Inside the Corporate Plan to Occupy the Pentagon

Behind the growing push to slash soldiers’ pensions and other military costs is a little-known advisory group—stacked with Wall Street executives.

<a href="">floatinglemons</a>/Graphic Leftovers

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With time fast running out for the so-called deficit supercommittee, the mammoth amount of government money spent on the military has become a prime target in Washington. But the main focus isn’t on big-ticket weapons projects or expensive wars—it’s on retirement benefits for the roughly 17 percent of soldiers, Marines, sailors, and airmen who have served 20 years or more in uniform. Currently the total cost of their benefits is about $50 billion a year.

Cuts to military pensions are “the kind of thing you have to consider,” Defense Secretary Leon Panetta said in September. When President Obama unveiled his $3 trillion debt reduction plan the same month, it called GIs’ benefits “out of line” with private employee retirement plans, saying the system was “designed for a different era of work.” When Congress held a hearing on military retirements in October, Rep. Austin Scott (R-Ga.) promoted a cheaper 401(k)-style plan that would slash existing benefits for many troops. “I see nothing wrong with them being able to choose a different retirement plan,” he said.

These ideas may sound like a bold new approach in an urgent moment—but in fact, the push for pension cuts and other corporate “reforms” at the Pentagon originates from an obscure advisory panel that has existed for a decade: the Defense Business Board. Its 21 members know little about military affairs, but they are rich in Wall Street experience, including with some of the biggest companies implicated in the 2008 financial meltdown. They are investment bank CEOs and CFOs, outsourcing experts, and layoff specialists who promote a corporate agenda of “behavior change” and “business solutions” in the military bureaucracy. The board proposes not only to slash and privatize military pensions, but also to have the Pentagon invest in oil futures, boost pay for its executives and political appointees, and make it easier for them to fire rank-and-file employees while scaling back those workers’ collective-bargaining rights.

Indeed, “this sounds like what’s being done now around the country with the public unions,” affirms Charles Tiefer, a University of Baltimore law professor and defense contracting watchdog who’s testified to Congress about the board’s recommendations. The board was launched in 2001 by then Defense Secretary Donald Rumsfeld, who famously wanted to downsize the military and corporatize its management system. The essential reason it exists, Tiefer says, is so that “a pro-business attitude—especially on personnel issues—remains intact” inside the Pentagon.

While the board’s ideas have enjoyed support on Capitol Hill over the years, it has made only a modest impact on policy. Now, the board’s proposals—which they say represent “a culture of savings“—are gaining currency as politicians look to cut federal spending any way they can.

When the federal debt ceiling crisis was escalating in July, a report (PDF) from the board argued that paying soldiers and their families for 60 years after 20 years of service was “unsustainable,” adding, “The ‘Military Retirement’ sacred cow is increasingly unaffordable.” The board called for scrapping the system in favor of a mandatory 401(k)-style account whose savings could “be invested in higher yielding equities and bonds.”

Over the years, the board has recommended a series of “cost-saving” measures that would channel large amounts of money to private-sector businesses.

The board’s proposal would set aside 16.5 percent of a troop’s base salary in a savings account to be invested in the markets. Assuming a modest annual return—hardly a safe assumption these days—the plan would still provide retired soldiers with far less money than what they are entitled to now. Critics say the proposal would also make it harder for the military to retain its most senior, most knowledgeable members. As Joe Davis, public affairs director for Veterans of Foreign Wars, put it in August: “Where will our future military leaders come from if people leave the service early because they’re losing retirement money?”

It’s a plan that even Rep. Joe Wilson (R-S.C.), chairman of the House subcommittee on military personnel (who’s known for shouting “You lie!” at President Obama during his 2009 health care address to Congress), has called “radical…a very controversial proposal with immediate negative consequences for morale and combat readiness.”

The head of the Defense Business Board’s pensions task force, Richard Spencer, served as a Marine aviator in the 1970s. But more recently, he was the CFO of a web-based commodities and derivatives exchange that is under investigation in Europe for its trading in credit default swaps just before financial markets imploded in 2008. Prior to that job, Spencer worked “on Wall Street for 15 years where his responsibilities centered on investment banking services focusing on strategic advisory services and capital markets underwriting,” according to his current biography on the Defense Business Board’s website.

