Halliburton headquarters near downtown Houston in 2003.
The Houstonian Hotel is an elegant, secluded resort set on an
18-acre wooded oasis in the heart of downtown Houston. Two weeks ago,
David Lesar, CEO of the once notorious energy services corporation
Halliburton, spoke to some 100 shareholders and members of senior
management gathered there at the company's annual meeting. All was
remarkably staid as they celebrated Halliburton's $4 billion in
operating profits in 2008, a striking 22 percent return at a time when
many companies are announcing record losses. Analysts remain bullish on
Halliburton's stock, reflecting a more general view that any company in
the oil business is likely to have a profitable future in store.
There were no protesters outside the meeting this year, nor the kind of national media stakeouts commonplace when Lesar addressed
the same crew at the posh Four Seasons Hotel in downtown Houston in May
2004. Then, dozens of mounted police faced off against 300 protesters
in the streets outside, while a San Francisco group that dubbed itself
the Ronald Reagan Home for the Criminally Insane fielded activists in
Bush and Cheney masks, offering fake $100 bills to passersby in a mock
protest against war profiteering. And don't forget the 25-foot
inflatable pig there to mock shareholders. Local TV crews swarmed, a
national crew from NBC flew in from New York, and reporters from the
Financial Times and the Wall Street Journal eagerly scribbled notes.
the 25-foot pigs are gone and all is quiet on the western front. How
did Halliburton, once branded the ugly stepchild of Dick Cheney -- the
company's former CEO -- and a poster child of war profiteering, receive
such absolution from antiwar activists and the media? Of course, the
defeat of the Republicans in the 2008 election, the departure of the
Bush administration, and a general apathy toward the ongoing, but
lower-level war in Iraq are part of the answer, but don't ignore a
potentially brilliant financial sleight of hand by Halliburton either.
That move played a crucial role in the cleansing of the company.
"Burn & Loot"
Halliburton has been doing work in war zones since the early 1960s,
when it acquired the construction company Brown & Root and was
tasked by the Pentagon with building
the infrastructure for the Vietnam War. Back in those days, it was
vilified as "Burn & Loot." After more than three decades in news
obscurity, in March 2003, with the invasion of Iraq, it suddenly
returned to national attention. After all, not only had its former CEO
been beating the public drums for an invasion, but its subsidiary KBR
(the old Brown & Root) had been given a vast, open-ended, multi-billion dollar contract to build and maintain the new infrastructure of bases that the U.S. military was rushing to construct in that country.
than six years later, KBR has taken in over $31 billion for a variety
of services to the U.S. military, notably in the field of logistics,
and the money continues to flow in. As of April 2008, under a renewed
contract, the company estimated that it had served more than 720
driven more than 400 million miles on various convoy missions, treated
12 billion gallons of potable water, and produced more than 267 million
tons of ice. While these numbers may be impressive, so are the multiple
claims from Pentagon investigators of Godzilla-like overcharges and
waste, not to speak of spiraling claims of workplace negligence,
including faulty electrical wiring that led to deaths and injuries on
bases KBR built, and a failure to provide adequately clean water
supplies to the troops; and then there are those allegations of war profiteering made by activist groups and politicians.
September 2004, Lesar announced that Halliburton was considering
spinning off KBR as a separate company, in part he claimed because it
was bearing the brunt of a "vicious campaign" of political attacks and
its employees didn't "deserve to have their jobs threatened for
political gain." It took three years, but in April 2007 the spinoff of
KBR was completed. It is now officially on its own, and the results for
both companies seem little short of miraculous. No protesters even
attended the three annual shareholder meetings that KBR has since held,
though its activities in the war zones have hardly changed, and only
five made it to Halliburton's in 2008. This year, of course, the
protesting larder was bare.
Five shareholder activists did manage
to attend Halliburton's annual meeting, including me. (I own a single
share of Halliburton stock.) When I asked Lesar about the company's
links to KBR, he responded unequivocally, "First of all, let's be very
clear, KBR and Halliburton are legally separated."
Just three months ago, however, Halliburton didn't hesitate to pay off
$382 million in fines to the U.S. Department of Justice as part of the
settlement of a controversial KBR gas project in Nigeria in which the
company admitted to paying a $180 million bribe to government
officials. Halliburton, Lesar assured us, had been willing to pony up
such a sum to ensure that KBR could survive on its own. He painted the
payment as an act of corporate generosity. I asked Albert Cornelison
and Mark McCollum, Halliburton's top lawyer and chief financial
officer, if the company had similarly agreed to pay off any future
judgments against the company on its monster military logistics
contracts in Iraq. Cornelison responded that he doubted the company had
financial obligations for KBR's work in Iraq.
