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00:00This is my kitchen table and also my filing system over much of the past three decades. I've been an investor the highest quality of mankind. I've often thought as private equity. And then I started interviewing Oh I watch your interviews because I know how to do it. I've learned in doing my interviews how leaders make it to the top. I asked him how much he wanted. He said to 250. I said fine I didn't negotiate with him. I did no due diligence. I have something I'd like to sell and how they stay there. You don't feel inadequate now because the only the second wealthiest man. Was that right. In January of 2013 Phoebe Nova Kovac became the CEO of General Dynamics one of the nation's largest aerospace defense contractors. Since that time its stock is up by more than 180 percent. I had a chance to sit down with Phoebe Nova Kovic in Sterling Heights Michigan and saw there the Abrams tanks that were manufactured by General Dynamics and talked to her about the future of the aerospace defense industry. When you became the CEO of General Dynamics in 2000 and 13 there weren't that many women who were aerospace defense executives. Did you ever think when you were joining this company in 2001 that you could rise up to be the CEO. I never thought I'd be the CEO. I think that would be highly aspirational. And I have always been a big believer in it. You do well in life by doing the job in front of you. Very very well being part of a team and serving that team. But I never could have believed that this would happen. So do you get tired when people like me ask you what it's like to be a woman and being CEO of an aerospace defense company. Or you get asked that a lot. I think some I think I and you and I've talked about this before. I approach this job primarily as a person largely one formed by being a woman but not exclusively. So I think about myself as a person and in this position not so much a woman. Your stock is up 180 percent since you became a CEO. Do you think under President Biden defense spending may level off and therefore it may be harder for aerospace defense companies to do as well. So I think defense spending historically has been driven by the threat or the perception of threat. And it is not a particularly safe world at the moment. That's number one. Number two President Biden has been a lifelong supporter of national security. So this budget that he submitted to Capitol Hill was a nominal increase. Importantly all of our programs were fully supported because of their criticality to the war. Most of the large aerospace defense companies have moved to Washington. You see the Pentagon leaders from time to time to go see the secretaries of Army or Air Force or defense or Navy or what do you do in terms of interacting with them. So I think it's important that we know our customer both on the uniform military side and we tend to try to know them as well. And then with each change of administration we try to get to know the primary decision makers so we can get inside the decision space help them think about again what we can provide. So I spent some time with all of them in our major customers. So that would be primarily the Army and the Navy. The American people obviously have a high regard for our military but they don't tend to think of the defense contractors as highly as they do the military. So do you think there's any reason for that. So I don't know that they're particularly not the love but this is the way I think about it. If the U.S. cannot avoid war through diplomacy or deterrence it goes to war and it goes to war with the U.S. defense industrial base. We cannot go to war as a nation without us. We make all the products and services that provide our service people with the weapons systems and protective devices they need to survive and win because of consolidation in recent years. We now have essentially five major defense companies. You think that's enough. Should we have more competition or you think that's OK. So competition is driven in the defense industry by two things one the number of new weapons systems coming out and they're relatively constrained say it compared to the 80s when you had a lot more defense companies and to the complexity of each of the weapons systems. So the capitalization requirements for defense companies the large defense primes and we're all one of them are significant. So given those capitalization requirements and given that the intimacy that we need to have with our customer I think we're pretty well balanced at the moment. And by the way when you think about competition we have a monopsony buyer with enormous purchasing power. So while we may be in do police or some people in monopolies we are up against a very powerful customer. So there is a lot of shaping that happens in our contractual discussions with our customer. But sometimes people say that the defense budget is very high because of cost overruns of new weapons system to so forth. Is that a fair criticism that sometimes the are cost overruns that are very very high. So if you think about the complexity of modern weapons systems it is not unusual for some of them to have early on in the production or the development some cost overruns. But it's incumbent upon us as a defense industry is that once we understand the technology and then how to build it and how to build it effectively continue to take costs out as we