In a candid conversation at Davos with Fortune managing editor Andy Serwer, PepsiCo CEO Indra Nooyi shares a few truly surprising management secrets.
FORTUNE — Indra Nooyi has been CEO of PepsiCo since 2006 and during her tenure has seen a remarkable amount of change: from a financial meltdown to recovery, huge new scrutiny for her company’s products, and a revolution in consumer technology. She also faced criticism over how she was running PepsiCo PEP as she attempted to overcome these hurdles and globalize her company. A big part of her strategy: intense focus on key employees to an extent that some might find extreme. A favorite technique is to pen letters to employees’ parents. (Seriously!) She says it really works. Nooyi recently sat down with Fortune managing editor Andy Serwer at the World Economic Forum in Davos for an interview. Here are the excerpted highlights (lightly edited for clarity):
ANDY SERWER: All right, good morning everyone. And welcome to this very special one-on-one interview. My name is Andy Serwer and I’m the editor of Fortune and I’d like it if you could please join me in welcoming our guest, Indra Nooyi, the CEO of PepsiCo.
INDRA NOOYI: Thank you, thank you.
SERWER: Indra, I want to just start off by asking you kind of a casual question about Davos, and that is, do you participate and do all the crazy speed-dating and meeting like the rest of us do? Is your schedule just jam-packed?
NOOYI: No, I think the trick to Davos is having someone with you who knows how Davos works, how the Congress Center works, how the whole town of Davos works, and manages your life. And I have the most unbelievable Ph.D. in Davos, assistant Elizabeth Avery, and she tells me what I can do and cannot do. And I just follow her instructions and I can get through Davos without collapsing.
That sounds great. So speaking of Davos, and the World Economic Forum, I want to start off in asking you about the CEO’s role when it comes to political and social change. What is your take on that, Indra? In other words, how much should a CEO do in terms of trying to affect, and even political change, in the world?
I think every company, especially large multinational companies like ours, is a product or a victim or a beneficiary of the foreign policy of a country and government policies in every country in which we operate. The thing that we’ve learned is that if you have a problem, you cannot walk into a government office and say, “help me,” if you haven’t built a relationship over a long period of time.
It takes a lot of time to build these networks and relationships. So from the time you become a CEO, you have to figure out those important countries, those important issues, and build the coalitions around that because if you only want people to help you when you need them and not have an ongoing relationship with them, they don’t know you, they don’t know where you come from, and they are doubtful whether you really are interested in the issue, or are you just trying to skate over a current problem?
So I think every CEO has to decide who they want to build a deep relationship with, who they want to build a distant relationship with, and over your tenure, you’ve got to actively cultivate these relationships.
And it’s tough because government people change, so you have to rebuild a relationship, but we have to do it. And I think we do too little of it these days. And that’s why there’s a little bit of skepticism between governments and business, because they think business only use governments as opposed to build relationships with governments.
So, as the CEO of a large multinational company, a Fortune 500 company, you have various constituencies: you employees, your shareholders, the people of the towns in which you operate. And for many years, it was said that you really only had one primary constituency which is your shareholders. That seems to be changing. What is your take on the priority of your constituencies?
It depends on whom you talk to, okay? I think many, many people would say today that if you take care of your customers, your employees, the societies you operate in, your shareholders will be taken care of. Shareholders would rather you say shareholders are the most important, and if you take care of the shareholders, that means you’re taking care of the customers.
So it depends on whom you’re talking to. At the end of the day, I think the old shareholder theory is gone. The stakeholder theory is there because what happens is the following. If you don’t worry about the NGOs that are focused on carbon footprint or water, and they decide to start a campaign against you, it affects the reputation of your brands, your sales goes down, and there’s your shareholder saying, why didn’t you anticipate this?
But, so depending on the issue, one stakeholder is going to come at you. So the best thing you can do is from Day 1, say, the company operates in an ecosystem, and you cannot ignore any part of the ecosystem. You’ve got to pay attention to every part. The employees are critically important. Your customers, you can’t do without them. Your suppliers, NGOs, multilateral organizations, governments, and shareholders: they all play a critical role in the overall ecosystem. And that, I think, is the challenge of a CEO: how do you juggle all these people so that everyone feels that you care about them and their issues?
By the end of the day, what you are doing is threading a needle, through all of that, in order to keep a company running for decades to come. That’s really what we are focused on.
