Harry M. Jansen Kraemer Jr. was on his way to another boffo year as chairman and CEO of Baxter Intl. (BAX ) last summer when the reports of deaths started coming in. Virtually overnight, 11 people in Spain died after undergoing kidney dialysis using a blood filter made by Baxter. Then, a few weeks later, 21 kidney-dialysis patients in Croatia died within 48 hours of using the same Baxter device. By the time Baxter yanked its dialyzer from the market in mid-October, the filter had been implicated in more than 50 deaths, including a handful in the U.S.
Baxter has paid for these mishaps. After tracing the deaths to filters that had been rinsed with an improper fluid during production, the Deerfield (Ill.) medical-products and drug manufacturer took an aftertax charge of $156 million to cover settlements with the victims' families and the shutdown of two factories. The charge helped plunge Baxter into the red in last year's fourth quarter and depress its 2001 net income 17% from a year earlier, to $612 million on sales of $7.66 billion.
Kraemer has paid, too. The 47-year-old CEO thought it would be wrong to ignore the fatalities and take fat 2001 company bonuses. Despite the bottom-line hit from the faulty filter fiasco, Baxter met its 2001 financial targets, entitling Kraemer and other top executives to annual bonuses of up to 150% of their base pay. For Kraemer, a 22-year veteran of Baxter, that meant as much as $1.3 million, on top of his $880,000 salary. Instead, at his urging, the board cut the bonuses of the other Baxter execs to 80% of their base pay. As for Kraemer, he slashed his own bonus to 60%, effectively taking a 33% pay cut. "The buck stops somewhere, and in this case, it stops here," he says.
MEMOS FROM THE BOSS.
This lead-by-example sacrifice is in keeping with Kraemer's character and the culture he has been nurturing at Baxter since he became chief financial officer in 1993 and then CEO in 1999. Believing that employees should have a clear stake in the overall performance of the company, Kraemer doled out stock options to all 42,000 staffers last year. Believing that management has a duty to share information -- thereby promoting teamwork -- he personally writes a two-page memo once a month to all employees and, by his count, leaves at least 100 voice mails with subordinates a day.
And believing that there's more to life than work, he insists on being home every evening for dinner with his family -- he and his wife, Julie, just had their fifth child, Daniel, in February -- and he takes time to teach Sunday school and coach Little League.
As chairman and CEO, Kraemer has reshaped Baxter's business portfolio to alter its strategic course. Baxter was founded in 1931 as a maker of bottled intravenous solutions, and its medical-delivery business is still No. 1 in terms of sales within the company, with $2.94 billion in revenue last year. Baxter also is No. 1 worldwide in renal care. That unit had $1.94 billion in 2001 sales.
But thanks largely to a series of acquisitions, Baxter's fastest-growing business is now its $2.77 billion biosciences unit. A sign of its momentum: Baxter teamed up with Acambis (ACAMF ) to win a $428 million federal contract last November to produce 155 million doses of the smallpox vaccine, beating out Big Pharma rivals Merck (MRK ) and GlaxoSmithKline (GLAFX ).
Are shareholders profiting, too? Yes. Since the mid-1990s, Baxter's stock has leaped by an average of 25% a year, about the same as the Standard & Poor's health-care index. In 2001, the S&P benchmark slid 13%, yet Baxter rose 23%. Recently, after a daylong presentation to shareholders and analysts in Chicago, Kraemer took time out to chat with BusinessWeek Correspondent Michael Arndt on topics ranging from recombinant hemoglobin used for treating hemophilia to executive-pay excesses and management lessons from a son getting an object wedged up his nose. Here are edited excerpts from the conversation:
Q: One of the things that you've been working on over the last few years is changing the corporate culture at Baxter. How would you describe Baxter a few years ago?
A:I always go back to 1993, which was the year I took over as CFO. I went around to talk to the 50 largest shareholders. They basically said: "Harry, you guys have got a lot of interesting businesses, but I don't think you're very focused or very disciplined. There's very little consistency because you say you're going to do something, and then it doesn't happen. And then you wonder why you don't have a lot of credibility."
To fix that, one of the things we did very early on was to change the compensation system. Back in 1993, a substantial portion of every senior manager's compensation was a bonus based on the results of his individual business. It was no wonder why no one was really worried about the total company. So we put incentives in place so people would focus on the total company rather than their individual business. We encouraged the top 65 managers in the company to take out a personal loan to buy Baxter stock. The performance of the overall company became the most important factor in how well they were compensated.
