Motley Fool Hidden Gems Investing - What a CEO Learned from Warren Buffett

Episode Date: June 1, 2024

… and other legendary leaders. David Novak is the former CEO of Yum! Brands. He’s also the author of the new book, “How Leaders Learn: Master the Habits of the World’s Most Successful People.” Ricky Mulvey caught up with Novak to discuss: Using power to empower others. Lessons from market-beating executives. Why prioritizing people over results is a winning strategy. Host: Ricky Mulvey Guest: David Novak Producer: Mary Long Engineer: Tim Sparks Companies discussed: YUM, CHDN, SBUX, GE, WMT, HD, LUV, TGT, AMZN, AAPL, MSFT, NVDA, NFLX, GOOG, DASH Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. The other thing I did is I went out and I spent, you know, Monday through Friday talking to the people on the front lines, you know, and I'd have these roundtables every morning and asking people what's working and what's not working, and I would learn what the problems are. And then what I would do is go to the people who knew how to solve those problems and say,

hey, let's do it. I'm Mary Long, and that's David Novak, the co-founder and former CEO of Yum! Brands, which spun off from PepsiCo in the late 90s and operates restaurant brands you know and probably love, KFC, Pizza Hut, Taco Bell, and the Habit Burger Grill. David's also a podcast host and author of the new book, How Leaders Learn. My colleague, Ricky Mulvey, caught up with him for a conversation about what he's learned from legendary investors and leaders like Warren Buffett, Howard Schultz, and others. Yeah. You talked to a lot of leaders who have, for our investing audience, who have beaten the market and delivered outstanding results for their

investors over a long period of time, both in your book and your podcast, you recently had on Bill Mudd of Churchill Downs, who is, it's one of those very popular in Kentucky, but for people who are people who are outside or maybe not as familiar with horse racing might not think about it as much. And one of the things that he does is, I think you asked him about, what have you learned about social media? And his quick response was, I bring in experts who know about it and I hire them and listen to them. And that's a big theme throughout your book, which is listening to experts, people you can learn from for specific challenges, not just groups of highly paid consultants to come in and teach you about your business. Yeah. And the other thing that is

interesting about Bill is he talked about how he attended the Masters, how he attended Super Bowls, all these different sporting events, because when the Churchill Downs as the Kentucky Derby, they have 150,000 people show up that day. And, you know, one thing that I really learned from that podcast with him was how he thinks about the customer experience from the minute someone goes into that churchill downs parking lot to the to the to the time when they leave you know and they have diagnosed that whole chain of events that happens to you as a fan and they try to make all sure all those touch points are are are really special so that the the fan walks out with a with a great experience and you know i don't think a lot of leaders really think through the customer

experience like Churchill Downs has done. And by the way, their market cap has just gone nuts in the last 12 years. And that also thinking about the customer experience often incurs short-term costs, right? With Bill, you talked about the Kentucky Derby where I think it's 150,000. And he said, the goal on the spreadsheet would be sell more tickets at a higher price. He, I would say, made a difficult decision to actually lower the capacity of the number of people they allow in to have a better customer experience for everyone attending the Kentucky Derby. Yeah. I think they had like 185,000 and it was just too crowded and it made it tough for everybody. But sometimes you have to drop back to go forward and he's done a great

job really navigating that. You've brought in leaders when you were the CEO of Yum to solve very specific challenges. One I'm curious about, if you have a story here, is Howard Schultz from Starbucks. Do you remember maybe a particular challenge he helped you solve or a piece of advice that he gave you? Yeah. Well, I think the one thing that Howard really reinforced to our team was just the importance of quality and not letting your standards slip. And the belief in the general manager at a Starbucks. We had him come talk to to our organization and, and he talked about how he brought all the general managers. I think it was in the new Orleans. Okay. So they could really get back to the basics of making good coffee and,

and, and, and, and getting the standards back into the, into the, into the brand. And that cost them a lot of money, but it was one of the things that he felt he had to do to, to shock the system, to get people focused on, on, on doing the right thing. And so we used Howard's example to really drive home the fact that quality really matters. And the second thing is, is that we always felt like our restaurant general manager was the number one leader in our company, because if you have a great restaurant general manager, they're going to build the team that's going to make the customers happy. And so that his view there reinforced, you know, our belief you know sometimes when you're trying to push ahead as a leader you can go to other

leaders to learn from and they may not tell you something different than what you're doing but they can reinforce what you're doing which gives what you're doing a lot more credibility and i think uh you know howard is a guy that also is very always pushing the envelope on on the customer experience and technology and the things that they were doing in technology we learned from as well What do you do about quality control when you have thousands of restaurants and you're one person in a leadership role? I think the only way when you have a big retail operation that you can get great execution is you have to put process and discipline around what really matters. So if, you know, having full tacos, for example, like, you know, with enough meat and every taco is important to you, you measure the hell out of it. Okay. Because 40% of what you sell is tacos. You better make damn sure they're good. Okay.

