Time to Divest From the War Machine; Drones First?

On January 12, 2011, the investment world thrilled to the announcement that ITT Corporation, one of the top ten US military contractors, will disengage from its “defense” business as part of a planned split into three new companies. The move points to ITT as a possible canary in the coal mine for military contractors, and a signal to those of us who want to stop our current wars that the time is right to mount a divestment campaign on the war industry.

David Wildman, executive secretary for Human Rights and Racial Justice for the Board of Global Ministries of the United Methodist Church, suggests that a defense divestment campaign might first focus on companies responsible for making killer drones, such as the Reaper, now being used in Afghanistan, Pakistan, Iraq and Yemen.

Money Musical Chairs

ITT is affected by an increasingly uncertain climate for military contractors, sketched out in specific detail on January 6, 2011, when Defense Secretary Robert Gates announced the details of plans to cut Pentagon spending by $78 billion over the next five years, a move initially signaled as early as August 2010. While the cut represents only a fraction of the Pentagon budget, projected at $553 billion for 2012, individual contractors still stand to suffer significant losses in its wake.

In addition, $100 billion will be cut from specific defense programs over five years. The money will be “reinvested” in other military projects, such as building more Reaper attack drones, “a long-range nuclear-capable penetrating bomber” that can be flown as a drone or by pilots and additional drones for the Army and Navy. More money will also go to the Army, Gates said, “to provide improved suicide prevention and substance abuse counseling for soldiers.”

The rejuggling of $100 billion will mark both the end of many existing military contracts and the beginning of new contracts; it indicates a time of shifting fortunes within the war industry.

Of particular concern to military contractors as the reductions play out is the Obama administration’s policy decision to reduce the amount of outsourcing, or privatization, of government work, such as maintenance of military equipment. On January 20, 2001, Aerospace Industries Association (AIA) vice president Richard Sylvester told Bloomberg News, “The outsourcing rules are just one of the battles that Defense contractors, including Lockheed Martin, Boeing and Northrup Grumman are fighting that may affect their profits.” AIA is a major lobbyist for military contractors and has lobbied for continuation of funding of the Afghanistan and Iraq wars.

Sylvester also told Bloomberg that Pentagon cost-saving measures “could affect contractors’ profit margins if they are prohibited from passing on to the government some costs that are now allowed.”

The 30-30 Rule

Steven Loranger, chairman, president and CEO of ITT, said in a June 2009 interview for BigThink.com:

I think the best business advice I ever received came to me from Dan Burnham, who was my boss, was the group president at Allied Signal, and later rose to be the chairman of Raytheon…. Dan told me, many, many years ago, that one way to stay ahead is anticipate as a leader. And he always said, no matter what action you take, take 30 percent more action, 30 percent sooner than you think you need to. So Dan called it the 30-30 rule…. And I follow that advice.

ITT’s Announced Subdivision to Finish by Close of 2011

The first of the three new companies will retain the name ITT and will focus on the aspect of the current business that involves, among other things, the manufacture of pumps, electronic interconnections and controls for industries, including oil and gas, as well as suspension and braking components for trains and automobiles. The revenue from this unit is expected to rise to $2.8 billion in 2011. The second company, not yet named, will focus on water and wastewater treatment, pumps and water distribution. Revenue in this sector is expected to reach $3.6 billion in 2011. The third company, also still unnamed, will handle what is now ITT’s military contracting business. ITT projects sales for this unit will decline, from a high of $6.1 billion in 2009 down to $5.8 billion in 2011.

Comments by Loranger and stock analysts suggest that the split was prompted partly by the desire to jettison ITT’s military business because it is a drag on ITT’s stock price. During an ITT quarterly review conference call on October 12, 2010 transcribed by SeekingAlpha.com, JP Morgan Chase analyst C. Stephen Tusa said:

It’s been a relatively frustrating year from a stock performance perspective [for ITT], and obviously, the elephant in the room is the defense business. I think a lot of people out there continue to believe that this business is just facing massive secular headwinds over the next couple of years, and you see it in all defense multiples. And sure enough all the defense companies this quarter like General Dynamics missing its revenue guidance, but the margins are better than expected…. I’m just wondering at what point you get frustrated with the [Wall] street view that just seems like no matter how much you explain the diversity and growth potential of this defense business it just doesn’t seem to me that you’re going to be able to get out of this [stock price] rut over the next year or so. So I’m just curious as to what level of frustration you guys have over there in the board room?

