he’d call a guy from the electrical trade to check the wiring or shut off electricity to the problem area. And these employees who came to help fix the valve had to drive a truck to the site
(the refinery covered seven hundred acres, after all), and there was a union rule that prohibited any union employee from riding in a vehicle with a supervisor. To satisfy this rule, the refinery had a union guy whose job was to sit in a pickup truck and ferry people around the refinery. As the different tradesmen were called on the radio, the pickup truck driver went to collect them—first the insulation specialist, then the electrician—and take them down to the problem site. The truck driver job was one of the cushier positions that the union carved out for its members. Only after the different tradesmen were called, and were ferried down to the site, and did their work one by one, only then could the leaky valve be fixed.
There were also rules for overtime pay that even the OCAW men found amusingly absurd. One rule stated that a shift worker needed to be given at least two hours of notice if he was going to be asked to stay late and work. If he didn’t get that notice, then he received a bonus payment worth two hours’ work plus time and a half. Thanks to this rule, it was often hard to locate anyone at the refinery around two in the afternoon, exactly two hours before the four o’clock shift change came around. The control rooms were empty at two. Then everyone suddenly reappeared at their desks at two fifteen—available to stay late and work overtime if asked, but in need of the bonus payment to do it.
Even longtime union members recognized that these rules were too good to be reasonable. “It’s crazy—I don’t know how they got what they got. The union had management by the balls,” recalled Ernie Tromberg, who was hired at the refinery in 1956 when he was still in his early twenties.
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