Chief executives and investor relations officers at companies in just about every industry sector have lately been called upon to calm the nerves of jittery shareholders worried about sinking sales, declining profits and plunging stock prices. But few have been confronted with a situation as dire as the one that confronted Baxter International’s top brass in 2008. The year began with actor Dennis Quaid pursuing a highly publicized lawsuit against Baxter, filed in December 2007, after his infant twins were mistakenly given near-fatal overdoses of heparin, a blood-thinning agent, at Cedars-Sinai Medical Center in Los Angeles. In testimony before the U.S. Congress and in interviews on “60 Minutes,” “Good Morning, America” and other programs, Quaid alleged that Baxter’s confusing product labeling had contributed to his newborns’ each having been given an adult dose of 10,000 units rather than a child-safe dose of 10 units.
[Links to profiles of the category winners are available at the end of this article.]
This wasn’t the only blow to heparin, which, despite its widespread use, is only a small part of the Deerfield, Illinois–based pharmaceuticals and medical device manufacturer’s portfolio; sales of the anticoagulant accounted for just $30 million of Baxter’s $11.3 billion revenue in 2007. In mid-January 2008 a spike in adverse patient reactions prompted the company to voluntarily recall the drug and suspend production. By April heparin had been linked to 81 deaths in the U.S. An investigation by the Food & Drug Administration traced the problem to a contaminated ingredient from a Chinese supplier, Changzhou SPL Co., whose production facility the agency itself was supposed to have inspected but hadn’t — the FDA had confused Changzhou with another Chinese supplier with a similar name.
To make matters worse, the FDA said it appeared that the imported ingredient, oversulfated chondroitin sulfate, might have been contaminated deliberately. A diplomatic tiff ensued, with China claiming the contamination had occurred after the product arrived in the U.S. The Chinese government refused to allow U.S. officials to investigate further unless the U.S. agreed to allow Chinese authorities to inspect Baxter’s facilities. A stalemate followed, and the Changzhou plant was shut down.
Testifying before Congress in late April, Baxter chairman and CEO Robert Parkinson Jr., said he felt “a strong sense of personal responsibility for these circumstances. I feel this responsibility because of who we are and what we do as a company.”
A CEO claiming personal responsibility for a product connected with the deaths of scores of people would be extraordinary under any circumstances, but even more so in this instance because Baxter was uninsured. The company had canceled its product-liability coverage in May 2007, saying it would self-insure because of the prohibitive cost of premiums.
One would expect shareholders to dump their holdings with lightning speed; they did not. Although Baxter’s share price slumped 11.4 percent last year from mid-January through mid-March, to $54.77, when Quaid’s lawsuit and the contaminated-heparin story were making headlines, the stock quickly rebounded and had surged 28.9 percent, to a record high of $70.57 by early August, when it began to tumble with the rest of the market as the global financial crisis intensified. Even so, Baxter’s share price slid only 6.3 percent in 2008, compared with the 38.5 percent tumble of the Standard & Poor’s 500 index.
Top executives’ deft handling of the heparin crises — while maintaining the company’s commitment to strong growth, improved earnings and an aggressive share-buyback program — certainly impressed investors and helped Baxter earn a first-place finish in the Medical Supplies & Devices sector in Institutional Investor’s fourth annual ranking of America’s Most Shareholder-Friendly Companies. The ranking reflects the opinions of 675 buy-side analysts and portfolio managers at more than 375 investment management firms with combined assets of $5.8 trillion in U.S. equities. Click on America's Most Shareholder-Friendly Companies to view the top-ranked companies in 57 industry sectors.
Baxter’s bottom-line performance helped too. The company reported strong numbers last year, including an 8.8 percent increase in total revenue, to $12.4 billion, and a 17.6 percent surge in net income, to $2.0 billion.
“The earnings growth that Baxter has delivered over the past three years, and particularly over the past 12 months, stands well above their industry peer group average and also the market overall,” marvels one investor.
Chief financial officer Robert Davis notes that the company is “somewhat immune” to the current economic environment because of the medically necessary nature of its products. Even so, the global recession and concern about ongoing heparin investigations are keeping Baxter executives busy with shareholders.
“The thirst for information from investors has grown significantly over the past 12 months,” says Mary Kay Ladone, vice president of investor relations. The challenge, she explains, is trying to find the right balance between “delivering a simple message that allows shareholders to make investment decisions, but not simplifying the message to the extent that we mask some of the uncertainty. This has always been the case, but the current environment has heightened it.”
Ladone says “open, honest and forthright communication,” has helped earn investor loyalty. Once the heparin troubles burst into the public spotlight, Baxter executives swung into action, issuing regular updates to the media and on the Internet about the progress of the investigation and the potential impact on the company.
