Citizen Kraemer: How baxter international's chief Harry Kraemer learned to stop worrying and love sustainability. (Sustainability).

On Nov. 13, 1998, a coalition of activist investors, led by advocacy group Healthcare Without Harm, filed a shareholder resolution with Baxter International, a provider of biomedical therapies and equipment with approximately $7.6 billion in revenues. The resolution demanded that Baxter "adopt a policy of phasing out the production of polyvinyl chloride plastic." PVC comprises many of Baxter's leading products--products as common as IVs, blood bags and dialysis tubing.

The resolution was like a draft indictment. The activists claimed that PVCs release carcinogenic dioxins during waste incineration. They also claimed that compounds in PVC leach toxicants that can damage testicular development in newborn boys and put dialysis and AIDS patients at risk.

The filing of the resolution was a critical test for then-President Harry M. Jansen Kraemer Jr., who would become CEO two months later. The investor group, a coalition led by the Interfaith Center for Corporate Responsibility, the New York group at the center of socially responsible investment, was preparing to confront Kraemer at the annual meeting. Baxter's manner of responding would establish the company's reputation as a good corporate citizen--or an errant one.

Kraemer issued a challenge to his people that set the tone for the negotiations that followed: "Can we sit down with these folks and -- rather than let them think they're sitting down with corporate drones who aren't listening -- can we convince them that we really care? We want to be involved, and we want to be sure we're doing the right thing."

When the activists traveled to Baxter headquarters in Deerfield, Ill., the company dispatched a group of top brass to meet them. Among them were the company's vice presidents of advanced technology, quality management, environmental affairs and IV systems, along with the corporate secretary, senior research scientist and medical director. Charlotte Brody, head of Healthcare Without Harm, came with three colleagues, a Greenpeace activist and three institutional shareowners representing tens of thousands of Baxter shares held by socially responsible investors.

The verdict by the activists? "A very impressive meeting," says Rev. Gordon Judd, representing 46,600 shares held by Detroit's Sisters of Mercy retirement plan. "They do their homework."

"They allowed an open, heated dialogue that made all of us smarter," adds Brody. "They had the people who could make the decisions at the table... It wasn't just public relations and investor relations [people] to politely disregard everything we had to say."

In a memorandum of understanding, Baxter agreed to three points: to inventory its PVC products, set a phase-out schedule and refrain from letting PVC trade groups include Baxter in advertising. In return, the activists withdrew their resolution, relieving Baxter of bringing it to a vote at the annual meeting.

Kraemer and his executive team thus won a key early battle in bolstering the company's reputation as a good corporate citizen. The activists laud Kraemer as supportive, knowledgeable and, in Brody's words, "gracious."

Alpine epiphany

An imprimatur from social investors and activists isn't something Kraemer has been seeking. But he's glad to have it. In his tenure as CEO since January 1999, he has vowed to make the world a better place at home, work and internationally. "Somebody has to do this," he says. "Why shouldn't it be the 45,000 people at Baxter?"

Championing citizenship used to be an unusual activity for CEOs. Such was the idiosyncratic domain of Ben Cohen at Ben & Jerry's and Anita Roddick at The Body Shop International. But Kraemer, 46, differs from early practitioners, whose efforts had a revolutionary flavor. To Kraemer, corporate citizenship is simply a sensible business strategy whose time has come. "He puts the same energy into this part of the business as he does the financial part," says Martha Ingram, a board member and chairman of Ingram Industries in Nashville.

Kraemer, who graduated summa cam laude from Lawrence University in Appleton, Wis., in mathematics and economics, loves the hard numbers of business. He received his Master's degree in finance and accounting from Northwestern's Kellogg School. But Kraemer has always had an eye on the big picture. After starting with Baxter in 1982, he became in 1993 one of the few CFOs who saw value in environmental management.

In 1996, when many CFOs still viewed "green" management as a way to spill red ink, Kraemer saw otherwise. "Being an environmental leader is one of the most important things we can do to be a global leader," he said at the time. In part because of his support, Baxter has for years issued one of the rarest of documents: an environmental profit/loss statement -- which shows that Baxter netted $12 million in savings during 2000 as a result of its environmental programs.

In 2001, Kraemer began the year with three big goals: to be the best team, the best partner and the best investment. But in February 2001, he attended the World Economic Forum in Davos, in the Swiss Alps. That year, the annual summit of business leaders drew record numbers of anti-globalization protesters -- and unprecedented discussion about corporate responsibility. Klaus Schwab, president of the Forum, called on corporate bosses to make the world a better place.