go down our learning curves. And that's an important part of the value equation we have with our customer. It's taking driving costs out of systems. So today what is the biggest challenges for General Dynamics and what are the biggest opportunities. So I think in any business the challenges are solving complex problems that come to you. You know the problems that come to me in my senior leadership team for or for resolving tend to be highly complex and nettlesome. So your ability to solve those complex problems are an important element. I think of the value that we add to the company and then I think opportunities. You always want to make sure that you've got a creative enough mind an open enough mind to be able to see around square corners. What am I missing. You know the why questions are really powerful. Why are we not doing this or why are we doing this. I asked those questions a lot. And in the answers you can sometimes tease out some real opportunities some hidden things. But thinking creatively about opportunities and problems is really important. And what about the industry generally. I think they have big challenges now as the defense budget probably comes down a bit. So I think that we are all responsible and we have an obligation to find the latest and best technologies that we can for our customers and deliver them the most cost effective manner we can. And I think that that's a challenge and an opportunity for all of the big defense companies. For more than 40 years now the M1 Abrams has been the US military's main battle tank. It's a 68 ton monster that can knock out enemy tanks more than three miles away. The Abrams tank was designed at a time when America was prepared to fight Soviet forces in Europe. But it passed its toughest test in Iraq in 1991 when it destroyed a huge Iraqi armored force. The U.S. Army has two thousand Abrams tanks in service and they're all built by General Dynamics. I got to see the Abrams up close. Sounds pretty solid to me. And watch that muscle through a course. At speeds above 43 miles per hour to operate soldiers 18 and older complete a six week training course. I meet the age requirement but I think I'll stick to the family car. Let's show through the major divisions you have a general dynamic. So what is the marine systems. Now you before you became CEO you were the head of marine systems is that correct. I think I've got it right. There were 68 submarines now in the entire U.S. Navy fleet. Do we really need a lot more submarines or are we just kind of replacing the ones we have or do we need more than sixty eight which is I think the number we have. So I personally believe that the more submarines the better. And while people may be jaundiced that in and skeptical of my view given where I sit I think from a national security perspective U.S. underwater supremacy is critical to our national security. And the more submarines that we can put in the water the better off we are to protect our shores as well as to protect our assets overseas. So it takes a long time to build a submarine said like three years four years five years. They attack boats. And we're on about our 20 something attack boat which is the Virginia class submarine takes about 17 months to build. And we are building the ballistic missile submarine replacement in the Columbia class which is replacing the Ohio class as part of the nuclear deterrent. That'll take us eighty four months. So these are long complicated build cycles. And what does it cost to build a submarine. I assume it's not cheap. So the Virginia class is about two billion dollars a submarine but they are highly survivable weapons systems. And by the way as we've come down our learning curves we have driven costs out of out of those submarines. So again that's part of the value proposition with our customer. Let's talk about another division the land division which is I assume that division that makes this tank. Yes. All right. So why are tanks so important today. Because with cyber and kind of missiles being launched off of submarines and so forth that we really need tanks to kind of help the military that much. So since the dawn of human time. Wars are ultimately won if they can't be avoided. They're one boots on the ground or taking territory. I don't see that paradigm changing anytime soon if we get into a really hot war. You need your tanks you need your army to take land. You have an aerospace division and they're the principal product is the Gulfstream jets is that right. Yes. I there a reason why you're not in the military jet business unlike some of your competitors. Well General Dynamics before the big sell off you recall General Dynamics in the height of the Reagan build up was the largest defense industry that come at the CEO at the time believed. And I think appropriately so to some extent that it was important to sort of liquidate at the end of the Cold War. And so he systematically went through and sold off units of defense including what was at the time General Dynamics fighter jet business. So we're out of that business. All right. So you're in Gulfstream now. Gulfstream is mostly a business jet business like almost exclusively. And so with Cove it I assume business people weren't flying around as much were they buying as many jets. So Gulfstream is a pretty cyclical business where economy facing and as is as goes the world economies. That tends to drive our demand. And this was the