There is a risk, in other words, to only focusing on shareholders, and simply trying to maximize shareholder value because it would come at the expense potentially of other constituencies?
I think the challenge, Andy, is to say, how does a CEO manage for level of returns and duration of returns? If you say I’m going to come in and I’m going to run this company for 5 years, and I’m going to drive the performance of this company to very high levels, and after 5 years I’ll retire, who cares what happens next? You are managing for the CEO’s duration and level of returns.
But if you are managing the company in an unselfish way for duration and saying, “I want this company to be around for decades — “ because large companies, that’s the whole reason they exist, to be around forever…. I think that’s the way you should run the company — not focused on extremely high level of returns, and then have the company fall apart. And in order to manage for duration, you’ve got to handle all of these constituencies, you have no choice.
Speaking of CEO tenure, you became CEO in 2006, and on the one hand it seems like it’s been a long time, on the other hand it’s not that long, but the world has changed quite a bit since then. I wonder if you could speak to that?
Well, I don’t think it’s because I became CEO, but a year after that, the economy collapsed. (laughter) The global economy collapsed. And you know, it’s very difficult because from about 2000 to 2006 was a period of phenomenal prosperity, if you recall. The bubbles were all being created.
And all the CEOs who ran companies in that first part of the decade had tailwinds from the economic growth. Companies like Walmart were growing in leaps and bounds. That provided tailwinds. The euro … was terrific, emerging markets were doing well.
Then the CEO changes…and then the economy collapses. [In the case of PepsiCo] we [had] a company which was more U.S.-based than we would have like it to be, and an environment where all of a sudden, our categories were being called into question.
So as the new CEO, you sit there and go, my goodness, what do I do? Do I say, “Okay, I’m going to manage this company for 4 years, and in 2010 I’m going to retire. So why don’t I cut, slash, and burn all the costs, run this company for double-digit EPS for 5 years, and then let the next CEO handle the problems?” Believe me, that thought crossed my mind, for about 5 nanoseconds. (laughter) And I realized that that would —
But there are people who have done that…
In fact there are books written saying that’s what CEOs should do: “The day you arrive, crash the financials, write the alpha, and hand it off to somebody else, let them crash the financials.”
I think, Andy, that is the most irresponsible way to run a company because it’s not good for shareholders, it’s not good for value creation. Nothing. And so I sat back and I said, “Look, this is my company, this is my living, my livelihood. And 300,000 people in PepsiCo depend on PepsiCo for their life and their livelihoods. There are pensioners and investors out there who are hoping PepsiCo will remain a successful entity forever.”
And so I sat back and I said, “It’s going to be a tough slog, but we’re going to transform this company. We’re going to make all the investments we need to make, including shifting our portfolio, to become emerging and developing markets-focused.”
Tremendous transformation. I knew there would be critics along the way, but as long as the board of directors was on board and we could sell it to our senior management, I knew that we had a damned good chance that we would get to the right place.
It wasn’t easy; it wasn’t easy at all. The board bought into it. Our senior executives bought into it. Those that didn’t had a duration over which they could change their mind– and if they didn’t, in that period, they had to leave the company.
I was out there, like a missionary with all the employees, explaining why we’re doing what we are doing. And you know very well, many people in the media questioned what I was doing. Investors — some investors — questioned it. I’m sure they sold the stock. But I think at the end of the day, the process of transformation is tough until the curves cross over, the old and the new model, and I think we’re at that point now where the curves are crossing over.
So all of a sudden, people are looking and saying, “My God, wasn’t she right in what she said?” So it feels good to be here today versus two or three years ago, when everybody was saying, “Why are you doing what you are doing?” And believe me, there were times then I said, “Maybe I should abandon this part.” But each of these thoughts lasted a few nanoseconds.
We talked about that indeed, Indra, and I know that that was a difficult time for you, and the critics were out in full force. I want to ask you very specifically about what the transformation at PepsiCo entailed. To my mind, you’ve talked about two elements: number one is focusing more on emerging markets; and number two, and this is something I think we should talk about a little bit, is creating a healthier portfolio of products — foods and beverages, right?
Is it both of those things?
Absolutely — and a little bit on philosophy and talent because they all come together.
Let me speak to each. We were a portfolio of products that were predominantly what we call “fun for you.” The Pepsi and the Lays and the Doritos and Tostitos — fabulous products that brought a smile to your lips.
