Kochland Read online

  One of Winn’s most important experiments was designed to figure out how Koch Industries could defeat its opponents. Specifically, the experiment sought the best way to overcome an economic dilemma called the “holdout problem.”

  The holdout problem was commonly encountered by Koch’s pipeline division. Any given pipeline might travel hundreds or even thousands of miles in length, passing through land owned by hundreds of property owners. A pipeline company had to convince each of these property owners to sell their land (or at least grant a right-of-way through it) along the pipeline route. This was no easy thing. Landowners are inclined to make companies pay dearly for the privilege of crossing their property. The cost of assembling the property rights and leases for a new pipeline route can quickly balloon.I The real problem arose when a pipeline’s path ran across the property of a holdout, meaning that ornery breed of property owner who stubbornly refuses to sell. A single holdout had extraordinary power to slow down a pipeline project and raise costs. The most intransigent holdouts simply refused to sell at all. Winn’s experiment was designed to find a way to outmaneuver them.

  The master box, in this experiment, became the pipeline company. The students, in their warren of cubicles, became the property owners. The master box was preprogrammed with buying simulations. It sent price signals to the students, who chose to accept or deny the bids. The chief aim of the experiment, as Winn and a coauthor later wrote, was to “discourage hard bargaining among the sellers.”

  As the experiment got under way, the master box bombarded the students with different strategies. Roughly 140 students sat alone in their cubicles, unable to see their neighbors, watching the computers as slides flashed across the screens with various offers for their land. They clicked when the price was right. The master box ran its scenarios again and again, collecting data every time. Eventually, it gathered more than seven thousand observations about the students’ behavior.

  As a result, Koch Industries developed a very rich data set that would help the company understand the holdouts and how to beat them.

  * * *

  Steve Hammond, a holdout, worked in a crummy little office on the second floor of the Longshoremen’s union hall in Portland, just down the street from Georgia-Pacific’s warehouse. Hammond was as surprised as anyone when he won the election to become a union official in 2008. He was also the first to admit that he had no idea how he was going to fight Koch Industries. “I was in over my head,” he recalled.

  Hammond wasn’t alone. He was elected as the second in command of the local IBU chapter, a position that was known as the business agent. His new boss, the IBU regional director, was a guy named Gary Bucknum. Unfortunately, Bucknum had also just been elected to his position. He was a rookie who was also surprised to find himself as a union boss. Bucknum had run for office on a whim. He didn’t work for Georgia-Pacific but for an oil terminal company that was also represented by the IBU. When he won the election, Bucknum’s reaction was simple: “Oh, crap.”

  Bucknum ran for election because he’d grown disillusioned with the union leadership. The union seemed weak. Grievance filings went nowhere. Pay and benefits were lagging. Bucknum had a stubborn streak—he complained so much to his union leadership that he’d earned the nickname “Gary the Anarchist” among the IBU workers. In spite of his militant nickname, Bucknum didn’t look like a union thug. He was thin and had large, round eyes and thick glasses. He would not look out of place at a comic book convention. His union militancy seemed almost fussy—like the stubborn refusal of an accountant to accept a spreadsheet where the numbers didn’t add up. Fair was fair. The rules were the rules. When the IBU didn’t back the rules aggressively enough for Bucknum, he made a choice. “Rather than sit there and complain about it, you put yourself out there to try and do something.”

  By 2009, Hammond and Bucknum were working side by side. The IBU, while technically independent, rented the office space from the Longshoremen after the two unions became affiliated. A bright-blue IBU flag hung on the wall outside the office door. Just inside that door, there was a small meeting room with a table and chairs, some filing cabinets, and a coffee urn. On the other side of that was the cramped office where Bucknum and Hammond sat at a broad table with two computers. The big window behind them offered a sweeping view of Portland’s industrial underside: an electrical substation, a gravel parking lot pitted with large puddles, and a view of passing freight trains. This would be the IBU’s command post for a prolonged battle with Koch Industries.

  The battle began in 2010, when it was time to renegotiate the labor contract for Koch Industries’ two largest distribution centers on the Willamette River, the so-called Front Avenue warehouse and the Rivergate warehouse farther downriver. These were the locations where Hammond had worked since the 1980s. This was the place that he wanted so much to change. The contract negotiation would give him the chance to finally do it.

  The size of the task was monumental. The decline of working conditions for IBU employees was even more severe than many of them understood. This degradation was illustrated by an analysis of labor contracts at the warehouse complexes going back to the 1970s. The analysis shows that the warehouse workers became more productive every year, moving more containers with less labor. But even as they did so, they were growing poorer. In 1975, for example, warehouse workers like Hammond earned $6.90 an hour. By 2005, they were making $19.74 an hour, which sounded like a large increase. But when adjusted for inflation, the warehouse workers were actually earning $25.77 an hour back in 1975. Over three decades, in other words, Hammond and his coworkers had taken a 23 percent pay cut. And while they were earning less, their work became more onerous. The LMS didn’t give them time to talk or blow off steam. They logged the minutes they spent in the bathroom, had to explain the minutes they spent telling a joke.