Military investigations continue
In reality, Halliburton's decision to spin the company off was
surely tied to hopes that it might indeed escape a number of pending
Iraq investigations and lawsuits, as well as tamp down the bad
publicity KBR was generating. Still, those investigations are ongoing.
At Fort Belvoir, Va., the headquarters of the Defense Contract Audit
Agency (DCAA), the office in charge of reviewing the Pentagon's
payments to KBR, a small group of investigators continue to pursue that
In early May, at a hearing
on Capitol Hill, DCAA director April G. Stephenson told the
independent, bipartisan, congressionally mandated Commission on Wartime
Contracting in Iraq and Afghanistan that, since 2004, her staff had
sent 32 cases of suspected overbilling, bribery and other possible
violations of the law to the Pentagon inspector general. The "vast
majority" of these cases, she testified, were linked to KBR, which
accounts for a staggering 43 percent of the dollars the Pentagon has
spent in Iraq. "I don't think we're aware of a program, contract, or
contractor that has had this number of suspensions or referrals," she
told the hearing. (In the allied area of overpricing services, DCAA
also recommended $4.3 billion worth of reductions to proposed or billed
costs and pointed to another $3.3 billion worth of costs under the KBR
contract that they believed were simply not supported.)
staff, she indicated, recommended not paying the costs KBR had billed
to the Pentagon on more than 100 occasions, among other things
suspending or blocking some $553 million in payments. In but one
example of typical KBR practices revealed at the hearing, the company
allegedly billed the Pentagon for 4,100 prefabricated living units for
military bases in Iraq at an average price of $38,000, even though
another contractor offered to provide similar units for $18,000 each.
of this may, however, matter, if the Pentagon continues to follow the
precedents it has recently set. As Stephenson notes, the Pentagon has
already agreed to pay out at least $439 million of the $553 million the
DCAA questioned, after accepting the company's explanations for each
"I'm struck by the fact [that] the military doesn't
seem to care about the cost as long as they get the service," said
Commissioner Christopher Shays, former Republican congressman from
Connecticut. "Is part of the problem that, in essence with this one
contractor, we've basically said, 'KBR is too big to fail'?"
Pentagon even appears willing to pay KBR for contracts that may have
resulted in the deaths of military personnel in Iraq, allegedly
electrocuted due to shoddy work by the company's electricians.
Just as Lesar was addressing Halliburton's shareholders in Houston, Sen. Byron Dorgan's Senate Democratic Policy Committee was holding a hearing
on Capitol Hill focused on KBR. Testifying was Jim Childs, a master
electrician hired by the U.S. Army to help review military facilities
Childs claims that as many as 70,000 KBR-maintained
buildings where troops lived and worked were unsafe because of faulty
electrical wiring. "When I began inspecting the electrical work
performed by KBR, my co-workers and I found improper electrical work in
every building we inspected," Childs said. Hundreds of soldiers are
believed to have received electrical shocks in showers and elsewhere as
a result. There have been four documented fatalities,
including Staff Sgt. Ryan Maseth of Pittsburgh, Pa., a Green Beret, who
died of electrocution while showering in his barracks in Iraq on Jan.
2, 2008. (Maseth's family has sued KBR, alleging wrongful death.)
According to Sen. Dorgan, documents show that KBR was paid huge bonuses by the Pentagon for this work, much of it after
the allegations became public. If accurate, this gives "shocking" a new
meaning. "How could it be that, given these obviously widespread
problems with KBR's electrical work, the Pentagon decided to give KBR
bonuses totaling $83.4 million for such work?" he wondered.
of course, denies everything. "We believe the standards that we did
employ were standards that were known and thought to be acceptable in
an expeditionary environment," KBR's William P. Utt told the Associated
Press in response. "We don't think the wiring that we installed was
potentially dangerous." In a brief statement about the deaths, the
company wrote: "Based on our current knowledge and the information we
have gathered to date, KBR has found no evidence of a link between the
work the military tasked KBR to perform and the reported deaths that
have resulted from electrocution."
Who is responsible?
One of the biggest problems with the sprawling 2008 KBR
mega-contract appears to be that not enough people are watching the
store (and evidently, some of those who do regularly doze off when
payment issues arise).