Kraemer was inspired. "If nobody provides the leadership, how's it going to happen?" Kraemer asked himself afterward. "If we truly are going to be a leader, if we truly are going to set an example...then we should highlight this ['best citizen' role] as a fourth goal."

Last November, Kraemer added "best citizen" to the company's three-part scorecard of performance measures, giving it the same emphasis as best team, best partner and best investment. On the scorecard, best citizen is defined by four objectives: Make Baxter a community leader. Stimulate active team member participation in communities. Increase global access to health care. And reduce waste and increase environmental productivity.

A dedicated father of four, Kraemer is proud that some of Baxter's best programs come in the work/family category. Baxter offers loads of benefits, like back-up elder care, adoption assistance and five kinds of alternate work arrangements, including flextime and job sharing. "He encourages [employees] to be fathers and mothers as well as business people," says board member Ingram.

"I want people to bring their whole person to work," Kraemer says. Baxter should be sensitive not just to peoples' work lives, he explains, but to their family, community, religious and health concerns. "It's a holistic approach," he says.

Indexing the difference

Some CEOs worry that, if they did the same, investors would accuse them of pampering employees or wasting money on pet causes. But research suggests otherwise. Most of the nearly 100 English-language academic studies that have looked at the link between corporate social responsibility and financial performance reveal a positive correlation.

To be sure, most of the studies are easy to fault, says James Walsh, University of Michigan business professor and co-author of several works on the topic. They fail to prove that responsible corporate behavior is the cause of better financial performance. They also measure financial gains and social effects in so many ways that one study's results aren't comparable to another's.

Still, being a good citizen doesn't hurt. The Domini 400 index of socially responsible companies has outpaced the S&P 500 over the past 10 years, gaining 13.82 percent annually versus the S&P's 12.78 percent. "We've proven that performance does not have to be sacrificed to invest in a socially responsible manner," says Steve Schueth, recent past president of the Social Investment Forum, a social investment trade group, and president of First Affirmative Financial Network in Boulder, Colo.

As for Kraemer, he has long wanted to have an impact beyond the bottom line. When he was 10, his uncle, a priest, was visiting the Kraemer home. Kraemer told his uncle that he liked how priests can make a difference in everything they do. In response, his uncle agreed, but cautioned Kraemer that priests only have an impact on people who come to church--and that many people need to be reached elsewhere.

Kraemer now has the chance to reach that "elsewhere," through his 45,000 people. Baxter has a broad menu of programs to help people outside the company. The Baxter Foundation gave $4.7 million in 2000 to care for children, the uninsured and the elderly, and to prevent child abuse, promote health education and otherwise help local communities. The company encourages volunteerism--and then donates money through its Dollars for Doers program to charitable causes employees participate in. For a number of years it has helped pioneer the emerging global standard for environmental and social reporting. As a member of the Global Reporting Initiative, it documents with hard numbers its social and environmental impacts in a published report--revealing its social and environmental performance numbers as transparently as its financial ones.

These days, Kraemer is not alone. The chief executives of leading companies from Dow to Shell to DuPont to Novartis are doing the same. These leaders argue that globalization, advocacy group pressure, Internet access, social change--a raft of trends--have made corporate citizenship a priority. Witness the global public uproar when Shell proposed dumping its Brent Spar oil rig in the North Sea in the mid-'90s. Afterward, Shell adopted corporate citizenship like a new religion. Today, Chairman Mark Moody-Stuart sounds like an executive from a different company. "How we succeed is as important as what we achieve," he says in the company's latest report on citizenship.

Among the forces driving the citizenship trend is the increased clout wielded by socially responsible investors in recent years. A report released several months ago by the Social Investment Forum reveals that $2 trillion, or 10 percent of all professionally managed assets in the United States, are screened for a clean record of corporate citizenship, up 36 percent in two years. Today, 230 mutual funds exclude companies with a blemished citizenship record.

The responsibility challenge

With so much social awareness, chief executives face a new challenge. "The job description of the CEO itself has changed," says David Vidal, director of research for Global Corporate Citizenship at The Conference Board in New York. Vidal says that, among other new tasks, CEOs have to lead stakeholder dialogue, create high-level training in citizenship, convert principles into operating plans and create an audited public accounting of performance.