  This economic stagnation wasn’t unique to the Georgia-Pacific warehouse workers. Between 1948 and 1973, American workers’ productivity rose steadily, and their wages rose with it. But in the early 1970s, as the age of volatility shook apart the New Deal policy infrastructure, the rise in productivity broke free from the wages that were paid for it. Productivity rose 74.4 percent from 1973 until 2013. Wages rose only 9.2 percent.

  Hammond and Bucknum were elected to somehow reverse the downward slide of the IBU workers. Their work began a few months before the labor contract officially expired in March of 2010. They had a matter of weeks to prepare before the official negotiations began. They didn’t know what to expect from Koch, but they knew that the IBU rank and file was prepared to hold out for a new and better deal.

  * * *

  Abel Winn closely scrutinized the data he developed at the MBM Center at Wichita State. Some clear patterns emerged early on in the experiment. In some ways, the data was discouraging—it seemed at first as if there was no easy way to overcome the holdout. The master box computer ran its various simulations, and, in case after case, it revealed that holdouts were hard to beat. One stubborn landowner could get a lot of money for their property—if they chose to stand firm.

  Over time, however, one promising strategy emerged from the tests. One simulation showed that a pipeline company might beat down the holdouts if it negotiated with all of the property owners at once, rather than buying one plot of land and then moving on to the next. This buying strategy seemed to inject a level of uncertainty into the sellers’ minds—each seller didn’t know if his or her neighbors would sell or not, which increased the pressure on them to do so.

  This strategy worked even better if the sellers were walled off from one another and didn’t know what price their neighbors were being offered. If the sellers couldn’t compare notes—in other words, they didn’t know how much the master box was willing to pay—they could be bargained down to a lower price.

  Winn realized that it was tough to pull off this kind of bargaining in the real world. Neighbors were always liable to talk. A company couldn’t manage to act in total secrecy. But it was best to
keep the sellers in the dark as much as possible.

  Or, as Winn and a coauthor would later summarize it in an academic paper based on the experiment: “In the field, truly simultaneously bargaining may be difficult or impossible to implement, but it may be approximated by limiting the flow of information between sellers.”

  In this way, bargaining against the holdout was not all that different from trading in commodities markets. The advantage went to the party that had the most knowledge and could best exploit any asymmetries of information.

  It was best to keep the holdouts guessing, and on the defensive.

  * * *

  When Hammond and Bucknum negotiated a labor contract, they usually sat down with the senior managers or owners of small, privately held firms. They typically hammered out a new labor contract in one or two months. Things would be different with Koch Industries.

  When it came time to negotiate, Hammond and Bucknum faced a team of trained labor negotiators whose full-time job was to travel around the country forging labor agreements at Georgia-Pacific facilities. Corporate labor negotiators learned their craft at some of the nation’s leading law firms and corporate consultancies. They trained to beat back unions for a living, a skill that was in high demand and well-compensated. The online job networking site LinkedIn, for example, listed “union avoidance” as a job skill that could be added to profiles and endorsed by colleagues. The industry of well-trained people who were paid to undermine union strength was booming, and the IBU leadership knew it.

  The IBU negotiating team, in contrast, consisted of rank-and-file warehouse workers. They were elected by their peers to sit on a bargaining committee of six members who would help Hammond and Bucknum. Some of the committee members had never negotiated a contract before. The lead negotiator on the 2010 committee was David Franzen, a longtime coworker of Hammond’s who had a hot temper and a reputation as a brawler.

  The IBU team had to learn the art of labor bargaining in a matter of weeks. They didn’t have the money to hire consultants, and it would have been a waste of time to search LinkedIn for people with skills like “labor organizing” or “solidarity.” Still, the IBU team did the best it could. They got help from two college professors at the University of Oregon, who offered training to local unions through a program called the Labor Education & Research Center, or LERC.

  When the IBU asked for help, the university dispatched Lynn Feekin, a soft-spoken woman with thick, gray hair who still had the midwestern accent from her many years of living in Wisconsin. Feekin had worked with unions in the Midwest before moving to Oregon to teach. She was joined by a fellow professor named Ron Teninty, a fast-talking expert on labor contracts who seemed to take glee in spending long hours poring over the minutiae of labor agreements.

  Feekin and Teninty arrived at the Longshoremen union hall and held a crash-course session for the IBU team in a large meeting room, just down the hallway from the IBU office. The team gathered around a large, collapsible table with rolling office chairs set around it. Behind the head of the table, the wall was adorned with black-and-white photos documenting the Longshoremen’s glory days of the past: portraits of past union presidents staring gloomily down, shots of the shipping yards and union hall meetings. Far down at the other end of the table, a big window looked out onto a wall of pine trees planted outside the union hall. The IBU had rented out the meeting room for the day, and it was going to be a long one.

