The Spy in General Dynamics’ Corner Office

That is what is known in the espionage trade as a cover story. In fact, the two met while working for the Central Intelligence Agency. And Vickers wasn’t just any CIA operative. He was a former Green Beret who became the chief strategist for the agency’s secret program that armed the mujahadeen as they fought to drive the Soviet Union’s army out of Afghanistan.

Novakovic’s role in the agency is more of a “known unknown.” (She and Vickers have both remarried.) Her company biography confirms she was a CIA operations officer. When interviewed, nearly all of her colleagues and fellow board members instantly volunteer, “You know she was in the CIA?” But like any good operative, Novakovic doesn’t so much as whisper a word about her activities. Former colleagues think she spent time overseas, probably under some official government cover, gathering information about military capabilities. “One thing I do know,” says one former government official, “is she wasn’t just an analyst sitting in an office back in D.C.”

At the time, even her closest friends had no clue Novakovic was in the CIA. “I thought she was somewhere in Washington,” says Patricia Anne Lind, who is the godmother of one of Novakovic’s three daughters and co–general counsel of Nine West Holdings. “Clearly I hadn’t known what my best friend was doing.”

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Phebe Novakovic long ago left the shadows—but three decades later she still shuns the spotlight. She is allergic to the press (it took her spokesperson a scant few hours to decline an interview for this article), noticeably scarce on the Washington think tank circuit, and limits her contact with most Wall Street analysts to quarterly calls and the occasional investor conference.

Despite that—or perhaps because of it—Novakovic seems to be thriving as CEO of the $31 billion (revenues) defense contractor General Dynamics (GD), which is best known for building the M1 Abrams tank, nuclear submarines, and more recently, Gulfstream jets. Nearly three years into her tenure as chief executive, she wins kudos on Wall Street for restoring the company’s profits after a traumatic loss under her predecessor. General Dynamics’ stock has rocketed past its competitors’ since the beginning of last year.

Novakovic, 57, has succeeded with a back-to-basics approach she describes as “doing what we know how to do.” She has slashed spending, expanded profit margins, and returned cash to shareholders. Last year’s earnings, $2.5 billion, were just shy of the company’s record ($2.6 billion, in 2010).

But General Dynamics’ revenues have been flat, and at some point, analysts say, Novakovic will have to chart a strategy that delivers growth—a tricky endeavor in an era in which U.S. defense spending is likely to stagnate. Says Linda Hudson, a former U.S. CEO of defense contractor BAE Systems who once worked with Novakovic: “Phebe has hit it out of the park streamlining the organization. The stock price is phenomenal.” But she thinks defense companies, including General Dynamics, need to bulk up via mergers. “I don’t think it’s going to be a growth market,” Hudson says, “and you need bigger players in order to maintain capacity and weather the ups and downs of defense-spending cycles.” That raises a question: Can a disciplined operator and cost cutter excel at a new and different mission?

True to her CIA past, Novakovic is notoriously elusive, especially when it comes to her personal life. Some years ago, when she was working at General Dynamics but hadn’t yet ascended to the top role, a former company executive recalls, “someone suggested we run an idea past David Morrison.” Morrison was then a top staffer on the House defense appropriations subcommittee, a powerful figure in defense contracting. “Phebe said she would talk to him at dinner,” the former executive recalls. “When I asked if she was seeing him that night, she said, ‘I have dinner with him most nights.’ I knew both of them, but it was only then that I figured out that they were married [to each other].” (Morrison later became Boeing’s chief lobbyist. He has since retired and is studying divinity at Princeton Theological Seminary.)

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That’s not to suggest that Novakovic is lacking in wit or charm. In a recent earnings call she came across as confident and direct, spare in her use of CEO jargon. (Novakovic also forgoes another CEO affectation: Rather than travel with a royal-size retinue, she tends to bring no more than two or three executives to Pentagon meetings.) On the earnings call she bantered with analysts but showed a military bluntness in refusing to be budged from her talking points. She dismissed suggestions of a possible weakening in the business-jet market as “rumor intelligence, or RUMINT.” She casually employed words like “parable,” “ephemeral,” and “perturbations.” When an analyst teased her about her use of “axiomatic” and “purported weakness,” she responded, “Yes, well, it helps to have been a liberal arts major. I do know the English language.”

Novakovic’s directness works to her advantage much of the time. “The reason people respond to her,” says Mike Petters, CEO of Huntington Ingalls (HII), which teams with GD to build attack submarines, “is she absolutely tells you what her expectations are, and when you deliver she takes care of you, and when you don’t she lets you know.” Novakovic, he says, has a “high standard of performance.”

