CEO of the Year David Novak: The Recognition Leader

David Novak sees himself as the chief teaching officer of Yum! Brands and believes that recognition is the foundation for motivation—which is the only way to make big things happen.

In 1996, when David Novak worked for PepsiCo as president of KFC and Pizza Hut, Roger Enrico, then CEO of the company, called him up one day and said, “David, I’d like you to create a leadership program for PepsiCo executives. You’ve got a pretty good reputation for building and aligning teams, and I’d like you to share what you know and what you do with others.” Sixteen years later Novak, the CEO of $12 billion Louisville, Kentucky-based Yum! Brands, continues to do just that.

In 1997, the restaurant group made up of KFC, Pizza Hut and Taco Bell was spun off from PepsiCo because Enrico saw it as a drag on his earnings (he bought Tropicana with the money). Tricon (the Yum name came later) had been a stepchild and was pretty much left out in the barren wilderness like an unwanted newborn in ancient Sparta. The debt with which it was saddled alone did not auger for a promising beginning. There were two forces, however, that changed things: Andy Pearson, the past president of PepsiCo and former professor at Harvard Business School who became its first CEO, and his mentee, David Novak, who would build a new culture, one that ultimately proved Yum’s competitive differentiator. To this day, Novak credits Pearson for smoothing off his rough edges and disciplining his managerial thinking about leadership development and building teams.

Since the spin-off, Novak, 59, has expanded his alignment process, enabling Yum to grow into the largest restaurant group in terms of system units. The company’s restaurant brands are global leaders in the chicken, pizza and Mexican-style food categories. Yum has 37,000 restaurants in 125 countries around the world. McDonald’s still leads in the U.S. market, but Yum is expanding faster in emerging markets with net unit growth of 4,000 restaurants from 2006 to 2011 compared to Mickey D’s 1,800. The share of operating profit derived from international markets has grown from 20 percent in 1997 to 75 percent in 2011—more than 3M and GE but less than Coca-Cola.

From its early days, Novak has shaped Yum’s strategy, which consists of driving international expansion—building strong brands everywhere but particularly China—and improving U.S. brand positions in terms of consistency and returns. Yum has increased its share price six times during this period while maintaining double-digit annual EPS growth. As of Q1 2012, same store sales grew 14 percent in China, 5 percent in Yum’s international units and 5 percent in the U.S.

Like many of Yum’s customers, Novak is a longstanding fan of fast food. His family loved a bucket of Kentucky Fried Chicken. In college, he took dates to Pizza Hut; and when cramming for exams, he could demolish six to seven tacos at Taco Bell. He encourages experimentation with tastes and local offerings. In India, now a separate unit within the firm, customers can order a Masala line of pizzas or Fiery Drumsticks. “They are unbelievably fiery,” he says with eye-widening emphasis. In China, where a breakfast-food launch is underway, customers can have congee, a soup that’s taken in the morning. The French’s taste for desserts is indulged with a cream-ball-style ice cream served in a great bowl. “We sell a ton of them.” Yum launched a 30-restaurant chain of Chinese food restaurants in China called East Dawning and will roll out more when the concept is fully tested. It acquired a controlling interest in Little Sheep, a hot-pot, casual dining concept where customers cook items like Mongolian beef and vegetables.

The core of the company’s secret sauce is the simple premise that if one wants results, one needs the enthusiasm and commitment of people along the way. Simple to say, but not so simple to do without a well-developed process to make it happen. It was one of the defining characteristics that impressed members of the 2012 CEO of the Year selection committee (see sidebar, p. 28) in naming Novak. “Being a strategy person, I didn’t at first fully appreciate David’s emphasis on culture,” says Sam Su, the company’s vice chairman and CEO of Yum! Restaurants China, who was among the original executive team, “but since then it has been clear to everyone here that we couldn’t have done this without it.” In the conversation that follows and in his book, Taking People with You, Novak outlines key elements of how this approach works. JPMorgan Chase CEO Jamie Dimon, on whose board Novak serves, quips correctly that it is “a leadership book you can actually use.”

Given his penchant for exuberance and handing out chattering-teeth awards to those who have achieved company milestones, it is curious that he describes himself as an introvert. The son of a government surveyor, Novak lived in 23 states by the time he was in seventh grade. “We moved every three months,” he recalls, “and my Mom would say, ‘David, I’m checking you into this school. You better make some friends because we’re moving again.’ I think that this helped me learn how to work well with people and size up situations in a hurry. It gave me [insight] about other people because I was forced to go into so many situations, work through the anxiety and learn how to get along.”