third economic perturbation that I have seen since I've been at General Dynamics. So what we have learned is to be at the cyclical and that's drive out costs faster than your revenue declines. So last year we were the only successful aerospace OEM to make a profit a significant profit at a billion dollars. And we did that by reacting very very quickly to the change in the marketplace. So demand was down as a result of the economic perturbations caused by Corbett but demand is nicely begun to recover. And we are in a very strong position in that recovery. So let's talk about your last division which is your information division which I assume is mostly cyber related things and things you can't probably talk too much about. But is that where the greatest growth is going to be for aerospace defense companies in cyber and other kinds of information technology. So cyber is embedded in almost every single one of our programs including the main battle tank the upgrades that we make and the continued improvements that we make to upgrade the technology in for example that platform all include cyber protection a multiple of multiple layers. So cyber is a growth area and has been for quite some time in the defense industrial base. We are very active and have been for 20 years in the cyber space and we'll continue to see growth. But I don't see it as the exclusive growth in our in our business. What's driving real growth on the. Fence scientist submarines. So one area we didn't talk about that is an area that some people think is important in aerospace defense is space. So some companies some of your competitors are building things for the space world. Are you thinking about getting into space. So we have some components some lines of business that serve largely as a merchant supplier. Some of the space companies. And that's a good place for us. We've made our large capital bets elsewhere. What do you advise young women who want to be a CEO. But the best way to prepare to be a CEO is part of a team. You serve your team well and do the job in front of you as best as you possibly can. Let's talk about your own background for a moment and how you came to be the CEO. So where did you grow up. I grew up pretty much all over. My dad was in the Air Force and we spent a lot of time in Europe during the Cold War and I got a real sense of being an American. Germany was still relatively poor in the 60s coming out of World War Two and not the major industrial power that it is today. And we had a real sense of what the United States had done to save Europe. Your father was a Serbian immigrants. United States is that right. Yes. So my father's family suffered from totalitarian regimes based on the fascist side on the communist side and they were fortunate enough to escape. But their lives during World War Two. And it was their dream to come to the United States because when you have suffered from both types of of totalitarianism you treasure democracies and particularly a market based democracy. And in it he is an avid patriot as is my mother. And they they imbued me with that same sense of patriotism. So you grew up in various places in Europe and United States and then you went to college at Smith. Yes. So did you study aerospace defense at Smith. What did you study. Well I was a government major and a philosophy minor. And. And I got a superb liberal arts. Background and education. So learn to write and I learned to think in college. Those are two critical values. So most people that graduate from Smith probably don't wind up in the CIA. Be my guess most. But that fact. So when you were interviewing for jobs at the end of your college career did you tell people I want to be in the CIA or how did you happen to get into the CIA. Well I had a sense of service to my nation and it seemed a good place for me so much in life and so when I've talked about before is finding place. And it was. The agency was opening its doors to women. And so it was a good opportunity for me. And I really enjoyed the service that I was able to provide. How long were you in the CIA. About four or five years. And were you a CIA agent or you were a spy or undercover. You can't say even today. So we were what were called case officers. So you might in common parlance think about those spies when you were doing that. Could you tell anybody what you were doing or what did you tell people you were doing as a career. Well we had various stories that we told approved stories and I think we'll leave it at that. OK. But your parents are they even know my parents. So after you did that for a while you decided to go to where. A business school. Yes. So the Cold War was winding down. And. Yes. And decide to go to business school. All right. She went to Wharton. And then if you have a Wharton MBA I assume it's easier to get a job. Was it easier for you get a job. It was extremely difficult. I had a rather iconoclastic background and I was seven months pregnant. So it was very hard to get a job. You have a CIA background. You're seven months pregnant and you find that employers aren't interested in hiring women like that. I had a number of interviews. I remember one in particular. I wanted to work for a steel company because I like making things the tangible value of seeing the fruits of your labor. And I walked in and now here they are at a hiring fair or and I walk in and they say we're not hiring. So I understand you're not hiring me as