“She is not terribly emotional about any particular aspect of the business,” Petters adds. “She doesn’t put a lot of energy into a lot of things she doesn’t think [are] necessary to running the business.”

In retrospect, Novakovic seems as if she was always destined for the defense world. Her father, a Serbian immigrant, served in military intelligence as a lieutenant colonel in the U.S. Air Force. Novakovic graduated from an Episcopal boarding school in San Antonio and moved on to Smith College in Northampton, Mass., where she majored in government and German. During those years in the mid- to late ’70s—the post–Vietnam War period when the military and the CIA were scorned on many campuses—Novakovic stood out. “Phebe was always very patriotic,” her close friend and classmate Lind says. “She had a more conservative and Republican upbringing” than many peers.

Novakovic went straight into defense after college, analyzing weapons systems for a small Beltway contractor. In 1983 she joined the CIA, where she met Vickers (who taught her to skydive). In 1986 they left for Wharton, where both earned MBAs. Vickers, who until this past spring was undersecretary of defense for intelligence, is only slightly more media friendly than his ex, which helps explain why the names of two such prominent defense players are so rarely linked in public.

After grad school Novakovic followed a well-trod path through government (purchaser of defense products and services) to private industry (seller of those products and services). In 1992 she joined the White House Office of Management and Budget and rose quickly to become a top official overseeing the defense and intelligence budgets. Five years later she crossed the Potomac to work as a special assistant to William Cohen, then Defense secretary, and his deputy John Hamre. “She had an enormous amount of authority in the contracting world,” says Nicholas Chabraja, who was then General Dynamics’ CEO and became a mentor to Novakovic.

The company hired her in 2001, and Novakovic meshed well with its no-nonsense culture. “Boeing makes planes; Raytheon (RTN) makes missiles; General Dynamics makes money,” says Loren Thompson, chief operating officer of the Lexington Institute and a consultant to GD and other defense companies. He says it has a tougher environment than its rivals: “At General Dynamics your contribution is measured on a quarterly basis.” (Thompson adds that “under Phebe, the consequences for failing to perform are even more immediate than they were in the past.”)

It was clear early on that Chabraja was grooming her for a top job. Still, when he retired in 2009, the CEO position went to Jay Johnson, a board member and former Chief of Naval Operations. Novakovic was named the head of marine systems, one of the company’s four divisions, which builds submarines and ships.

As it turned out, Novakovic was lucky. Chabraja was a tough act to follow. And after a decade of lavish Pentagon spending, the “Army business in particular went into a precipitous decline” with the drawdown in Iraq, notes Myles Walton, an analyst at Deutsche Bank. In Walton’s view, Johnson may have had “the hardest job in defense.”

In an effort to expand into what Johnson called “faster” markets, GD spent nearly $1 billion in 2011 to acquire Vangent, a health care IT provider poised to cash in on Obamacare. The following year, GD spent an undisclosed amount to acquire a civilian cybersecurity company and a maker of wireless network equipment.

In June 2012 General Dynamics announced that Johnson would retire by the end of the year and Novakovic would succeed him. The explanation for that early departure became clear in January 2013, just weeks after Novakovic took over as CEO. The company reported a $1.2 billion drop in 2012 sales in its information systems and technology group and an $800 million fall in sales in its combat systems group. Even more surprising was the announcement that it would take a $2 billion write-down on a long series of acquisitions in its info systems businesses. GD’s $332 million loss for 2012 was the company’s first year in the red in two decades.

“Phebe has hit it out of the park streamlining the organization. [But] I don’t think it’s going to be a growth market, and you need bigger players in order to maintain capacity and weather the ups and downs of defense-spending cycles.”—Linda Hudson, Ex-CEO, U.S., BAE Systems

In her first earnings call, Novakovic made no effort to hide her displeasure with the state of the business—or her predecessor. She blamed the write-down on a “somewhat broken” acquisitions process. “Had I been consulted,” she said, some of the deals “wouldn’t have been done.” She said she would not “venture back into” the acquisitions market “until we have re-established discipline,” and she vowed instead to plow GD’s cash into dividends and stock buybacks. She has repeated that promise, and kept to it, ever since.

Novakovic quickly began “retiring” corporate vice presidents. She consolidated operations and reduced GD’s already lean headquarters staff from 190 to around 140 people today. (The company employs 96,000 overall.) Moves like those have improved cash flow margins from 11.8% in 2012 to 14.6% today, according to S&P Capital IQ.