Loranger gamely defended his defense business, saying that the Pentagon intends to maintain funding for “the intelligence piece of control, communications, surveillance and electronic capability, which as you know is the bulk of where we play … so the market segment where we’re playing, we think, is actually going to be slightly positive.”

Denise Ramos, ITT’s chief financial officer, also disclosed on the call that ITT is facing the problem of other military contractors protesting the loss of Pentagon contracts to ITT: “We’re seeing an increase in protest activities from incumbents, especially for those large, multi-year contracts. These protests may delay the recognition of orders in revenue and complicate our ability to forecast outcomes,” said Ramos.

“And lastly,” said Ramos, “we believe that customers [the military] may reduce funding levels and frequencies in response to current budgetary pressures.”

The October 2010 conference call did not prepare stock analysts, however, for the January 2011 announcement that ITT would opt to subdivide.

From War to Water

On the January 12 conference call announcing the split-up, transcribed by Thomson Reuters, several stock analysts offered surprised praise. “Brilliant move in my opinion,” said Jeff Sprague of Vertical Research Partners. Gautam Khanna of Cowen Group echoed Sprague: “Congratulations. Sounds like a very smart strategic move.”

Among the analysts on the call, it was Tusa who asked most directly what sped ITT’s decision to subdivide, particularly since, less than a year earlier, the company’s management was discussing the addition of another business “leg” to the company:

It just seems like quite a flip in a six-month period, even shorter than the year that’s been talked about on this conference call. I’m not sure what other additional color you can give around the timing, and I’m sorry to nitpick around the timing. It’s just, that’s a relatively short time period to go to, kind of to the nuclear option here.

“These conversations about strategy are ongoing,” answered Loranger, who added that, “I think it’s all soaked in that we expect the defense segment to be somewhat muted or slow for some time.” He also noted that sovereign solvency, debt and credit issues in the US and Europe were concerns for ITT’s commercial business, but it was not clear whether he meant for all units or for the commercial portion of the defense unit only.

ITT declined to make Loranger available for an interview. Several of ITT’s board members did not return Truthout’s calls for comment, while others declined to comment when they were reached.

Loranger has chosen to be the executive chairman of the new water company that will be created in the split-up. In a 2010 article published on The Huffington Post, the executive wrote, “Simply put, the world is running out of water … less than 1 percent of the world’s water is safe to drink.”

Perhaps Loranger also felt social pressure to get out of the war business.

On October 23, 2010, 45 protesters marched through Loranger’s hometown of Greenwich, Connecticut, and into his neighborhood and labeled him a war profiteer. They called on him to stop ITT’s manufacture of bomb release mechanisms for Reaper drones and to work to end the current wars. The protesters carried a replica of a drone and placards calling for Loranger to “Use Your Power for Peace and Not War.” The next day’s Greenwich Time newspaper noted the rally on its front page and carried an article entitled, “Peaceniks Target Greenwich Neighborhood of ‘War Profiteer.'”

ITT shareholders will receive stock in all three new companies when the subdivision is complete.

ITT stock rose 16.5 percent, reaching $61.50, on the day ITT’s planned split was announced, marking its highest share price since September 2008. It has since dropped back several dollars.

The “Fiduciary Responsibility” Trap

Although ITT’s decision to subdivide is a sign of slow or no growth for major war contractors, it does not necessarily indicate that investment fund managers are likely to agree to calls to drop stocks in companies profiting from the current wars. Indeed, many investment managers appear reluctant to sell stocks based on social concerns because they believe that this kind of investment decision can jeopardize income and therefore violate what is commonly termed their “fiduciary responsibility.”

For example, said a June 2010 US Government Accountability Office (GAO) report on how investment managers have responded to laws requiring divestment in firms doing business in Sudan:

Our survey results demonstrate that state [investment] fund managers, when expressing concerns about fiduciary responsibility, focused on the impact that divestment might have on a fund’s returns and administrative costs. Respondents who divested and those who did not frequently cited fiduciary responsibility as a concern. Specifically, 17 out of 25 fund managers [or 59 percent] who had divested or frozen their Sudan-related assets, or planned to do so, said they were concerned to a moderate or large extent that “it would be difficult to divest while ensuring that fiduciary trust requirements were not breached and my office/state was not vulnerable to lawsuits.”

But the report went on to say that, “Although fiduciary responsibility was the primary concern for state fund managers in considering divestment, only a few managers responded that they took advantage of applicable state laws or policy provisions” that would allow them to opt out of divestment.

It would be hard to imagine that the fund managers were immune to video reports of atrocities in Sudan or the widespread public outrage these reports generated.

