The Day Defense Contractors Had to Choose: Shareholders or Warfighters
The Email That Changed Everything
I was reviewing a contract proposal last week when the email came through. The Trump administration had just issued an executive order with a simple, brutal premise: defense contractors can't prioritize shareholder returns over delivering capabilities to warfighters.
The mechanism was equally simple: "Major defense contractors will no longer conduct stock buybacks or issue dividends at the expense of accelerated procurement."
The punch line: "Underperforming" contractors face stock buyback and dividend restrictions, with "underperformance" criteria to be determined by the Secretary of War within 30 days.
If you're Lockheed Martin, RTX, General Dynamics, Northrop Grumman, or Boeing, this just changed your entire capital allocation calculus. If you're an APFIT-backed startup, this is the largest competitive advantage shift you'll see in your career.
The Boeing Problem: $43 Billion in Buybacks While Programs Slipped
To understand why this executive order matters, you need to understand how defense contractors have historically allocated capital—and why that allocation has increasingly diverged from warfighter needs.
Between 2010-2019, Boeing spent approximately $43 billion on stock buybacks. During that same period:
- 787 Dreamliner deliveries slipped years behind schedule
- KC-46 tanker program faced repeated delays and technical failures
- 737 MAX experienced catastrophic safety failures resulting in two crashes and 346 deaths
- Engineering workforce was hollowed out through cost reduction initiatives
The market rewarded Boeing's shareholder returns. Stock price increased dramatically. Executive compensation—tied to earnings per share and stock performance—soared.
The warfighter got delayed tankers, troubled programs, and a contractor optimizing for quarterly earnings instead of delivery performance.
Lockheed Martin: $13.6 Billion in Buybacks While F-35 Struggled
Lockheed Martin spent approximately $13.6 billion on share repurchases between 2021-2024 while:
- F-35 program continued to face technical challenges and cost overruns
- Hypersonic weapons development lagged behind China/Russia
- Classified program delays (publicly unacknowledged but documented in congressional testimony)
To be clear: Lockheed delivers. The F-35 is operational, production rates are increasing, and the company executes complex programs. But the question the executive order raises is: could Lockheed have accelerated delivery if $13.6 billion went to production capacity, engineering talent, or supply chain resilience instead of shareholder returns?
What the Executive Order Actually Does
The Core Mandate
"Major defense contractors will no longer conduct stock buybacks or issue dividends at the expense of accelerated procurement."
Key questions:
- What constitutes a "major defense contractor"?
- What does "at the expense of accelerated procurement" mean operationally?
- Who determines "underperformance"?
- What are the enforcement mechanisms?
The 30-Day Secretary of War Review
The executive order directs the Secretary of War to conduct a review within 30 days (by ~February 7, 2026) to establish criteria for "underperformance."
What this review will likely establish:
- Quantitative metrics for delivery performance (on-time delivery %, cost growth, technical performance)
- Thresholds triggering buyback/dividend restrictions
- Enforcement mechanisms (contract clauses, vendor ratings, exclusion from competitions)
- Appeals process for contractors disputing underperformance designation
What contractors should do before the review concludes: Prepare delivery performance data demonstrating on-time performance, cost control, and technical execution. If you're underperforming, prepare mitigation plans showing how capital reallocation would accelerate delivery.
New FAR/DFARS Clauses (60-Day Deadline)
The executive order mandates new Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) clauses incorporating stock buyback restrictions within 60 days (by ~March 7, 2026).
Expected contract language:
- Prohibition on stock buybacks/dividends for contractors designated as "underperforming"
- Requirement to disclose capital allocation plans (buybacks, dividends, R&D investment, capex)
- Certification that capital allocation prioritizes delivery acceleration
- Potential clawback provisions if delivery performance deteriorates post-award
Implications for contract negotiations: Expect these clauses in all new competitive solicitations starting March 2026. Existing contracts may be modified via bilateral amendments.
Executive Compensation Tied to Delivery Speed
The executive order directs tying executive compensation to delivery speed, not just stock performance.
Traditional compensation structure:
- Base salary
- Annual bonus (tied to earnings, revenue, stock price)
- Long-term incentives (stock options, restricted stock units)
- Result: Executives optimize for earnings per share and stock price
Expected new structure for contractors with DoD revenue >X%:
- Base salary
- Annual bonus (tied to delivery performance: on-time delivery %, cost growth, technical milestones)
- Long-term incentives (tied to multi-year program execution, not just stock price)
- Result: Executives optimize for warfighter delivery
Enforcement mechanism: Likely through contract clauses requiring compensation disclosure and certification that incentives align with delivery performance.