Last year [we started] giving options to all team members at Baxter, so that every single person -- whether an executive vice-president or on the line in a plant -- has an ownership position.
Q: Pardon me, but isn't that pretty obvious?
A:Yes, but most of my thoughts are pretty simple. I really believe that 99% of this is common sense. But then I always quote Mark Twain, who said, "The only problem is common sense isn't common."
Q: How else can you achieve this team spirit?
A:Another avenue, and it is something I'm very personally focused on, is communication. At most big companies, everybody is in a silo. My idea is if we could get people to start to understand and focus on how to optimize the total company, we could really do significantly better. So let's make sure people have a basic gist of what's going on at the company, try to keep it very informal, and try to increase the level of communication throughout the company.
Q: Give me some specifics on how you increase the level of communication.
A:Here's one crazy example. We have more than 30,000 Baxter team members hooked onto the same voice-mail system. That includes everybody but the folks on the factory line. This is hooked up in over 50 countries. People will tease me, but on an average day, I send between 100 and 120 voice mails. And I'll get back the same amount.
Tonight when I get home, I will leave a couple of voice-mail messages for the senior management team -- the top 155 managers of the company. I'll give them a summary of how the meeting went, what some of the highlights were. Then the other thing I'll do tonight is leave a message for all the team members worldwide -- that's 30,000 people -- and give them a more general summary of the key points.
Q: You also write a monthly newsletter, don't you? Or is it really ghostwritten?
A:I write it myself. I have no ghostwriter. Here's how this thing started. We were in the middle of a lot of chaos in 1993. We weren't generating cash. As CFO, I wanted to make sure everybody knew what the heck was going on and to keep everything unbelievably simple. So the last day of the month, after everybody had left, around 7 or 8 o'clock, I spent the next four or five hours writing.
What I did was tell a story from my own experience. Of course, if you've got children, there's always something going on. So as I was talking about the importance of incentives, I mentioned my son, who at the time was 4. He had got a hold of his sister's bead set and he somehow got one of them stuck up his nose. He tried to get it out, and the thing kept getting higher up his nose.
I got him in the car to take him to the emergency room, and right as I was getting ready to park I said to him, "Andrew, Daddy loves you a lot. We've got to get this thing out. If we go to the emergency room, this is going to cost Dad about $150. But here's the deal: If you can figure out a way to blow that out of your nose, first, we'll go to Blockbuster and you can buy any tape you want. And second, we'll go to Bakers Square, and you and I will split a French silk pie." Well, he blew the thing out, and it almost cracked my windshield.
The day [after I sent the newsletter], I'm in one of our facilities, and people are saying, "I really understand this incentive thing now."
Q: You've laid out lots of new products that Baxter is introducing and new areas that Baxter is going into. What excites you the most? I'm sure you could pick 10, but I'd like you to pick one.
A:If I could only pick one, I would have to pick protein-free recombinant Factor VIII products, which is a blood protein needed for coagulation and used for the treatment of hemophilia. We can make these products in genetically engineered cells rather than plasma so they don't have the risks of contamination. They are safe in terms of purity. It is by far and away the largest single opportunity for Baxter.
Q: All right, how about a second one.
A:I am unbelievably proud of what the company has done with vaccines and being the sole source provider, with Acambis, for smallpox. Until 1997, when we acquired Immuno Intl. we weren't in the vaccine business, and because we were going to be focused and disciplined, we honestly wondered whether it would make sense for us to get out of this. But I got a lot of push back from people saying, "Harry, here's why we believe this is going to be a significant opportunity." So we took a shot at it.
Well, four years later, when Tommy Thompson [Secretary] of Health & Human Services was taking bids for smallpox, we decided to put in a bid. Our total vaccine sales were $50 million or $60 million. but we thought that even if we got just a portion of [the smallpox business], it would show that we had come a long way. Now, ironically enough, all of the major vaccine companies want to do something with us.
Q: You got into the vaccine business, as you just mentioned, through an acquisition. Yet you've been critical of acquisitions. How do you make sure that what you buy makes bottom-line sense?
A:If there's one area I'm fanatical about, it's this whole area of mergers and acquisitions. Now, people don't like to hear this -- CEOs certainly don't like to hear this --but at the end of the day, 80% of acquisitions make no economic sense.