A cached version of Spencer’s bio identifies the firms where he previously served: Goldman Sachs, Bear Stearns, and Merrill Lynch, three of the biggest Wall Street banks involved in the housing and credit collapse. Joining him in the board’s vote to gut military pensions were the managing director of Accenture’s defense industry portfolio; the chairman of HR consultant Convergys, “a leading outsourcing company”; the CEO of the Bank of Virginia; several high-profile investment bankers; and two Sears executives.

Over the years, the board has recommended a series of “cost-saving” measures that would channel large amounts of money to private-sector businesses. Its members have consistently advocated for the Pentagon to engage in fuel hedging—investing in oil futures to lock in a supposedly low cost for their long-term fuel needs. The board’s fuel-hedging push was led by member Denis Bovin, who was a top investment banker for Bear Stearns until the firm went bust in late 2008. After consulting with energy giants BP and Shell, among others, Bovin’s team concluded that the Department of Defense should invest based on rising oil prices, even while he conceded that “as a whole, DoD is not highly exposed to fuel price volatility.” Such deals, he noted, would incur investment transaction costs of “$10 to $250 million per year.” Even though no federal agency currently engages in fuel hedging, the board tasked Bovin with another study on oil futures last January.

The Defense Business Board was born in another American era, on September 10, 2001. That morning, Rumsfeld rose before a crowd of Pentagon workers to declare war on “an adversary that poses a threat, a serious threat” to the nation: “It disrupts the defense of the United States and places the lives of men and women in uniform at risk.” He was speaking not of Russia or China or even international terrorism, but of the military’s own bureaucracy. He announced: “We’re establishing a Defense Business Board to tap outside expertise as we move to improve the department’s business practices.”

“This business, the MBA thing, it’s for managers, not for warfighters.”

“Some of those ideas go way back,” says Thomas Christie, a career defense analyst for multiple administrations who was called out of retirement by Rumsfeld in 2001 to help improve the Pentagon’s weapons-buying process. Rumsfeld, Christie says, “just had a suspicion about the whole bureaucracy; he didn’t trust it.” But Rumsfeld did trust private enterprise, and the September 11 attacks only temporarily sidetracked his transformation efforts. By March 2002, the Defense Business Board held its first meeting, tasked with (among other things) achieving “a cost effective military” with private-sector employment practices and providing “civilian human resources faster, at a reduced cost and by taking advantage of the power of automated tools.”

He couldn’t have asked for a better group to help corporatize the Pentagon: Its original 19 members included the vice chairman of Bear Stearns; an ex-CEO of AOL; executives from PricewaterhouseCoopers and Deutsche Bank; a Goldman Sachs board member who would later land in hot water for a $1.7 million purchase of the company’s stock; and Richard Perle, nicknamed the “Prince of Darkness,” who gained notoriety as a Bush administration cheerleader for the Iraq War.

The leader of the board’s supply chain task force was Gus Pagonis, a senior VP for Sears who, as an Army general had managed supply and logistics for the Gulf War, and whose son would hold a similar position in the second Iraq War. As the head of its “change management” task force, the board chose Dana Mead, a layoff king who titled his autobiography High Standards, Hard Choices: A CEO’s Journey of Courage, Risk, and Change. As CEO of the Navy’s largest shipbuilding yard in Virginia, he’d assured workers in 1994 that there’d be no layoffs; two years later, Mead had canned nearly 10,000 of the 29,000-person workforce and boasted to the New York Times that the yard was “now as efficient as any shipyard in the world.” As a board member of Pfizer several years later, Mead would help secure a $83 million golden parachute for the pharmaceutical giant’s outgoing CEO.

Mead’s job was to help ease the Pentagon’s transition to a corporate culture. In the board’s view, one way to accomplish that was to start creating boardroom titles for military leaders; it recommended that Congress create a chief management officer, or CMO, to double-check admirals’ and generals’ business decisions. Congress approved, although the job remains open, with only a deputy CMO currently serving.

