Defense Companies in the Crosshairs
Increased Defense Spending, a Significant Future Growth Opportunity, and Government Scrutiny Raises Risks to Current Operations and Reputation
What's Happening
Earlier this week, President Trump signed an Executive Order directly targeting defense contractors that are behind schedule, over budget, or failing to invest adequately in domestic production. The order, published on January 7th, directs the Secretary of War to identify defense companies within 30 days that are not meeting Department of War expectations based on criteria such as contract underperformance and insufficient capital investment to support the needs of the Department of War. The investigation will specifically target companies that have engaged in stock buybacks and dividend payments during periods of underperformance. The White House has framed this as an effort to restore accountability and ensure taxpayer dollars are directed toward making Americans safer; not lining the pockets of investors. For defense companies that fail to meet the criteria, the scrutiny will be intense and repercussions with likely be swift.
What Does This Mean for Defense Companies
The order marks a notable shift in how the government is planning on treating contract underperformance, as issues may quickly escalate from program managers to the highest levels of government and litigated publicly. The risk to companies is not merely contractual—it’s reputational, financial, and operational. While implementation details are still emerging, it’s reasonable to assume the findings of the Department of War’s investigation will not remain behind closed doors. The administration has consistently relied on public pressure as an enforcement tool. Companies named publicly could quickly find themselves managing simultaneous crises with government customers, supply chain partners, investors, and other stakeholders.
Defense companies should immediately assess their operational, reputational, and financial risk exposure, and proactively develop and then action plans to mitigate these risks as quickly as possible. Key early actions include:
- Identify risk factors. Identify programs behind schedule or over budget and assess the factors driving delays or underperformance.
- Take corrective actions. Quickly address the factors driving delays or underperformance when possible, while preparing clear plans to remedy issues that may take longer. Rapid progress achieved and a well-documented path forward for longer-term corrective plans will likely need to be proactively communicated to all stakeholders.
- Prepare risk mitigation plans. Since companies identified by the Department of War as underperformers will likely become public, it is important to think through how to deal with political, media, or investor scrutiny .
- Proactively assess capital allocation strategy. Defense companies should consider whether their capital allocation strategies are misaligned with the growth priorities of the Department of War, particularly for companies that have a history of returning capital to shareholders. Any changes will need to be disclosed and communicated with investors quickly to reduce uncertainty and reset expectations.
In short, defense companies that are unprepared for public scrutiny and unable to determine and implement decisive corrective action risk being caught flatfooted.
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