Few companies can better appreciate the yin and yang of good and ill fortune than McKesson, the $80 billion health-care-services corporation. On April 28, 1999, it announced a small earnings restatement in its HBOC business unit. Investors reacted by selling off, in a single day, $9 billion (or nearly half) of McKesson's market capitalization.

Forensic investigations in the succeeding months revealed widespread accounting fraud at HBOC, the medical-software business that McKesson had merged with, to great fanfare, only three months earlier. In addition to bringing about further earnings restatements, the scandal soon claimed the jobs of the newly merged company's board chairman, CEO, and CFO, as well as five top managers of HBOC, several of whom were later indicted for securities fraud.

In the scandal's wake, McKesson's previous chairman—who had retired when the merger with HBOC closed—resumed his post and named a new management team with an unusual co-CEO structure. One of the co-CEOs was John Hammergren, who since 1996 had served the "old" McKesson in a variety of executive roles. Hammergren became sole CEO in early 2001. He and his new leadership team faced the daunting task of rebuilding not just one shattered company but, in essence, two: the former McKesson and the newly acquired HBOC.

McKinsey's John Durrett, a director in the Silicon Valley office, recently sat down with John Hammergren in McKesson's San Francisco boardroom. Hammergren's comments show that the true meaning of misfortune can't become clear until time reveals the good that accompanies the bad. The crisis McKesson endured provided a once-in-a-lifetime opportunity to remake its culture and performance along stronger lines. And remade it was: today McKesson has an industry-leading position in pharmaceutical distribution and health care information technology, among other businesses, as well as an extremely strong balance sheet. The transformation also influenced the top line: revenues have more than doubled over the past five years.

The Quarterly: What was your reaction when you first learned the extent of the fraud committed at HBOC?

John Hammergren: All of us were in a state of shock. McKesson had been a high-flying, high-performing company in the years previous to the restatement and so had HBOC, the company we'd acquired. We couldn't help but ask ourselves how could this have happened, what can we trust, and what steps must we take to recover. The recovery process was the first thing on my mind.

The Quarterly: Didn't it take a while for the full extent of the fraud to be revealed?

John Hammergren: Yes, there were two restatements after the initial one. At first we thought the problem might be just a single contract that had been inappropriately booked. But when the audit committee began a more thorough investigation through the use of outside experts, it realized that the issues were much more pervasive and much more significant than we had expected. While my initial reaction was that perhaps Wall Street had overreacted to the first earnings restatement, it turned out that Wall Street understood something I didn't: in the software industry—and HBOC was a software company—issues around revenue recognition often suggest more significant problems.

The Quarterly: What were the first steps the company took to address the crisis?

John Hammergren: The board did a couple of very smart things right away. First it took control of the company, starting with the initial, relatively small restatement. The board clearly felt that it was important to diagnose the financial statements and to establish the appropriate control system over them and over revenue recognition. So the board began to direct the discovery process relating to the acquired company's financial condition and took charge of the restatements and communications associated with the process, as well as the transition to new leadership. Along the way, the board made sure to protect the enterprise, not individuals. If this meant it had to make some difficult personnel decisions, that's what it did.

The Quarterly: What might have happened if the board had been less hands on?

John Hammergren: Without the early moves the board made to be open and transparent to the financial community and to the regulators—and without its ongoing efforts to keep people informed as we uncovered more and more problems—the company could have had a much different fate.

As a direct result of the board's active role during that time of crisis, the company was never indicted by the Justice Department, and the Securities and Exchange Commission never took any formal action, although some individuals involved in this affair have faced difficulties from those sources. Clearly, there have been companies where directors either didn't pay as much attention or didn't assert as much control and autonomy. We were ahead of our time regarding those kinds of governance processes.

The Quarterly: Did the direction of the crisis shift back to management with the naming of a new team—including you as co-CEO—a few months later?

John Hammergren: The direction of the crisis, from an operating perspective, shifted at that point to management. But I spent most of my time focused on going forward rather than trying to understand what had happened in the past. And having the board continue to manage the litigation allowed me to focus on making sure we would have a going concern when everything was settled. It was one thing to discover what had happened and why, and another thing to have a company going forward. So my mission, my first priority, became to gather people up off the floor and to focus them on what needed to be done to make things right.

The Quarterly: Did you formulate a plan at that point or were you more reactive?