In early May, Michael Thibault,
co-chairman of the independent Commission on Wartime Contracting in
Iraq and Afghanistan, highlighted a simple, if disturbing statistic at
the second hearing of his newly established commission. Out of 504
oversight officials that, by Pentagon estimate, are needed to keep an
eye on KBR's contract in Afghanistan alone, just 166 were actually in
the field in April 2009. As Thibault added:
more than six years of fighting, this is just one example of serious
and persistent shortfalls in staffing and training. In military
parlance, no one is pulling guard duty on contractor performance. This
example, an issue by itself, points to another broader question. Who is
responsible? Who's going to fix these types of issues?"
the Democratic Policy Committee hearing in late May, Charles M. Smith,
a 31-year veteran of contract management in the U.S. Army, testified
that Pentagon officials were deliberately ignoring criticism in
deciding to reward KBR. Smith was in charge of KBR contracts in
Afghanistan and Iraq, as well as of the award-fee or bonus-payment
process that went with them. He refused to allow any bonuses to be paid
out, however, because the company was not able to provide proper
documentation of its costs. This was one reason, he believes, that he
was taken off the contract in August 2004. Smith became a
whistle-blower after he retired a year ago. Here is a sample of his
"The award-fee process is supposed
to evaluate a contractor's performance level and provide a 'bonus' or
award fee for superior performance. Failure to perform satisfactorily
should result in a significantly lower or no award fee. [The award
system] appears to me to have failed to work as it was intended and to
have led to poor service for American troops, wasted taxpayer money,
and possibly the deaths of soldiers in KBR operated facilities...
problems for operating in the environment of Iraq and Afghanistan are
not insignificant. However, the major failure appears to me to have
been a culture that decided KBR was too big to fail and too important
to be held to account. The Army was aware of KBR's poor performance in
Iraq. There have been numerous government inspections and reports. The
Army, however, continued to give KBR high award fees. Those high award
fees appear to have sent a message to KBR that performance did not
really matter. Award-fee boards and decisions are a communications tool
between the government and the contractor. The contractor learns what
is important to the government and will respond accordingly."
And the record shows that KBR did "respond accordingly."
the meantime, Halliburton, which provided so many years of corporate
"oversight" for KBR, has been cleansed of all charges in the court of
public opinion and has essentially dropped from view. It has also done
its best to ignore a shareholder resolution brought by Patrick Doherty,
the comptroller of the city of New York, that raises the obvious issue
of war profiteering in Iraq, based on the Pentagon dollars it raked in
while its former CEO helped oversee the war that was making it so much
Some shareholder activists continue to pursue the company
by other means. For instance, the pension fund of the Policemen and
Firemen Retirement System of the City of Detroit filed a lawsuit in
mid-May against David Lesar and other executives of KBR and
Halliburton, accusing them
of a "reign of terror." The lawsuit listed a number of complaints
including bribes in Nigeria, overcharging the Pentagon for services
rendered, accepting kickbacks, engaging in human trafficking, and
concealing the rape of an employee.
"Under defendants' watch, and supposedly under their control and
supervision, the companies were permitted to engage in conduct so
notorious that the name 'Halliburton' has become virtually synonymous
with 'corruption,'" the pension fund said in a complaint filed at the
Harris County District Court in Houston. "Defendants' failures have
caused the Companies to suffer hundreds of millions of dollars in
damages, and to be exposed to substantial additional judgments in the
Heather Browne, a company spokeswoman, responded: "It
appears that the lawsuit is based on unfounded allegations. We intend
to vigorously defend ourselves."
Another shareholder activist,
John Harrington, a socially responsible investment manager in
California, used his KBR shares to file a protest resolution against
the company this May. According to Harrington's press release:
management is obviously not taking their human rights footprint very
seriously. The board of directors is accountable to shareholders, but
only if we assert ourselves as the real owners of the company.
Understandably, shareholders don't like being associated with
atrocities. If ever there was a need for responsible fiduciary human
rights oversight within a company, it is with KBR. This company has
been castigated in the press, sued, and accused of bribery, rape,
murder, political corruption, tax avoidance, and who knows what else."
nonetheless took in another $5.7 billion from the U.S. taxpayer in
2008, up 15 percent from the $4.8 billion it received in 2007. With the
planned drawdown of U.S. troops in Iraq, KBR expects its revenue to
fall this year. But shareholders need not worry: Its contract with the
Pentagon, signed in April 2008, potentially sets it up to make more
than triple the maximum profits allowed in the previous six years.
Recently, the Financial Times ran an interview
with KBR's Utt, aptly headlined "KBR believes it is ready to construct
a new image." The same day stock analyst Will Gabrielski raised his
profit estimate for KBR, causing company shares to jump.
forgiving and forgetting are now the norm when it comes to the records
of Halliburton and KBR in the Bush years, the question remains: Will
the Pentagon complete this cleansing ritual or engage in the serious
task of investigating both companies?
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