Kraemer maintains Baxter is well along in each of these tasks. The company's guiding concept for implementing citizenship is "sustainability" -- defined as balancing the needs of all stakeholders while operating in a manner that sustains the business, local communities and the environment for future generations. Kraemer trumpets this message over and over.

In a speech last year to the Coalition of Environmentally Responsible Economies, or CERES, the corporate watchdog group founded after the Exxon Valdez oil spill, Kraemer convinced the crowd he was the genuine article. "Life is dramatically simpler if you only understand one side of the story," he said. "It's understanding all sides of the story that actually makes things complex... [and] you almost owe it as a socially responsible person, as a global citizen, to understand the other perspectives."

When asked how he puts sustainability and best citizen notions into action, Kraemer is philosophical at first. He stresses three values above all: respect, responsiveness and results. Respect, his favorite, depends on cultivating leaders who have the self-confidence to let other people challenge them. "When you're not caught up in being right," he says, "then you have the ability to listen when an issue comes up--and I mean really listen." And by listening, Kraemer says, people take the time to understand all the perspectives he referred to in his CERES speech. They then make "holistic" decisions in the best interest of the whole company. They worry more about doing right than being right.

Such an approach is especially critical in a crisis. In August last year, more than 50 people died using Baxter dialyzers in Spain, Croatia, Taiwan and elsewhere. Baxter recalled the dialyzers immediately. Then, in November, Baxter announced it was closing the two plants that made the dialyzer models that caused the problem.

Some people thought plant closure was overkill. After all, Baxter had found the problem, a residue of unevaporated testing chemical. But Kraemer wouldn't hear of continuing production of the problem models. By November, Baxter had already settled with 10 Spanish families, paying each $289,000. "We're accountable for what is our responsibility," Kraemer says. "I feel terrible about what happened."

Principles pass muster

Social watchdog groups cite few lapses at Baxter. Institutional Shareholder Services' Social Investment Research Service in Rockville, Md., reports that Baxter has a clean record. So does the Investor Responsibility Research Center in Washington, D.C. IRRC tracks the use of animal testing, environmental performance, board diversity, labor relations and a dozen other issues.

Baxter's performance under Kraemer has earned it a spot on the Dow Jones Sustainability Group Index, reserved for the top 10 percent of companies with the most sustainable business practices. It has also earned Baxter a spot on Business Ethics magazine's list of "100 Best Corporate Citizens."

Though Kraemer emphasizes citizenship, he hasn't neglected the business. Baxter's market value has rocketed from $5 billion to $31 billion in the past five years. Kraemer's approach has not been to pay for citizenship with shareholders' money, but to integrate citizenship into all business practices to bring more money to the bottom line.

Of course, as much progress as Kraemer has made in instilling best-citizen status in the company, he doesn't claim perfection. Baxter forthrightly lists in its sustainability report "developmental opportunities," or weaknesses, such as community relations, volunteerism, diversity in senior positions and workplace safety.

But Kraemer is certain that self-confident leaders who listen and who are willing to accept being wrong for the virtue of doing right will propel the company to be more socially responsible. With just such leaders at the PVC meeting, Baxter turned the challenge to its advantage. In a follow-up meeting last July, Baxter executives met with Brody, Judd and other activists to show that Baxter is ahead of schedule in developing the next generation of polymers that will replace PVC.

University of North Carolina--Chapel Hill business professor Stuart Hart, an expert in sustainable business, says that the most advanced companies are "using sustainability to identify the business of the future that will make existing operations obsolete." That's what Baxter is doing: getting ready to overtake the competition -- and polish its reputation in the meantime.

Consumer Clout

MULTINATIONAL COMPANIES FACE growing pressure from consumers to act responsibly. The most demanding consumers, based on interviews with 20,978 average citizens in 20 countries, are in the United States and Canada, followed by, surprisingly, Mexico. Consumers in these markets expect firms to go beyond traditional economic roles to help society and are willing to punish companies--for example, by boycotting products--for acting irresponsibly.

Corporate Social Responsibility Ranking

1 United States

2 Canada

3 Mexico

4 Great Britain

5 Spain

6 Argentina

7 Italy

8 Sweden

9 Germany

10 France

11 Indonesia

12 South Korea

13 Chile

14 Japan

15 Turkey

16 Brazil

17 China

18 Nigeria

19 Russia

20 India

Source: Environlcs International Ltd., 2001.