'My first priority became to gather people up off the floor and to focus them on what needed to be done to make things right'

John Hammergren: I focused not on the big strategic issues of the corporation but on how to recover the minds and souls of our employees. I knew that if we didn't get this done there would be no strategy, no future, and no grand master plan. You have to remember that this was 1999 and early 2000, when the equity markets were still on fire because of the dot-com boom. That made recruiting and turnover a huge issue for our corporation. Headhunters promising to turn young managers into millionaires overnight, at least on paper, were attacking the talent in all of our businesses—especially our technology businesses. So it was a very difficult time. Recovering from the crisis would have been hard enough on its own, let alone when headhunters were actively recruiting our most talented and highest-potential people.

The Quarterly: Employees no longer had a growth stock as an incentive to stay at the company.

John Hammergren: The company clearly had no holding power—from the point of view of personal wealth creation, at least—over any member of the management team, including myself. Every option that any of us had was now underwater. And trying to regain momentum in the stock market was obviously subordinate to regaining momentum in our business and regaining the confidence of our customers. That had to be the first priority. We had to focus on things other than our stock price as a sign that we were making progress, knowing that the stock price was going to be a trailing indicator.

The Quarterly: Meanwhile you had to contend with the ongoing litigation. In what way was that a distraction?

John Hammergren: Winning people's hearts and minds over to the idea that they can stay with you as a customer for life or can be an employee for a substantial part of their careers is a tall order in any circumstances. And in every one of those minds and in every decision about commitment to McKesson, there was always a nagging question: what are the financial implications of the litigation for the company? There were also other distractions. What about the stock price? What about John Hammergren—is he going to stay? Does the board support him? What about the company's strategy? Are we going to get rid of this or that business? Are we going to shut something down? Are we going to spin something off? And there was lots of conjecture, in the financial press in particular, about all of these things.

The Quarterly: Given the uncertainty inherent in such a situation, how did you go about "winning people's hearts and minds"?

John Hammergren: I spent the first few weeks on the road seeing as many of our employees as I could. I went out and tried to calm people down. I needed to reach out to people from the old McKesson to get them on the same page with me, to explain what had happened, and to talk about where we were going. And I had to reach a completely separate group of employees who had come aboard with the HBOC merger, all of whom were in a business I didn't understand at all—the information technology business. I had no point of reference for the people there. I hadn't recruited them. I hadn't even met them. And they didn't know me. They had no reason to like or trust me and no reason to follow me on this journey.

Many of them felt guilty about HBOC's leadership and how it had led that company astray and let McKesson down, so you had a lot of emotion tied up in this. And you had a lot of energy around questions such as what McKesson would do with this business unit now that the scandal had broken and what our future was going to be. It was an understandably scary time for these people.

The Quarterly: What did you do to unwind that emotion and put in place a foundation for trust?

John Hammergren: There were four things I focused on. The first, very quickly, was the realization that this was going to be a long march—not one of those quick-turnaround stories. In my experience, quick turnarounds are usually financial rather than cultural and performance turnarounds. And a quick turnaround, typically involving some kind of financial engineering, doesn't necessarily position a company for success. McKesson has been around for 172 years, so my goal was to make sure it could sustain itself for another 172. I knew that the turnaround was going to take years, not months, and I needed to get that point across.

The second thing was to establish a set of priorities we would focus on in revitalizing the company and to make clear statements that would help people understand those priorities. One of these statements was the need for a refreshed culture. And this was something that needed to happen not just in HBOC but in McKesson more broadly.

The Quarterly: Many companies undertaking cultural transformations lack such a clear mandate for change.

John Hammergren: We certainly had one. In many ways, it was a golden opportunity. The crisis we'd been through had broken the spirit of both organizations, and that allowed me to engage in more direct, person-to-person, heart-to-heart discussions about what was important than I might have been able to have otherwise. Because it wasn't about money anymore; our stock options were underwater. In fact, even if we survived, the money was going to be a long way downstream. We had to come around to a sense of how we were going to work with each other, of what our habits and norms were going to be, and of how we were going to mobilize around a common purpose. This cultural transformation became our third area of focus.

The Quarterly: How did you go about creating that common purpose?

John Hammergren: Primarily through a set of shared principles we began calling ICARE, with the I standing for integrity—doing what we say we're going to do and being straightforward and honest. The C is for customers first: how we think about building lifetime relationships with our customers. That means you don't mislead them, you don't lie to them; you treat them with respect and you follow through on your commitments.