The Defense Business Board also champions corporate tactics on personnel issues. It calls for more and better-paid senior executives, while depriving middle- and lower-level Defense Department employees of basic job security. “We believe the DoD should have a leadership corps composed of senior executives, managers, professionals, and political appointees drawn from the best of America’s diverse population,” the board argued in 2002 in a “Human Capital Transformation” report. They proposed boosting the pay for upper-management positions in the department from $130,000 to $225,000. “The gap between what they can earn in service to their country and employment in the private sector is too great a sacrifice for them and their families,” the board said. “No high-performing private organization aspiring to upgrade its management talent would permit such a situation to exist; neither should DoD.”

“There was a left side and a right side to the defense establishment when Obama came in. The DBB represents the continuity of the right side.”

The board further argued that individual Pentagon bosses should have the right to fire their subordinates without involving the workers’ union, the American Federation of Government Employees: “Under the existing system of employment, individuals have rights not to be terminated without due process safeguards. But, in an organization charged with protecting the nation’s interests and safety, no individual has the right to be maintained in his or her position.”

In 2004, Rumsfeld got Congress to approve the National Security Personnel System (NSPS), a new HR policy that offered workers performance bonuses while giving supervisors more hiring and firing authority. The change “severely crimped the power of the unions to handle grievances and bargain collectively,” says Tiefer, the University of Baltimore law professor.

A 2008 investigation by Federal Times found that the first round of bonus pay under the new policy had been riddled with iniquities. And a May 2009 investigation by the Pentagon itself found that employees previously making below $60,000 ended up making less under the policy—while workers with salaries above $80,000 ended up making more. In summer 2009, Congress killed funding for the National Security Personnel System, and the Obama administration considered ending it outright. But that August, after the pay system had lost virtually all of its defenders, the Defense Business Board issued a report saying it should be saved: “[T]he performance management system that has been created is achieving alignment of employee goals with organizational goals.”

Union leaders called the board’s opinion bunk. “A steady stream of DOD managers and supervisors have told us that NSPS is unfair, dishonest and effective,” says John Gage, president of the American Federation of Government Employees. “We know that those under the NSPS system suffer from low moral and lower productivity.”

The Defense Business Board also believed that one path to transforming military culture was to recruit more business-school graduates; they could “bring new ideas, energy and private sector management techniques to the Department of Defense,” according to a board report. The board discussed the possibility of changing federal pay rules to hire MBAs at a senior pay grade, even with no military or workplace experience. One board member, David Walker, pointed out an obvious complication of hiring so many business school alums to run the military bureaucracy: “Most MBA candidates are not motivated by public service. This makes long-term retention very difficult.”

Nevertheless, the board studied how companies like Bear Stearns, Goldman, General Electric, and McKinsey recruited MBAs, then recommended that the Pentagon start offering business school grads senior positions starting at $70,820 a year (which normally required two years of relevant experience). Rumsfeld loved the idea, but according to notes from a 2006 Defense Business Board meeting, an unnamed congressional opponent kept the MBA recruitment plan from being adopted.

If you wanted to search for ways to make the Pentagon’s ponderous bureaucracy more efficient—an ambition nobody would disagree with—”why wouldn’t you have a balanced task force?” Tiefer asks. A pro-business perspective could of course be a valuable component of such a task force, if it were balanced with alternative viewpoints. “If you want to make reforms, you have to offer some of the sweet along with the bitter,” he says. But when it comes to the Pentagon’s key advisory panel, “that’s not what Rumsfeld set up, and it’s what Obama didn’t change.”

The Defense Business Board operates under a renewable two-year charter; it was last renewed in early 2010. As the deficit battle consumes Washington, it appears to be capitalizing on an opportunity to exert more influence. “There was a left side and a right side to the defense establishment when Obama came in,” Tiefer says. “The DBB represents the continuity of the right side.”

If the congressional supercommittee fails to come up with a deficit plan, it will trigger $600 billion in non-optional cuts to the military budget. Some in Congress have already vowed to never let that happen. But either way, Pentagon funds will be on the chopping block, and the designs of the Defense Business Board may be seen as more useful than ever. Even Christie, the conservative defense analyst, is wary of that. “We look askance at all that [corporate influence], particularly with respect to the uniformed military,” he says. “This business, the MBA thing, it’s for managers, not for warfighters.”

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