If speed of service is good, you better, you better measure your delivery times. And, you know, you, you, you rack and stack everybody, people knows where they stand. And, you know, that's a key thing, but you put process and discipline around what really matters. And then you train people around what really matters. And that's the only way you can do it. You just can't say, Hey, make a good taco. You better train people on how to do it. And then you better measure what you expect and you'll see improvement. I would say you learn about someone as a leader in a time of crisis. And as we're talking about tacos, when you co-founded Yum, there was a very difficult relationship between the franchisees who were very much at odds with

the company and threatening to break away. And that was a relationship you had to repair. What did you learn about leadership then? And how did you do that? Well, I think when you go into an acrimonious situation and you're the leader, I think the first thing you have to do is really listen to what people are concerned about. Okay. And when you have a distrusting situation, you have to be the person that extends trust first. Okay. I always felt like, you know, nobody's going to trust me unless I trust them. And I'm going to trust you until you prove otherwise.

And I think that philosophy, you know, helped us work through a lot of crises. I think the issue that you're talking about with our Taco Bell franchisees was we had a food safety issue, which really took a lot of our franchisees in the tough financial territory. And I basically told him, hey, you know, I understand exactly where you're at here. I know that your business feels like you feel like you could, you know, lose your business or a great deal of your net worth, but I'm going to stand by you and we're going to work our way through this. And the only thing I expect is that you trust that I'm going to be doing that and that we work on this together and we don't have any rogue behavior.

You know, you're not out there talking about how stupid we are. Okay. And we worked it through and our franchisees today are very successful. And I remember after we went through that whole experience, they had a meeting out in California and they recognized me and my team for standing by them. And our relationship, because we went through that, I think is one of the best in the industry. One of the things you write in the book related to this is, quote, people, not knowledge or results should be the priority, end quote. What's that look like for a leader of a publicly traded company, especially when they have analysts who very much want to know the exact sales that are coming next quarter and the

exact margins on these relatively short-term bases? Well, I think that we all want the results that you're talking about, but I think what you have to realize is how you get them. And the formula for success in, I'd say, almost every business is you got to put your people capability first, then you satisfy customers, then you make money. Too many times people say, Hey, I want to make a lot of money, but they don't, they don't realize how you really get there. And you, if you don't have the people capability and the talent to get it done, it's never going to happen. You know, the best investors I know realize how important it is to

have strong culture and the long-term investors, they're never going to invest in any company that doesn't have a strong culture or CEO that doesn't really make that the highest priority because they know that's ultimately how you get the best people and you end up with the best results. To put yourself out there is very important. It's one thing you've done throughout your career. You made a very interesting jump as a chief marketing officer of a major food company to a chief operating officer of a food company, which you normally don't hear about those types of transitions. What was that like? I know you gave your boss at the time, sort of a six month trial period, you know, take me off it and there's no hard feelings, but what did you learn

in those six months when you were the COO of PepsiCo? I learned when you don't really know something, find the people that do and, and, and tell them you need them. And so when I went into that, I'll tell you a story of why I became, I felt like I was, it was important that I become a chief operating officer. I, as a chief marketing officer, I used to meet with Wayne Calloway, the chairman of PepsiCo. And, you know, there would always be this, you know, I'd go in with my ideas and my thoughts and tell them what was going on in marketing. And then finally he asked me one day, he said, David, what do you want to do in your career? And I said, well, I want to be a president of a PepsiCo division. And that was

either Frito-Lay, Pepsi, Taco Bell, KFC, or pizza. I didn't care which one, but I wanted to be a president. And he said, David, you're a really good marketing guy. And I said, well, I want to be a president because David, you're a really good marketing guy. I said, Wayne, I want to be a president. He says, you're a really good marketing guy. I'll make you president of marketing for PepsiCo because we need marketing talent. Well, when I walked out of there, I had the self-awareness that if I didn't gain operating experience, I would never be a president of PepsiCo. So when the Pepsi chief operating job opened up, I went to my, my boss and begged for the opportunity to do it. And I told him, like you said, I said, you can fire me in six months or, or, or put me

back into marketing or whatever, but I give me a chance. So then I get this job. I'm scared to death. Okay. I know nothing about operations. You know, I'd kind of been the marketing guy to go into an operating plant and I'd be thinking about my creative ideas, but I really wasn't paying attention to what was going on. But I realized the only way I was going to survive was to get the people who knew a lot about operations and use my power, okay, to do what was needed to be done. So I got the top operating guys in the company to come in. We talked and they told me all the issues that were within our operations. And so I understood what the problems were. And then I got the people who knew what the issues were. I said, okay, what do we