Novakovic also benefited from some good timing. The economy has rebounded, bolstering demand for Gulfstream jets. And a deal at the end of 2013 blunted the automatic cuts caused by the budget sequester. (It’s not certain Congress and the White House can negotiate another reprieve this year.)

Meanwhile the company scored some lucrative new defense projects, including a $10 billion to $13 billion contract to sell light armored vehicles to Saudi Arabia. GD’s marine division and Huntington Ingalls were jointly awarded a $17.6 billion, 10-year contract to build 10 Virginia-class submarines for the U.S. Navy.

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Novakovic is certainly disciplined, but at times she can appear risk-averse—the result perhaps of watching Johnson’s tenure come to a quick end. GD has pulled out of the bidding for several contracts, including the $30 billion to $40 billion U.S. Air Force T-X trainer program, which Novakovic and her team decided were either out of their core business, too risky, or unlikely to provide high returns.

By contrast, when an opportunity feels as if it’s in the company’s wheelhouse, Novakovic pushes hard for a big win. She is now positioning GD to take the majority of what could be a $100 billion program to build 12 Ohio-class nuclear-missile submarines. Novakovic told an investor conference in June that she had no interest in repeating the teaming arrangement with Huntington Ingalls that was demanded by Congress for the Virginia-class subs. “That won’t happen,” she said, adding, “We don’t like it, and second, it’s too much risk.”

In this case, Novakovic’s bluntness may not serve her well. The Ohio-class program is so expensive that it could devour the Navy’s acquisition budget unless Congress is willing to ante up more cash. Spreading the wealth and the jobs is the best way to guarantee a program’s success on Capitol Hill, and some Pentagon officials worry she could alienate key decision-makers. Still, there hasn’t been much reaction so far—another possible salutary result of her low profile. When asked about Novakovic’s comment, one congressional aide whose boss is a big booster of Huntington Ingalls says, “I hadn’t heard it. Frankly, I had to look up [Novakovic’s name] when I got your email.”

The obvious question is, Where will General Dynamics find new growth? Such queries have grown louder since July, when Lockheed Martin (LMT) announced plans to acquire Sikorsky Aircraft, maker of the Black Hawk helicopter, for $9 billion. (Lockheed is also spinning off $6 billion in infotech assets, the same line of business that caused trouble for GD.) The purchase, expected to win regulatory approval, will boost and diversify revenues for Lockheed and open additional foreign markets.

Novakovic has been clear about what she doesn’t want to do—pursue new acquisitions or stretch GD outside its comfort zone—but much vaguer about a long-range vision and how she plans to meet the challenges of a Pentagon budget likely to remain flat for years to come, an uncertain strategic environment—will the U.S. keep fighting in the Middle East or finally pivot to Asia?—and technology and manufacturing that is changing far faster than the usual decades-long defense-contracting cycles.

“Phebe has rebuilt credibility with shareholders,” says Byron Callan, an analyst at Capital Alpha Partners, which provides research for institutional investors. “But you have to ask, particularly on the defense side, how much more runway she has raising margins and buying stock back.” Callan argues that “in another year or two she is going to have to articulate a vision of where she is taking the company.”

General Dynamics directors interviewed for this article say that, given her results and Wall Street’s enthusiasm, there is no reason for Novakovic to change what she is doing. Told that some investors complain that she is inaccessible, former CEO Chabraja, who remains a major player on the board, dismissed it as whining. “If it is true she is ignoring investors, she should keep on doing it,” he says. “She has more than doubled the stock.” Chabraja doesn’t believe Novakovic “is averse in principle” to acquisitions. “Right now we are in a period where defense and aerospace have organic growth,” he says, so there is no need for “prattling on about acquisitions.”

Of course Chabraja is best remembered for an acquisition: He bought Gulfstream for $5 billion in 1999. Wall Street was skeptical the business was too far afield. But today Gulfstream is the company’s brightest light: Last year the commercial aerospace division produced 28% of GD’s revenue and 41% of its profits. There’s a three-year wait for a G650, which goes for $64.5 million and can fly 8,000 miles before refueling.

Given all of the uncertainties of the defense market, Novakovic may have to move herself and General Dynamics beyond their comfort zone. Will she find her own golden acquisition in the civilian world to help drive revenues? Or should GD grow by doubling down on next-generation technology like undersea drones or microwave or laser weapons? Perhaps Novakovic already has a plan. So far, though, she’s not telling.

To see the full Most Powerful Women list, visit fortune.com/most-powerful-women.

Research Associate: Marty Jones

A version of this article appears in the September 15, 2015 issue of Fortune magazine with the headline “The spy in the corner office.”

Correction: An earlier version of this article misidentified the location of the shipyard photographed above.