Harry Kraemer's Moment of Truth

The next day, Kraemer and Heller flew to Washington, DC to brief officials at the Food and Drug Administration on the company's findings and its plan of action. Baxter executives had similar conversations with regulators in Spain, Croatia, and other affected countries. Baxter had warned 3M of the problem over the weekend. It also had reported the problem with the dialysis filters to rival manufacturers it knew or suspected were using the same process.

In the months that followed, Baxter searched through records for hundreds of thousands of its products and product parts, looking for processes that might resemble the faulty one at Ronneby. It added steps to qualify any material used in manufacturing, even if that material wasn't designed to stay in the end product. "This made us second-guess systems that we'd had for 20 years and that had always worked," Persky says. Adds Jose Divino, the associate medical director who had been Baxter's point man in Spain and Croatia: "What we know for sure is, this problem will never happen again."

And there was one more thing. Kraemer recommended that the compensation committee of Baxter's board of directors reduce his performance bonus by at least 40% for 2001. (In the end, he still got paid $1.4 million.) He also suggested to the committee that his top executives take a 20% cut. Patients had died on their watch. They had been responsible.

So Baxter admitted that it was wrong. It took the hit. And guess what? The world didn't end. The company's stock dropped slightly on news of the charge to earnings but soon recovered. "Baxter didn't try to assign blame away," says David Lothson, an analyst who follows Baxter for UBS Warburg LLC. "It showed signs of dealing with it decisively rather than letting it drag on. Investors tend to react very favorably to that."

The message to CEOs: Investors like honesty, including public apologies. (Kraemer visited New York to apologize in person to the president of Croatia.) So, it turns out, do employees. Kraemer was flooded with appreciative emails and phone messages from Baxter workers. As for customers, Heller admits that his renal business has dropped off in Europe - but he hopes to win that back too. "We violated the physicians' trust," he says. "It wasn't intentional, but our product failed. We have to rebuild that trust.

"In the short run," Heller allows, "our results are probably worse for the way we handled things. But in the long run, they'll be better. Bad ethics and bad judgment ultimately come back to burn you." (Of course, good ethics don't guarantee safe passage either. At press time, the FDA announced that on September 6, 2002, Baxter notified hemodialysis centers that tubing and needles used with its dialysis machines might have been linked to five deaths in the United States in late August.)

Nearly a year after the first death in Spain, Kraemer sits in his office, pondering the aftermath. To him, there is nothing extraordinary about what Baxter has done. This is simply how organizations and their people should behave. "Simplicity," he says. "Open communication of values." Respect, responsiveness, results. "Over and over and over again." If the values are authentic, then so are the decisions and the actions.

He pauses, then finishes the thought. "Of course we'll do the right thing," he says. "As opposed to what?"

Sidebar: What's Fast

Confidence and Humility
Handcuffs have replaced cuff links as the most visible wrist wear for CEOs - which makes Baxter International CEO Harry Kraemer's philosophy of leadership all the more refreshing.

"Leadership is a delicate blend of self-confidence and humility. You have to have the self-confidence to say, 'You don't want to make that decision without my input!'

"But self-confidence without humility becomes a problem. I may be the CEO. But part of that was having a few skills, and part of it was luck. Part of it was the man upstairs. So I'm no better than anyone else. Self-confidence and humility: Blend those two together, and you have someone who has a good chance of leading effectively.

Ninety-nine percent of people want to do the right thing. I've got 48,000 employees, most of whom care about the environment, or they have parents, or they are parents. I'm representing them. I've got 48,000 people who assume that we're going to do the right thing."

Keith H. Hammonds (khammonds@fastcompany.com) is a Fast Company senior editor based in New York. Learn more about Baxter International on the Web (www.baxter.com).