The report found that, “Since 2006, state treasurers and public pension fund managers have divested or frozen about $3.5 billion in assets primarily related to Sudan in response to their states’ laws and policies.”

Can’t Hear You

States’ and private investment fund managers’ ultimate acceptance of investment sanctions against the government of Sudan may be a result not only of the public outcry over Sudan, but also of the growing movement toward what is termed “socially responsible investing (SRI).” The 2010 Report on Socially Responsible Investing Trends in the United States, prepared by the Social Investment Forum (SIF) Foundation, finds that: “At the start of 2010, professionally managed assets following SRI strategies stood at $3.07 trillion, a rise of more than 380 percent, from $639 billion in 1995 [the first year of forum reporting]…. Over the same period, the broader universe of assets under professional management increased only 260 percent from $7 trillion to $25.2 trillion.”

The SIF Foundation report found concerns about Sudan affected $446 billion in assets being handled by money managers such as mutual funds, private equity and hedge funds. The next-largest asset category subject to social concerns in investing decisions was tobacco, at $295 billion, followed by alcohol, at $161 billion. Environmental and military concerns were tied for fourth and fifth place, at $101 billion.

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The report showed the same pattern in college and university endowment funds:

Colleges and universities have provided very broad support to the movement for divestment from the Sudan, with nearly $219 billion in assets affected, and educational institutions continue to avoid investing nearly $147 billion in tobacco-related companies…. Human rights issues explicitly affect less than $14 billion in endowment assets (excluding Sudan), and criteria related to defense or weapons affect only $6 billion.

The report found that, in large part due to Sudan divestment legislation, public employee pension and retirement funds and other publicly controlled funds had assets of nearly $1.1 trillion withheld from Sudan investment. The second-largest banned category for public funds was “terrorism,” banning investment in countries identified as state sponsors of terrorism and affecting assets worth about $600 billion; this category was followed by investments related to concerns surrounding: Iran, affecting $445 billion; the environment, affecting $416 billion; and human rights, affecting $415 billion.

Concern about investment in war is apparently not a significant worry to public fund managers, as the report found. “Other values-based … issues, such as restrictions related to gambling, defense and weapons, alcohol or pornography affect far fewer public plans and a much lower percentage of institutional assets,” it found.

Fifty-two percent of the managers of public funds responding to SIF’s survey cited regulations or legislative mandates as the primary reason that they incorporated concerns about companies’ environmental, social or governance practices (or ESG) into their investment decisions.

Meg Voorhes, research director for the Social Investment Forum, said that the overwhelming interest in divesting from Sudan as compared to interest in divestment from weapons manufacturing, “has to do with demand” – that is, demand by investors to disengage from Sudan. The fund managers, she said, “maybe aren’t hearing that demand” in relation to weapons stocks.

Eighty-five percent of managers of private funds who responded to the survey said their primary reason for incorporating ESG into their investment decisions was “client demand.”

Voorhes said that religious institutions have been the earliest investors to divest weapons stocks.

The SIF report notes that, “Religious investors from Jewish, Christian and Islamic faiths and many indigenous cultures have long married ethical values and financial decisions, giving careful consideration to the way economic actions affected others around them and shunning investments that violated their traditions’ core beliefs.”

The report found that tobacco was the leading investment concern for the surveyed fund managers working for faith-based institutions, affecting $38 billion in assets. Defense and weapons bans came in second, affecting more than $30.5 billion in assets.

“Moral Decision”

The Presbyterian Church USA, or PC(USA), adopted a military-related divestment policy in 1982 and has set criteria that ban it from investing in 14 military-related businesses.

Bill Somplatsky-Jarman, the PC(USA) associate for mission responsibility through investment, said that his church is not a historic “peace church” in that, “We believe in some form of military presence.” However, he said, the amount of money going to the US military remains a key issue. The proscription of five of the largest military contractors – Lockheed-Martin, Boeing, Northrup Grumman, General Dynamics and Raytheon – will continue, according to the church divestment statement, “until such time as the United States is no longer among the top ten nations ranked according to per capita military expenditures.”

Another group of military contractors are banned by the PC(USA) because they depend on the Pentagon for more than 50 percent of their sales over three years. ITT is not included in this list because its military sales had not exceeded 50 percent of its revenue for three years, but the military-related spin-off of its new subdivided company will be.

Somplatsky-Jarman said that the church’s investment fund managers have found that they can observe the investment restrictions and still make money for the church.