The A is for accountability. Being accountable for the commitments we make to each other as employees, to our customers, to our business partners, to our suppliers, and to our shareholders. Accountability doesn't mean that you're always going to accomplish your goals, but it does mean that you don't commit yourself to something you can't deliver. The R is for respect, which really starts with communication. Communication, to me, is more listening than talking.

And the E is for excellence. In some cases, we had been stringing together a bunch of mediocre products and trying to convince people that, just because we had strung them together, they were somehow better than products from the competition. That obviously doesn't work. We needed to have world-class offerings in every one of our segments and every one of our services and then had to put these offerings together in a compelling value proposition that would help our customers win in their markets.

The Quarterly: So you focused on the long term and created shared principles. What came next?

John Hammergren: Next we refocused our communications to reflect McKesson's broader mission in the world. We needed to engage an extra 20 percent of our employees' effort and energy, to encourage them to bring both mind and soul to their work. I was worried, as I've said, that too many of them would go off to do something else they saw as more economically worthwhile from a personal perspective. There was also a risk that people would retire in place—spend more energy on their kids' softball teams than on McKesson, because they had just given up.

So we began to talk about the great things we're doing in health care and how important our company is to saving lives. Every one of our employees and customers is or will be a patient in the health care system, so it's in everybody's interest to do everything we can to improve the system before we use it or to improve it while our children or parents are there. I think that this larger purpose began to make a difference to everyone from the people with brooms in their hands to the executive vice president. Had we been in the ball-bearing business I'm not sure it would have been as easy to personalize it.

The Quarterly: So you established shared principles and shared meanings?

John Hammergren: Yes, and to underpin them we put goals and metrics in place through a balanced scorecard, which may not have been new to the world but was new to us. This, along with adopting the Six Sigma approach, allowed us to focus on operational excellence and to get the necessary progress reports about our performance. By mapping our processes and improving our productivity up and down the line, we discovered efficiencies across the company. In particular, the efficiencies in our core distribution business meant that we could deliver better service and value to our customers. At the same time, we invested heavily to remake the old HBOC.

The Quarterly: Why was a cultural transformation necessary in the old McKesson? The fraud was committed at a company you had acquired.

John Hammergren: Up until the acquisition of HBOC, the old McKesson had been making a significant number of acquisitions, all of which had their own priorities, value systems, cultures, leaders. No one had really taken the time to go back and put all of them into a common template.

What's more, McKesson—like many other companies at the time—probably became caught up in what its stock was doing as opposed to the more important metrics about how our customers were performing. Many of our acquisitions went by their former names. It wasn't until I became CEO that we took all of the business unit names off and made McKesson the sole brand. We did this as much for cultural as for branding purposes: to get people to realize that we should all think as one company.

The Quarterly: What was the fourth area of focus?

John Hammergren: The fourth key area was execution. We benchmarked our competition in every area and surveyed our customers and employees. We focused relentlessly on specific objectives in every area. We brought operating discipline back into the company.

The Quarterly: Did you ever have moments, during those first two or three years, when you doubted whether you could make the turnaround work?

John Hammergren: There are two key elements to succeeding with a long-run turnaround strategy. One is the financial wherewithal to stay the course: do I need to batten down the hatches and count nickels and dimes to make payroll? The second is the support of the board of directors. Fortunately for us, both of those things were in place. We never had a cash flow crisis, never had a balance sheet that was upside down, and never lost the support of our banks and vendors. So the financial condition of the company was very positive. And we quickly sold off one of our larger businesses—our water products business—whose proceeds further insulated us from any financial difficulty that might have short-circuited the long-term plan.

Was I concerned about our being successful? Absolutely. Was I worried about being able to turn around the technology business? Absolutely. Were there days when I said, boy, this is a tough row to hoe—our competitors are ahead of us, and we've lost the will of our employees and the commitment of our customers? Yes, all of those things concerned me. In the first six months, there were very dark moments. Every time we went around a corner, there was another negative surprise. Employee turnover continued to get worse. Customer attrition continued to get worse. Product deliverables continued to miss deadlines.

The Quarterly: No one would wish a crisis like this on anybody. Yet it certainly seems you've made a virtue of necessity.

John Hammergren: What transpired in 1999 allowed us, as a leadership team, to take the broken wreckage of what had been two great companies, each with multiple companies inside them, and to rebuild them in a different form and in a different fashion with a different set of criteria for defining greatness. I think we're fortunate that enough people here recognized the once-in-a-lifetime chance for us to remake McKesson in a better way.