need to do to solve these issues. Okay. And I want you to develop the processes that's going to help us get, you know, make sure that our bottling plants are, are, are, are run better. And they went to work on it and they, they did it. And then I yielded my power, okay. To, to execute it and, and, and to get it done. But I couldn't have done it myself because I didn't know enough about operations, but I got people engaged. Okay. And then the other thing I did is I went out and I spent, you know, Monday through Friday talking to the people on the front lines, you know, and I'd have these round tables every morning and asking people what's working and what's not working. And I would learn what the problems are. And then what I would do is go

to the people who knew how to solve those problems and say, Hey, let's do it. And that I actually did a pretty good job as the chief operating officer of Pepsi. And it ended up, it was the reason why I ultimately got promoted by Wayne Calloway and became the president of KFC. But I think two things are really important here. Number one is I had the self-awareness that I was going to have to gain this skill or demonstrate that I could actually make money, you know, understand operations and, and work with the frontline. And I wasn't just an airy fairy marketing guy. I understood what that, that was, that was self-awareness that I gained. Okay. And then the second thing I learned is that you don't have to know everything if you're smart enough to seek

out the people that do. And then really listen, understand what it is, and then use your power to galvanize the organization or your team to change what needs to be changed. It's a thread in that is using power to empower others. And that's what you do when you're in a space that you're unfamiliar with, or maybe if you're trying to make a career change, convince those above you that the first thing you're going to do is really listen to the people who know their stuff and make decisions based off that. One leader who you learned from who I'm sure our investing audience would like to hear about your interactions with is Warren Buffett. And that's someone you specifically learned about communication from.

What were the lessons that helped you be a better CEO from your time with Warren Buffett? Well, I went to Warren, you know, when I became a CEO, I was a good operating guy, really did not have necessarily a great background at all in terms of dealing with the investment community. And so I wanted to learn the best way to do that. So I used some of my contacts and I got an opportunity to go, go meet with Warren. And I said, you know, Warren, what advice could you, would you give me? And he said, well, the first thing he says, you got to be really honest about your business. Tell everybody you're really in a tough business. You know, it's going to be, you know, it's a retail business. It's, it's, it's really, really intense competition.

And that is, that is challenging, but you're going to be more right than you're going to be wrong. And you've got great brands and you're, you're, you're going to win. That was one thing he said. And he said, and then he said to me, this was really a huge learning for me. He said, David, do you ever talk about what could go wrong in your business? And I said, well, not really. Cause I'm, I love our brands and I go in there and pretty enthusiastic about the opportunities the company has. And so I'm pretty, you know, pretty bullish about our opportunities. And he said, well, I would highly recommend that you tell people what could potentially go wrong in your business. And, you know, tell them the two or three things that they should be aware of if

they invest in your stock that could actually, you know, take the stock down. And I started doing that. So I go in and make my presentations that I say, you know, I love these brands. I'm passionate about them, but there's three things you need to know. Okay. About investing in our business and that could potentially go wrong. And most of the time investors would argue with me and say, it's not going to happen. Okay. But I found that by bringing those things up, it gave me a lot more credibility with the investor investment community. And I learned the power of what I would call a sober selling. You just got to be sober about your business. You can't act like, oh man, everything's great. That sober selling, I think, gave me a lot of credibility

over time. You got a pretty good kudos from Warren Buffett at one point, which is that you made Gertie proud. And I think this is a model, whether you're doing anything creative or for business, but it's to communicate to just one person. What did it mean to you to get that sentence and hang it up in your office for those who don't know? Yeah. Well, this is a, you know, I asked him about his annual letter and I said, you know, how do you write your annual letter? And he says, I think about my sister, Birdie. She's a very smart person. And I write this sister, you know, to my sister and I tell her, this is what businesses i'm in here's why i'm in the business and and i lay it out in really simple terms so

she can understand it because she's not a financial person and so i really took that to heart and i started writing my annual report letters and i really tried to think about that same thing like i'm writing it to my mother you know or and and uh you know so i sent him my annual report letter and he sent me a note back he says uh you know uh birdie would be proud and you're Right. I'm looking at it in my office right here. I'm looking straight across at the letter from Warren Buffett where he sent me that note. But I think the big thing, the point that he makes is that, you know, a lot of times we overcomplicate things. And, you know, if you're really going to communicate well to your investors or the investment community or your customers or

whatever, you need to simplify. Make it simple. You know, I always like to say you need to make your communications duckies and goats. You know, it's like when you, when you read a children's books to your kids, you know, they're, they make a point, but it's really simple and everybody gets it, you know? So, you know, how do you, how do you really simplify your communications? Well, it's, it's a rhetorical strategy. If something's going wrong, you present as much information as you possibly can for someone to sort through and then, and come to their own conclusions. But in simplicity, you have very, you have fewer places to hide. Absolutely.