He said that the PC(USA) has had “some conversations” with ITT, asking that the firm divulge the names of countries to whom it sells weapons because of the church’s concerns about human rights and foreign military sales. He said that ITT did not want to provide the information although they were working on improving the language of their human rights policy.

Somplatsky-Jarman said that the church had not raised the issue of providing weapons for the Afghan war with ITT, but that this may be included in future discussions about supplying weapons in “conflict zones” where they could be used to perpetrate human rights violations.

Somplatsky-Jarman noted that other religious bodies set an even lower percentage allowance for military business when formulating investment restrictions. Among these institutions is the United Methodist Church.

The United Methodist Church’s General Board of Pension and Health Benefits maintains a “Failed/Ineligible Investment List” that bans investment in 97 US companies because of their military work and/or production of firearms. Twenty-five foreign firms are so banned.

The church will not hold a company’s stock if more than 10 percent of its income is generated by sales to the military or from firearms.

Wildman said that divestment in war-related stocks for his church “is seen as a moral decision and not a financial decision.” He said the church’s investment managers have agreed that “over the long haul,” divestment in military contractors has had “negligible impact on return.”

Wildman said the church may rethink its 10-percent filter in consideration of companies such as Hewlett-Packard, which makes parts essential for certain weapons systems, but whose military sales are less than 10 percent of the company’s total revenue. If a company used slave labor in “only” nine percent of its business, Wildman asked, would there not still be reason for concern? “A Boeing plane without computer parts won’t be so deadly,” he said.

In 2010, DefenseSystems.com listed Hewlett-Packard as the 13th largest Pentagon contractor, with military sales of $1.589 billion in 2009. Its net revenue for fiscal year 2009 was over $114 billion.

Wildman also recalled that land mines generated divestment enthusiasm. Now, he suggested, drone manufacture might be a divestment target that would be a “strategic entry point” to open the way for broader divestment of war stocks.

Externalizing the Downside

Drones, Wildman said, are “externalizing any of the downside to war,” including the fact that Reaper drone pilots remain out of harm’s way from bases in the United States while they conduct attacks of Afghans and Pakistanis. According to the Air Force, the drones are flown by pilots at Creech Air Force Base (AFB) in Nevada and Holloman AFB in New Mexico.

The drones reduce risks not only for combat pilots but also for ground troops, who may be spared entering some combat areas because drones are used for attack.

A Reaper drone costs $13.4 million, compared to an F-15E Strike Eagle at $31 million, according to the US Air Force. The Reaper can be armed with Hellfire missiles and laser-guided, 500-pound bombs.

The drone attacks appear to affect mostly civilians in countries where the US is fighting resistance movements.

David Kilcullen and Andrew McDonald Exum, both noted US specialists in “counterinsurgency,” wrote in a May 2009 New York Times op-ed that it appeared possible that for every “militant” killed in drone strikes in Pakistan, 50 civilians died, “a hit rate of 2 percent – hardly ‘precision.'”

They noted that the US has disputed these kinds of figures, but they pointed out that “every one of these dead noncombatants represents an alienated family, a new desire for revenge, and more recruits for a militant movement that has grown exponentially even as drone strikes have increased.”

They called for a moratorium on drone strikes in Pakistan, but, in September 2010, The New York Times reported that:

the CIA has launched 20 attacks with armed drone aircraft thus far in September, the most ever during a single month, and more than twice the number in a typical month. This expanded air campaign comes as top officials are racing to stem the rise of American casualties before the Obama administration’s comprehensive review of Afghanistan strategy set for December.

Almost Human

Civilian deaths result in part from the drone’s use of Hellfire missiles and bombs that can and do kill indiscriminately whether they are fired from drones or from manned aircraft. But civilians also suffer from apparent limitations in a drone’s ability to identify who is being targeted. There seems to be no substitute for human eyes and human judgment on the ground.

For example, as reported by Robert Reid in a May 29, 2010 Huffington Post article, US military investigators “found that ‘inaccurate and unprofessional’ reporting by US operators of a Predator drone was responsible for a missile strike that killed 23 Afghan civilians in February [2010].” The Predator is a cousin of the Reaper that uses similar radar and sensing equipment.

The deaths occurred when a crew flying a Predator from Creech AFB spotted a convoy of three vehicles moving along a road near where US and Afghan troops were following resistance fighters. The drone crew called for a helicopter attack on the vehicles.

“After the first salvo,” Reid writes, “the helicopter crews stopped firing because they saw brightly colored clothing in the convoy – a strong indication that women were present. A video shot from the drone saw women and children present.”