Why This Is Different (And Might Actually Work)
I've seen plenty of acquisition reform initiatives that sound good in press releases and die in implementation. This one is different for three reasons:
1. It Directly Changes Contractor Incentives
Stock buybacks aren't inherently bad. They return capital to shareholders when reinvestment opportunities are limited. The problem is when buybacks are prioritized over investments that would accelerate delivery.
By restricting buybacks for underperforming contractors, the executive order forces a choice: deliver on time and on budget, or face capital allocation restrictions.
This is a forcing function. It changes the calculus for CFOs and boards.
2. It Targets the Right Problem: Incentive Misalignment
The defense acquisition system tolerates delays because contractors face limited consequences. Cost overruns get negotiated. Schedule slips get rationalized. Technical failures get fixed through engineering change proposals (ECPs) that increase contract value.
The contractor gets paid. The stock price holds. Executives get bonuses.
The warfighter waits.
The executive order targets this misalignment by making shareholder returns contingent on delivery performance. If you're not delivering, you can't return capital to shareholders.
This is the right lever to pull.
3. It Has Enforcement Teeth (FAR/DFARS Clauses)
Acquisition reform initiatives often fail because they lack enforcement mechanisms. This executive order mandates FAR/DFARS clauses within 60 days—meaning every new contract will incorporate these restrictions.
Contractors can't opt out. The clauses will be mandatory for major defense contractors. Non-compliance will likely result in suspension/debarment proceedings.
That's enforcement.
What "Underperformance" Will Likely Mean
The executive order doesn't define "underperformance." The Secretary of War's 30-day review will establish criteria. Based on existing DoD performance assessment frameworks, here's what "underperformance" will likely include:
Quantitative Metrics
1. Schedule Performance Index (SPI):
- SPI = Earned Value / Planned Value
- SPI < 0.95 = underperforming (more than 5% behind schedule)
2. Cost Performance Index (CPI):
- CPI = Earned Value / Actual Cost
- CPI < 0.95 = underperforming (more than 5% over budget)
3. Technical Performance Measures (TPMs):
- Red/yellow ratings on critical technical parameters
- Failure to meet key performance parameters (KPPs)
- Technical deficiencies requiring significant rework
4. Delivery Timeliness:
- On-time delivery rate < 90%
- Contract modifications exceeding 20% of original value
- Schedule slips exceeding 6 months
The "Underperformance" Threshold Will Be Negotiable—Initially
Here's what contractors need to understand: the initial criteria will be relatively lenient. DoD doesn't want to immediately designate every major prime as "underperforming" and crater the defense industrial base.
The threshold will start at programs with egregious performance issues—years behind schedule, massive cost overruns, critical technical failures.
But the threshold will tighten over time. As DoD refines metrics and establishes baselines, "underperformance" will become more stringent.
Contractor strategy: Don't assume you're safe because you're not the worst performer. Position for tightening standards.
The APFIT Advantage: Why Startups Win
The executive order creates a massive competitive advantage for APFIT-backed startups and non-traditional defense contractors. Here's why:
APFIT Background: Prototype to Production Acceleration
The Accelerate the Procurement and Fielding of Innovative Technologies (APFIT) program posted record funding in FY2025: $925M+ deployed across 75+ companies.
What APFIT does: Funds the transition from proven prototype to production capability—the "valley of death" that kills promising technologies.
Average Time Acceleration: 2 years faster to warfighter compared to traditional acquisition.
Why APFIT Companies Win Under This Executive Order
1. No Buyback Pressure: APFIT-backed startups don't have public shareholders demanding buybacks. Capital raised goes to product development, manufacturing scale-up, and delivery execution.
2. Delivery Performance Incentives Align: Startup equity value depends on successful delivery and follow-on contracts. Founders/executives make money when the product works and scales—not when they manipulate quarterly earnings.
3. Speed Is the Business Model: APFIT companies compete on delivery speed. The executive order rewards exactly what these companies already optimize for.
4. Investor Expectations Match DoD Requirements: Venture capital and private equity investors backing APFIT companies expect 2-5 year value creation timelines based on product delivery and market penetration—not quarterly buybacks.
