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Blatantly Boasting War Profiteers

Profiteering execs don't usually brag about their windfalls from the 'war on terror' -- unless they're talking to potential investors.
 
 
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Like Sen. George "macaca" Allen in a crowd of white Virginia Republicans and Rep. Katherine "God chooses our rulers" Harris with a reporter for a Baptist newspaper, defense executives tend to let their hair down in conversations with investment analysts.

In their glossy annual reports, military contractors are typically modest about how much loot they've gotten from a bloody and increasingly unpopular "War on Terror." But read the transcript of virtually any Q&A session with Wall Street and the truth comes out. While millions are suffering from the human and economic costs of the Iraq war, the violence has been very good for the bottom lines of military contractors and their top executives.

Black Hawk up

"Obviously, military was a big bang for us in the post-September 11 period," crowed George David, CEO of United Technologies, in a meeting with analysts last December. UTC makes Black Hawk helicopters and fighter jet engines, along with civilian aircraft and elevators. David went on to boast that UTC had beaten all its competitors because the military side of its business had more than made up for a 25 percent drop in commercial aerospace revenues.

Not surprisingly, David's personal rewards haven't been too shabby either. Since 9/11, he has been by far the highest paid defense executive, hauling in a total of more than $200 million. David and other top defense executives are highlighted in a new report, "Executive Excess," by the Institute for Policy Studies and United for a Fair Economy ( PDF).

So confident is Mr. David of continued military largesse that he's biting the hand that feeds him. In a lawsuit that is the first of its kind, UTC is suing the Pentagon to block the public release of documents related to alleged quality control problems in its Black Hawk factories. The Bush administration, not exactly known for its openness, had agreed to make the documents public in response to a journalist's Freedom of Information Act request.

A pop for "Uncle Bucky"

"Obviously, we got a pop during the Iraq and Afghani thing," CEO Gerald Potthoff of Engineered Support Systems International candidly if indelicately told an investment publication last year. A big pop indeed. A series of war-related contracts for logistical services, some awarded on a no-bid basis, drove company earnings to record levels and set up executives for a lucrative sale of the company to another defense contractor, DRS Technologies, earlier this year.

Among the beneficiaries of that sale: President George W. Bush's uncle, William H. T. Bush, an ESSI director, who cleared $2.7 million in cash and stock. Known to the president as "Uncle Bucky," he claims he had nothing to do with the company's landing lucrative defense contracts.

The Securities and Exchange Commission is now investigating whether company officials went even further to jack up their war windfalls by manipulating the value of their stock options. In 2004, Potthoff's pay, including options gains, came to nearly $40 million.

Casualties = $$

Investors shouldn't trouble their little heads over the possibility of a U.S. troop withdrawal from Iraq, Health Net CEO Jay Gellert said in a conference call, since the military's own medical capacity will be stretched "into the foreseeable future" by the huge number of injured troops. That's reassuring for Health Net, which, thanks to Pentagon outsourcing, provides managed care services to as many as three million persons in the military and their families.

Another company spokesperson boasted of how war-time stress has turned its mental health services into a "fast-growing business."

The military's booming health care needs have sent CEO Gellert's personal fortunes soaring. He took home a total of more than $28 million during the past four years, compared to only $2.3 million during the four preceding years. That 1,134 percent increase is the biggest enjoyed by any defense executive.

Upbeat reports such as these have helped make Wall Street bullish on defense. The IPS/UFE study found that the top 34 military contractors had a 48 percent increase in their share prices between the end of 2000 and the end of 2005. By contrast, the S&P 500 dropped 5 percent during that period.

These stock gains have translated into big paydays for defense industry executives. The top 34 enjoyed a doubling of their compensation during the four years after 9/11.

Business grows. Stock price rises. CEO gets big reward. That's the American way, right?

Even during peacetime, there are strong arguments for broadening the definition of executive performance beyond the bottom line. Everyone, not just shareholders, has a real stake in how corporations are run and how executives are paid. Compensation should reward responsible leadership, including strong environmental performance and job creation, and not be so astronomical as to exacerbate the inequalities that undermine our democracy.

During times of war, there are even stronger arguments for pay restraint. For years, experts like management guru Peter Drucker have been advising against morale-killing pay gaps within companies. Imagine how it must feel to be risking your life every day on the front lines in Iraq, knowing that military contractors are getting grotesquely rich in the comfort of their executive suites? No wonder we're seeing the U.S. Marine Corps having to force their reservists back to the battlefield.

It's also no secret that defense executives tend to be well-connected politically. Why should we allow guys who play golf with top government officials to have personal profit motives for continuing the war -- or getting into new ones?

Congress could put an end to this by requiring that all defense contractors restrain executive pay to reasonable levels during wartime. This wouldn't need to be a fixed dollar cap. Procurement rules could instead deny defense contracts to companies that pay their top executives more than 20 times what their lowest-paid worker receives.

Current U.S. laws already deny government contracts to companies that discriminate against women and people of color. Why should we let our tax dollars subsidize war profiteering?

Sarah Anderson is a Fellow of the Institute for Policy Studies and a coauthor of the report "Executive Excess 2006: Defense and Oil Executives Cash in on Conflict," published by IPS and United for a Fair Economy.