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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.

| Mon Nov. 21, 2011 7:00 AM EST

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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