The Strategic Shift: Primes Will Acquire APFIT Companies
If traditional primes can't maintain buybacks while improving delivery performance, they'll acquire delivery performance by buying companies that already deliver fast.
Expected M&A activity:
- Lockheed/RTX/Northrop acquiring drone swarm companies
- General Dynamics acquiring AI/autonomy startups
- Boeing acquiring manufacturing innovation companies
- Raytheon acquiring electronic warfare startups
The acquisition thesis: Buy delivery speed, integrate into prime platform offerings, demonstrate improved performance metrics to avoid "underperformance" designation.
APFIT company implications: If you're an APFIT-backed startup delivering on time and on budget, your acquisition value just increased significantly. Primes need your delivery performance to maintain shareholder returns.
What Contractors Should Do Now
For Traditional Primes
1. Audit Current Delivery Performance: Run SPI/CPI analysis on all major programs. Identify programs at risk of "underperformance" designation. Prepare mitigation plans showing how capital reallocation would improve delivery.
2. Develop Capital Allocation Scenarios: Model impact of buyback restrictions on stock price. Prepare communications for shareholders explaining delivery performance investment. Identify production capacity/engineering investments that would accelerate delivery.
3. Engage with DoD on Criteria Definition: Participate in Secretary of War review process. Provide input on "underperformance" thresholds. Propose metrics that balance delivery performance with program complexity.
4. Tie Executive Compensation to Delivery Metrics (Now): Don't wait for FAR/DFARS clauses—demonstrate proactive alignment. Revise compensation plans to include delivery performance targets. Communicate changes publicly to signal commitment.
For APFIT-Backed Startups
1. Position for Competitive Advantage: Highlight delivery performance in all DoD engagements. Emphasize capital allocation prioritizing product development over shareholder returns. Market speed as core competitive differentiator.
2. Prepare for Acquisition Interest: Build clean cap tables and financial records. Document delivery performance metrics (on-time, on-budget). Identify strategic acquirers and initiate conversations.
3. Bid Aggressively on Contracts Primes May Avoid: Programs with tight schedules and performance risk. Contracts where delivery speed matters more than incumbent relationships. Opportunities where underperformance risk makes primes cautious.
For System Integrators and Mid-Tier Contractors
1. Clarify "Major Defense Contractor" Definition: Determine if your company meets threshold (likely based on DoD revenue). Understand whether restrictions apply to your competitive tier. Prepare compliance plans if applicable.
2. Position as Delivery Performance Partner: Market integration capabilities that accelerate prime delivery. Emphasize flexibility and responsiveness vs. prime bureaucracy. Build partnerships with both primes (needing delivery help) and startups (needing integration expertise).
The Bottom Line: Incentives Finally Align
I've watched acquisition reform initiatives come and go. Most fail because they don't change underlying incentives. They add process layers, create new offices, mandate reports—but the fundamental contractor calculus remains unchanged.
This executive order is different. It directly changes contractor incentives by making shareholder returns contingent on delivery performance.
The mechanism is simple: Underperforming contractors can't buy back stock or issue dividends. Want to return capital to shareholders? Deliver on time and on budget.
The enforcement is real: FAR/DFARS clauses within 60 days mean every new contract incorporates these restrictions. Non-compliance isn't an option.
The impact is structural: CFOs and boards must now balance shareholder returns against delivery performance. The trade-off is explicit. The consequences are contractual.
For traditional primes: This is uncomfortable. Wall Street will pressure you to maintain buybacks. The executive order pressures you to deliver. You can't do both if you're underperforming. Improve delivery performance or accept capital allocation restrictions.
For APFIT-backed startups: This is your competitive advantage. You already optimize for delivery speed. The executive order rewards exactly what you do. Bid aggressively. The primes are now competing with one hand tied behind their back.
For the warfighter: This is long overdue. Defense contractors have prioritized shareholder returns over delivery performance for too long. Delays aren't just inconvenient—they risk lives. If this executive order accelerates delivery by even 10%, it's worth the market disruption.
The 30-day review will establish the details. The 60-day FAR/DFARS clauses will establish enforcement. But the strategic direction is clear: warfighters come first, shareholders come second.
For contractors: adjust your capital allocation accordingly.
This analysis is based on the January 2026 executive order and ongoing defense acquisition reform efforts. While specific enforcement mechanisms are still being defined, the strategic implications reflect current defense contractor realities.