You did a tour when you were CEO and you took your partner's counsel to visit dynastic companies. At the time, it was General Electric, Walmart, Home Depot, Southwest Airlines, and Target. It's amazing. Almost all of those have held up. General Electric has since been spun off. Are there any you would add to that today if you were doing a similar tour of companies that are just strong dynasties for leaders to learn from? Oh, yeah. Oh, if I was if I was starting a company today and, you know, and I wanted to go out and figure out what it takes to drive dynasty like performance. And what we did back then, Ricky, is we went to those companies because they had consistent performance year after year. And that's what investors value. They don't want you to be up one year and down the next year and up. You know, what people want is just consistent results. And so that's why we visited those companies at that point in time, because they were the companies that, that had that consistent results. And we created what we call our Yum Dynasty drivers and build our company around what we learned from those companies. But today, I mean, you know, you'd have to go to Amazon. I mean, what a company that is. Okay. I think you'd, you'd have to go to Apple. you know i mean you know you'd have to go to microsoft uh you know you know i would want to go to nvidia i would want to go to i would want to go to netflix you know i mean those are those

are five right off the top that you know i mean you just got to admire what they've done in the last decade you know and it's it's it's been an impressive as hell and obviously google i put how could you not go to Google if I could get in? You know, I mean, you know, but, but these, these are unbelievable dynastic companies that, that, that have great market positions and, and have figured out a way to, to keep things moving and keep things moving forward. And, and same way with Meta, you know, I mean, these, I know I'm dealing with the magnificent seven or more, but I mean, you know, how can you argue with what they've, what they've done? I mean, If you could get in and learn from any one of those CEOs or any one of those management teams, you'd be crazy if you didn't take that opportunity.

And all of those are heavy tech companies. Yeah. Whereas before it were retailers. Yeah. Well, you know, that's what's happened. You know, things change. I mean, you know, the Walmarts, the Targets, they got attacked by Amazon. They got totally disrupted, you know, and then, you know, it took them a while, but now they've got that digital business that they need and they got a chance now.

But if they wouldn't adjust it, if they'd have been like Sears and Kmart, I mean, good luck. Good night, Irene. Okay. They had to bite the bullet to be competitive. And now they've got the hard assets and they've got the digital and they've got a chance to win. I want to talk about recognition culture for a little bit, because if you're not only important for emerging leaders, but also for investors, one thing you might want to look for is if the CEO is recognizing the people around them, you did it with floppy chickens, signing them and then handing them out to folks with a crisp $100 bill so they remembered that they were doing something well. And it wasn't something that was always given out. I think someone you also feature who investors might want to hear this story is Tony Zhu over at DoorDash. And he does this a little bit differently, which is making those in corporate go out and do food deliveries so they know what it's like on the front lines. Yeah, absolutely. You know, he started out the, you know, the business by making deliveries himself and he never lost that. And his parents were in the restaurant business and he saw the importance of really understanding every aspect of the business. So he still does deliveries and he still has his team go out and experience the business from the frontline perspective. And, you know, that is such a powerful way to not only learn what's going on and understand how you can improve your operating processes to drive more reliable results. results, but it's also great recognition that you're giving the front line in terms of how much you value what they do, because you expect everybody on your management team to, to, to

understand what it takes to really deliver to the door dash expectation, which I, I think is, is great. You know, one thing about recognition that I think people really need to understand a A lot of leaders, you know, say, well, I'm not really that good at recognizing people, you know, or it's not going to work in my category because I'm, let's say I'm an engineer or, you know, I'm into technology. People aren't into recognition, you know. First of all, that's a bunch of BS. But what I always say is, okay, if you're, if you think, if you've got an engineering company, okay, what behaviors are going to drive your results? And for example, the person might say, well, you know, we got to be on time. We got to be innovative with our customers.

You know, we got to be on budget. You know, those are three things. So I said, well, why don't you start recognizing the hell out of people every time you see people who are on time, on budget and innovative? And guess what's going to happen? You're going to see more innovation, more people being on time. and you'll see those behaviors being executed. I call it recognize on purpose.

Whatever your cultural behaviors are, they should be the behaviors that are going to drive results. And then you recognize those behaviors every time you see them. And then you'll get people executing that, those behaviors on a much more frequent basis. David Novak, I appreciate the time you've spent with us listeners on Motley Fool Money. Thank you so much for your time, insight, and the conversation. Thank you, Ricky. I appreciate it.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.