  During the hours-long series of lectures, Feekin walked the IBU team through the formulaic legal process of contract negotiation. There was a set of prescribed steps for the negotiations, and a set of legal pitfalls that the negotiating committee should avoid. But Feekin’s primary goal was to teach the IBU negotiators a larger lesson. She wanted to teach them how to get the best contract possible when they found themselves up against trained negotiators. Her main message to them was not to count on their silver tongues. The back-and-forth in the bargaining room was not, in fact, as important as what happened outside the room. It was the power dynamic—the balance or the imbalance of leverage between employer and employee—that ultimately determined who would win or lose in the contract negotiations.

  The IBU team knew, intuitively, that these dynamics were not in their favor. Union membership in America declined virtually every year between 1975 and 2010. By the time the IBU was ready to take on Koch, only about 10 percent of wage and salary workers belonged to a union. This decline reversed the force of gravity in the labor market—now nonunionized workers were the most powerful force, stripping away pay and benefits from organized labor. When most of the workforce didn’t have job security or pay raises, the job security and pay raises won by unions seemed like an unfair privilege.

  Other cultural changes pushed unions into retreat. Back in the 1970s, it was difficult for a company to lock out workers and replace them during a strike. This was in part due to the strength of picket lines, but also because it was seen as unethical to replace workers who were on strike. This changed in 1981 when Ronald Reagan fired federal air traffic controllers who were on strike and replaced them. Reagan didn’t change any laws; he simply set an example. Afterward, the risks of a strike were far higher for workers.

  But Teninty and Feekin gave the IBU team hope. Teninty pointed out that no company wanted to face a protracted labor dispute. Teninty explained that the IBU must show Koch Industries that the union was strong and that its workers stood in solidarity.

  “Your job is to convince the employer that it’s better to settle with you than to fight with you,” Teninty remembers saying. “That’s, frankly, the name of the game. That’s how unions have worked forever.” This was inspiring talk for guys like David Franzen. He had been a forklift driver his entire adult life (outside of a three-year stint in the US Navy). His bosses and the LMS directed his every move at work. Now he was in a position to speak back to them. This sense of hope and inspiration would be hard for Franzen to recall, after everything that happened next. “That was a lot of beers ago,” he said. “A lot of bad memories.”

  * * *

  The first negotiating meeting was held at a Georgia-Pacific warehouse, inside a conference room upstairs. Bucknum was joined by Hammond and the six negotiators from the warehouse. The Koch team included a trio of managers from the warehouses, but they didn’t do much talking. The Koch effort was led by Don Barnard, a professional labor negotiator whom Georgia-Pacific had flown in from Atlanta. Barnard was polite and inscrutable. He said his hellos and got straight to work.

  Bucknum watched as Barnard set a thick three-ring binder on the negotiating table. If the IBU team had shown up ready for a fight, what they got instead was a bureaucratic process, one that was administered by the unsmiling—but utterly amiable and inoffensive—Don Barnard. He listened pleasantly as the IBU laid out its desires: The annual pay raises. The increases in health care. The IBU had even hired an outside expert to come up with new rules around the LMS software system that might make the workday a little less grinding on employees.

  Barnard took it all in and consulted the three-ring binder. Then he informed the IBU team what would be possible. For starters, he said, the IBU needed to drop the health care plan that it administered for employees and put the workers into Koch Industries’ health insurance plan. It would be necessary to do this before Barnard could even think about negotiating wage increases. The union pension plan was a problem as well. Koch Industries preferred that employees entered a 401(k) plan run by the company.

  Barnard agreed that changes should be made to the workplace rules: they needed to become far stricter. The absentee policy, in particular, needed adjustment. The warehouse workers were afforded far too many chances to miss work without being disciplined. Koch Industries proposed an absenteeism policy that would allow them to miss less than 1 percent of their total scheduled time.

  Neither Hammond, nor Bucknum, nor anyone else on the IBU team had experienced anything like this. Typically, the union asked for a 6 percent raise, and
the company countered with 3 percent. Now the union was asking for 5 percent and being offered an overhaul to the entire labor agreement in return.

  The proposal that the IBU abandon its existing health care plan was particularly offensive. Since the 1960s, the warehouse workers’ health care plan had been owned and operated by the IBU and administered through a health care trust. The union owned it, controlled it, and set the rules. When Koch Industries revealed the rules of its own health plan, it was apparent that they violated almost everything that the union stood for. Koch’s health plan used a so-called “cafeteria-style” membership, whereby members could pick and choose their levels of health care coverage. This meant that a young employee who was single and had no children might pay a monthly premium of $150. An older employee who had four children, on the other hand, might pay a monthly premium of $500. In the IBU trust plan, every member paid the same premium. The single employee paid $300. The father of four paid $300. It was an economic embodiment of the union’s solidarity. The Koch health plan would institutionalize division between the workers. The drivers were already competing against each other in the LMS rankings. Now it would be each worker for themselves in the health care plan.