Misconceptions about the defense industry.

• Author: Farrell, Lawrence P., Jr.
• Position: PRESIDENT'S PERSPECTIVE

The defense industry is probably one the least understood corporate sectors in the United States. Yet it is frequently vilified. Ask most Americans what comes to mind when they think about the nation's industrial base and you're likely to hear about $600 toilet seats, $400 hammers, and all-around war profiteering.

Many also will cite former President Dwight Eisenhower's famous words of advice: "We must guard against the acquisition ... of unwarranted influence by the military industrial complex." In that 1961 speech, Eisenhower also said, "We can no longer risk improvisation of national defense." We also must remember that, back then, defense was much larger that most other industries, which Eisenhower noted in his speech: "We annually spend on military security more than the net income of all United States corporations."

Most Americans tend to regard defense industry as a juggernaut, while in fact it is now relatively small, when compared to other corporate sectors. The top 10 defense contractors, for example, have a market capitalization in the range of $170 billion. Wal-Mart's market cap alone is $196 billion, and Microsoft's is $224 billion, while Exxon Mobile's is $ 356 billion.

Also profit margins in the defense industry are puny compared to those in the commercial sector. Compare the profits as a percentage of revenue for Pfizer, Boeing and Lockheed Martin in 2004--Pfizer, 21.5 percent; Boeing and Lockheed Martin, 3.6 percent. This is only partially explained by the fact that some legitimate expenses borne by defense are unallowable costs and thus not reimbursable by the government.

Despite recent scandals--such as procurement violations by a former Air Force acquisitions official and a series of critical reports by the Government Accountability Office and the Defense Department inspector general--defense industry generally can claim a better ethics track record than the non-defense sector. Witness the colossal scandals that engulfed Enron, WorldCom, and several other major corporations.

Defense firms in recent years have made a major push to prevent unethical conduct and to ensure company employees understand what's acceptable and what's not acceptable under the rules of government ethics. Companies have instituted in-house ethics training and have put top-down emphasis on self-regulation. Organizations such as the Defense Industry Initiative and our NDIA Ethics Committee are actively engaged. They report growing interest in ethics...