Why? Because as they got into it, and the love of the deal got hotter and hotter and hotter, people end up saying to themselves: "If this made sense at $30 a share, it's got to still make sense at $35, and they want $40? Well, you know what? We're just going to work a lot harder, and that'll made sense too." I don't think so -- particularly if it's a publicly traded company.
If the market price is $20, that means in an independent marketplace, buyer and seller have concluded the thing is worth $20. If I'm going to pay $30 for it, and it's going to be economic, I've got to make it worth 50% more. I've got to have an unbelievable explanation. So if we cannot demonstrate that we can generate an aftertax 20% rate of return, it doesn't make any sense for us, and we won't do it.
Q: How do you maintain a balance between being a CEO and your family?
A:That actually works out very well for me. I do some things that many CEOs don't do. But there are a lot of things that CEOs do that I don't do. I don't attend a lot of dinners. I don't golf.
We've been married 22 years, and Julie and I decided from early on that nothing was more important than our relationship. And if we were blessed to have children -- and we both came from large families -- nothing would be more important than our children. And I really do try to set a very specific example. So when an employee calls up and says I've got to pick up my kids, I'm not sitting there wondering: Is she committed to Baxter? This is not about not working. We've all got a lot of work to do.
You know what? We're going to create as much flexibility for people as possible, which basically means you figure out how you want to get it done and when you want to get it done. It just has to happen.
How does that manifest itself? I never get in to the office before 8 o'clock. And I will tell you, as strange as it sounds, very rarely will I ever be in the office after 6. We have dinner at 6:30, and if I'm not traveling I'm home for dinner with the family. Now, between 6:30 and 10, you would never, ever try to bother me at home because that's when we're either into our athletics, or we're doing our homework, or we're going to the park, or going to Border's and reading.
At 10 o'clock, once everybody's in bed, I run five miles through the Northwestern University campus in Evanston. When I come back at 11 and take a shower, I'm wide awake, and between 11 and 1:30, I've got 2 1/2 hours to respond to every voice mail. I don't do many e-mails because I type too slow. I'll also do 2 to 2 1/2 hours of voice mail on the weekend. Would I admit to doing voice mail when I'm jogging? Occasionally. But I never come in on the weekends.
Q: What are you reading these days? Is there a management book you'd recommend?
A:I would recommend a couple. I've always been a disciple of Alfred Rappaport, so I still recommend his old book, Creating Shareholder Value. Now he has another one out, Expectations Investing. Another is the new Jim Collins book, Good to Great. I fell into that one because I got 10 copies from different people. It was a little scary to me because the book is exactly what we've been talking about: a lot of common sense, a lot of communication, getting the right people in the right job, keeping it very simple, not trying to come up with some grand vision. But 99% of the management books I wouldn't recommend.
My hobby is world history. I am always in the middle of one of the volumes of [Will and Ariel Durant's Story of Civilization. But my mind is getting so bad that every time I get to the 11th volume, I have to start all over again.
Q: There's one last topic I wanted to talk to you about -- executive pay. Is there a point at which executives get so much money that they don't even know what to do with it all?
A:I'm a strange person to be asked this question because of my personal background. I personally don't spend more money than I did 20 years ago. I'm very, very conservative. I drive a Toyota. Julie just ends up donating a lot of money. But the money thing, that's how we keep score. I used to play baseball. Now, I run a company.
If you do well and the stock price does well, you're going to have money. I would have thought 20 years ago, yeah, how much money can people spend? But I have yet to run across people who said, "Harry, that's nice, but I really don't need any more money." Logically, you'd think you would, because you can't live in more than one house at a time, and it's hard to drive more than one or two cars. But people seem to find a way to spend.
It's just my own bias, but I'm in favor of a very, very significant portion of pay being based on the stock price. My view of compensation would be to pay someone a reasonable salary. I don't know precisely what it is, but it certainly wouldn't be more than $1 million under any scenario. The fact that people can make millions and millions of dollars and shareholders not get anything -- I'm sort of amazed that shareholders let people get away with that. It strikes me as beyond absurd.
I also believe that you should set a standard. For us, for example, you could look at 2001. We had a great year. But we also had a problem with our dialyzer. Fifty people died. Does it really make sense for management to receive 100% of their bonus payouts? I don't think so. The buck stops somewhere, and in this case, it stops here.
Edited by Douglas Harbrecht