a little out of there. So you've finally got a job at the Office of Management Budget which runs the budget the United States government. So what did you do there. So I started out as a budget examiner and was fortunate enough to work my way up and ended up running the National Security Division which was responsible for all defense and intelligence spending submissions to the to the Congress. So after a while you decided I had enough of this. The government salary is good but not that good. You decide you want to go into business and you've got a position in 2001 with General Dynamics. Yes I had to step over for four years at the Pentagon and then to General Dynamics. And I went there because I remember thinking very distinctly at these seminal times in your life when you have perhaps a bit of a epiphanies. I sat at my desk one afternoon thinking I can't afford to put my children through college. And I happen to know a number of CEOs including the CEO of General Dynamics. And I called him and I said I'm I'm going to be leaving your soon if you ever would be interested and called a couple of the other CEOs. And and I was fortunate enough to go with General Dynamics OK. She went to General Dynamics in 2001. And what was your initial job there. So I was in strategic planning. But think about that more as special projects for the CEO. And I ultimately kept a series of jobs as I moved up the chain at General Dynamics. But I was also the chief of staff to the then CEO. And I learned a lot about how a very very effective powerful CEO manages the company. I learned a lot watching a superb CEO operate. And you said hey I can do this job as well as this guy. At some point now that would be the height of hubris. And I've never suffered from that. I think I was the beneficiary of a lot of learning. So I was blessed with that today. As you look at the opportunities that women have to be chief executives you think they're much better than when you were coming along. And what do you advise young women who want to be a CEO about the best way to prepare to be a CEO. So I think there more opportunities for women that there certainly were in the late 70s when I entered the workplace. And that is throughout the food chain. I tell whether it's young women or young men few want to do well in this world be a part of a team serve your team well and do the job in front of you as best as you possibly can. And in functional organizations the rest takes care of itself. In a dysfunctional organization all bets are off. Get out of it. What would be the skill set that a CEO really needs to be successful in today's environment. So I think a good leader needs fundamentally good character good character is required. I think a smattering and and a whole some capabilities set and whether it's intellect or finance or ability to think strategically or solve complex problems. All those things are really important. And frankly perseverance. Sometimes you just have to never never stop. Never quit. Never give up. So you have three daughters. I do. And so you've obviously got a private sector jobs. You can help support them and get them through college. And you have now again four grandchildren or grandchild grandchildren. OK. So what do you do for rest and relaxation. Spend time with your children grandchildren. Well that's joyful but I wouldn't call it restful or relaxing. Three toddlers and one newborn relaxing. But my husband and I walk a lot hike a lot and we talk a lot. He's finishing his doctorate at Princeton Theological Seminary and Ethics. And so I find those kinds of conversations really stimulating and interesting. There are respect for me but there are also a lot of mental gymnastics to kind of keep up. Other people said it seems in Congress to have a spouse who is getting a degree from Princeton Theological Seminary is very spiritual presumably. And you're in the aerospace defense business as anybody mentioned. That seems unusual or not. Well I think it probably is a bit unusual but I think when you're in leadership positions it's important to look at all of your decisions through a moral prism irrespective of the industry that you're in and to make sure that you're doing the right thing and to constantly question am I doing the right thing. Is this the right thing. And if you don't ask yourself those questions routinely then I think you can you run the risk of failing to see potential error. So what's the greatest pleasure of being the CEO of General Dynamics and what's the biggest downside. Well I think these jobs are such great privilege. I don't think I see a particular downside. The pleasures the people and the team. We have a highly functional very transparent very cohesive team. And frankly you know it was an interesting outcome from covered crises. Bring out the worst and the best in people. And while we entered the corporate crisis as a very clear and powerful team we emerged even stronger forged. And that brings me a lot of satisfaction.

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The David Rubenstein Show: General Dynamics CEO Phebe Novakovic

Phebe Novakovic, General Dynamics Corp. chairman and CEO, talks about her time with the CIA, U.S. defense spending, and the need for a strong military. She is on the latest episode of "The David Rubenstein Show: Peer-to-Peer Conversations." This was recorded Aug. 17. (Source: Bloomberg)

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