“There’s a huge body of information on our Web site that was updated almost weekly,” says Deborah Spak, communications director. “Whenever there was something new in the case, it was published on our Web site.” The site also includes a “situation overview” and a number of videos of Parkinson and other Baxter executives discussing heparin, plus a full transcript of the CEO’s testimony before Congress. Investors who had signed up for the RSS feed from the site would get an e-mail alert when anything was added or updated, she says.
Baxter executives also discussed the situation in detail with buy-side analysts in a mid-April earnings call and opened the floor to heparin-related questions during the annual shareholder meeting in Chicago last May.
Quaid’s children recovered from the heparin overdose, which the California Department of Public Health concluded was a “preventable error” on the part of hospital staff; in December the actor agreed to a $750,000 settlement from Cedars-Sinai. His suit against Baxter was dismissed on jurisdictional grounds; Quaid is appealing the decision.
Executives at Procter & Gamble Co., deemed the Most Shareholder-Friendly Company in the Cosmetics, Household & Personal Care Products sector, also report a sharp increase in inquiries from investors. “The questions are about what our strategy is to manage, given the environment: Are those strategies enduring? Are they the right strategies?” says Jon Moeller, CFO of the Cincinnati-based consumer products manufacturer. “The nature of the questions has tended to be much more macroeconomic in nature, focusing on commodities prices, foreign exchange rates and market growth.”
Higher commodities prices compelled P&G to raise prices last year on many of its products, but the increases were not enough to offset losses attributable to unfavorable foreign exchange rates in Asia and Eastern Europe, where sales have been brisk. P&G’s director of investor relations, John Chevalier, says the volatile economic environment has prompted P&G to take a much more active approach to shareholders. After each quarterly earnings call, the company contacts its biggest shareholders to see if they have any questions or concerns. When times were good, Chevalier says, he would wait for investors to contact him.
One portfolio manager credits P&G with doing “a good job on conference calls” and for having “the appropriate people on the calls who can answer questions.” Another praises the company for being “open to talking about its business even when the news is negative,” as it was in January, when P&G announced quarterly profits that fell short of analysts’ expectations and cut its full-year earnings forecast on the belief that fiscal 2009 sales could fall by as much as 4 percent. The company’s stock slumped 13.8 percent in 2008.
P&G isn’t the only company to get good marks for the open, direct way it delivers bad news in this challenging economic environment. Kimberly-Clark Corp., No. 1 in Paper & Packaging, also had to inform investors in January that its fourth-quarter results were below expectations. Profits at the Irving, Texas–based manufacturer of Kleenex, Huggies and other tissue-paper products slumped 8.1 percent, from $456 million to $419 million. Management attributed the decline to lower sales in the U.S. and a weak dollar undercutting revenues in overseas markets, but “regardless of the reason, there is no one at Kimberly-Clark who is satisfied with this outcome,” CEO Thomas Falk told investors in an earnings report Webcast. Kimberly-Clark’s share price tumbled 21.0 percent last year.
“We do get good recognition and appreciation for reaching out directly,” notes Michael Masseth, vice president of investor relations at Kimberly-Clark.
So does the top company in the Airlines sector, Southwest Airlines Co., which one shareholder says “is pro-active and communicates a lot.”
Communication is not always easy. “One of the more complicated pieces of our story has been explaining our hedging strategy,” says Tammy Romo, vice president of financial planning for the Dallas-based discount air carrier.
Southwest began last year with 70 percent of its fuel needs hedged at roughly $51 a barrel, as protection against soaring prices; the same strategy saved the company $727 million in 2007, Romo says. However, when oil prices dropped sharply last summer, eventually hitting bottom at $33.87 a barrel in December, the airline began to unwind its positions, resulting in a $117 million writedown and a fourth-quarter loss of $56 million; its share price skidded 29.3 percent in 2008.
“Whenever you can’t break down information into an easy sound bite, it’s more difficult,” Romo says. “The key is being responsive, having open communication, and being accessible.”
Those attributes will only gain in importance as the global recession endures and investors need assurance that their money is safely invested. When companies can’t rely on earnings performance alone, they must be able to rely on their relationships with shareholders, who demand to be kept informed of how a company plans to deal with whatever contingency may come along.
“In this environment, anything you can do to please your shareholders is appreciated,” says one money manager.
Click on the company title below to view profiles of the category winners.
Baxter International
Health Care: Medical Supplies & Devices
Kimberly-Clark Corp.
Basic Materials: Paper & Packaging
Procter & Gamble Co.
Consumer: Cosmetics, Household & Personal Care Products
Southwest Airlines Co.
Consumer: Airlines