According to the Huffington report, US spokesperson Rear Adm. Gregory Smith said the only people the drone operators could see in the convoy before ordering the helicopter attack were in the back of a pickup truck, and that the operators should have reported the possibility of civilians in the two cars in the convoy. “They did not report the ambiguity of what they were seeing,” Smith said. “They weren’t clearly seeing a heavily armed threat.”

The investigation report noted that commanders did not report “ample evidence” of civilian casualties for almost 12 hours after the killings while waiting for confirmation of what had happened. Four US officers received reprimands.

The report is also stunning in its implications when one considers that, as noted by Mary Ellen O’Connell in an article for The American Society of International Law, “Current drone computer programs merely advise human operators on the decision to launch an attack. In the future, drone computers may be programmed to launch attacks on the basis of pre-set parameters without the need for a human being to make the real time decision.”

Technology’s limitations are an obvious concern with regard to the routine use of drones to assassinate people identified as enemies not only without charging them or taking them to court, but also without identifying them on a face-to-face basis. Drones make this type of killing much easier and more common than it would be if it had to be carried out by humans on the ground – not to mention that these types of assassinations are illegal in the first place.

In addition, by removing humans from direct involvement in combat, technology shields not only the soldiers themselves from the risk of physical harm, but also shields their political and military commanders from the possibility that if soldiers were carrying out and witnessing this type of violence firsthand, it might make them less willing to fight and kill.

In his 2009 book “Wired for War,” P.W. Singer draws a picture of the future robotic war could hold:

The public back home will be further distanced from the human cost of war, perhaps making such wars easier to start, but maybe also harder to end, even in democracies. In turn, the very technology itself might lead to new social, economic, even religious conflicts and maybe even create new sparks of war among those left behind or so fearful as to lash out in anger and confusion.

Finally, these wars will feature new questions about what is legal and ethical, including even how to control our own weapons. The resulting dilemmas and debates will not only be intense, but will challenge many of the codes that have long shaped and regulated the very practice of war.

In short, the systems and stories captured in this book are just the start of a process that will be of historic importance to the story of humanity itself.

Reaper Makers

There are now at least a dozen different types of drones that are either in or nearing use in combat and that are used for surveillance and/or as weapons platforms. The most widely used killer drone is the Reaper, manufactured by General Atomics Aeronautical Systems (GA-ASI), based in San Diego, California. GA-ASI is a privately held company; however, essential components for Reapers are made by the following publicly traded companies, some of which have their own drone projects:

Reaper Drone Component Makers

• Boeing: Intelligence workstation and mission planning system; laser guidance for bombs
• ITT Corporation: Sensors; bomb and missile release systems
• Honeywell: Turboprop engine
• L-3 Communications: Sensors; satellite communications link; tactical date link
• Lockheed Martin: Hellfire missiles; Paveway laser-guided bombs
• Microsoft: Software for detection of humans and human-made objects
• Northrup Grumman: All-weather surveillance radar
• Raytheon: Targeting system that can be connected to Hellfire missiles; AIM-92 Stinger missiles

Sources: Air Force Technology.com, Bloomberg Press, Wikipedia and “Wired for War”

Seize the Money

We are living in a time when many feel powerless and hopeless in trying to end our wars and reverse the military contractors’ collective rise in power, which is a key factor driving the wars.

ITT’s decision to dump its “defense” business is an indicator that military contractors are not all-powerful. Indeed, they depend to a considerable degree on private investment, not just taxpayer money. This means that people who want to end the wars can “do something” by acting, as individuals and as members of any and all institutions that make investments, to defund the war-making business.

The SIF Foundation report shows that educational institutions and public employee pension funds and other public investment funds appear to have very limited interest at the moment in divesting their military stocks. This reality is a challenge for students, school alumni, faculty and municipal and state employees who want to end the wars and turn the US away from war-making and military intervention. At the same time, those involved in religious institutions can push for war divestment by their congregations and national bodies.

Religious institutions such as PC(USA) and the United Methodist Church have proven that disengaging from investment in weapons does not damage financial health; there are many other businesses that can provide the returns they need and allow the churches to obey their consciences.

The message suggested by church investment guidelines, particularly those of the Methodists, is that military contracting stocks are not “just another stock.” They are unique in offering individuals and institutions an opportunity to profit from war, and, therefore, carry a heavy moral burden. Some people have decided this moral burden is too great to bear, regardless of the economic consequences.

A commitment to defense divestment offers a solution that might begin to enable us to stop our wars.