But as you looked at eating and drinking habits around the world, it was clear that people were looking to balance their lifestyles. I’m not talking about swinging the pendulum, but balance their lifestyles. They wanted to eat a combination of these “fun for you” products — and “better for you” products like Diet products or baked products, and then “good for you” products like Quaker and Tropicana.
People are beginning to focus more on prevention of illnesses. And I looked at this and I said: “Okay, there are headwinds in our cold categories, and there are tailwinds on the ‘good for you’ businesses.’ So how do we do 3 things? First, take the ‘fun for you’ portfolio and reduce the salt, reduce the sugar, and reduce the saturated fat levels. Second, how do we dial up the ‘better for you?’ [products] — make a lower calorie Pepsi, a baked Lays? How do we dial that up? And then how do we really push the ‘good for you’ products?”
I don’t want to tell you as a consumer, “For healthy products, you have to pay more.” Or “For healthy products, you have to make taste tradeoffs?” Because the worst thing I could tell you is if you want a healthy product, it’s going to taste like sawdust. You’re not going to buy it.
And that it costs more, too.
And costs more. And guess what? And you have to search for it, too! All 3 are no-nos. [You’ve got to] make it ubiquitously available, price it right, and make it taste great. And so this was a three-pronged strategy.
In retrospect, people go, “God, it’s so logical.” But at that time, they kept telling me, “Your job is to sell more fat and sugar and salt.” Which I never understood, because every person that told me that this was my job had already changed their lifestyle to consume less fat, sugar, and salt! (laughter) So I really have a problem when people tell you to do something, and they’re not practicing that, and I don’t think they have the moral authority to tell me to do it. That’s where I had the biggest problem. So that was one transformation.
The second one was geographic transformation. We were a phenomenal U.S.-based company that had a big presence in developed markets. And now we were saying, “Let’s just hit the pedal and expand our emerging market business.” The problem is, you can’t do it organically because if you did it organically, it would take two or three decades with uncertain outcomes.
So you’ve got to make acquisitions, and that’s what we did. We rolled the dice, made acquisitions. My experience, again? Any emerging market acquisitions looks expensive when you buy it. Three years later, it looks like, “Jesus, why did I do this?” Five years later, you’re a hero.
That’s the normal cycle, and I’ve seen so many of these developing- and emerging-market transactions. We made some investments. We have a pristine balance sheet. We used the balance sheet, made some acquisitions. [Those were the changes] to the geographic and product portfolios.
But we had to make another profound change in the company. We had to go from “Get the business done”– focusing completely on ourselves — to say, “Wait a minute, we operate in communities. We operate in countries. Let’s walk a mile in the shoes of the people in the community and the people of that country, and their government officials. Let’s think about our water usage, let’s think about the waste that we create. What if we changed the kind of company we are? Because if we use less plastic, we save money; if we use less water, we save money. We get a license to operate in communities.”
So we had to actually tell people why it was critically important to focus on all of those aspects of sustainability — not because these were corporate social responsibility programs, but because we wanted to make money a different way, in a responsible way.
And lastly, we had to sell this up and down the chain in the company, and we had to change the talent base. That was very tough because how do you take a company with a very strong U.S. employee base and say, “Guess what, guys? Global is where the growth is. If you want a career in PepsiCo, how about an assignment overseas?” They go, “Yeah, I’m ready to go to London or Paris or Geneva.” But that’s no longer “overseas.” Overseas is Latin America, Asia, Middle East: pick which one you like to go to. All the hands go down, and I go, “You know what? That’s your future. Because if you don’t understand those geographies, from the heart, you’ll never be able to run this company.”
Making that change — changing our whole talent management process — was not easy.
There was a lot of jumping off points there. I particularly like that line where you said that people were telling you to do things that they didn’t practice themselves, and I see that a lot of times in business, and it’s distressing, actually. I want to ask you, going back to the food portfolio — food and beverage portfolio — can you really be a company that makes healthier food, healthier products, and have healthy profits?
Absolutely. Absolutely. In fact, some of our healthier products have very good margins. The best way to make good profits in healthy products is to actually have a “fun for you” portfolio because the way you make healthy products taste great is to take the flavoring formulation technologies from “fun for you” and apply them to “good for you.”
The best example, for those of you who are in the United States, we have a product called Quaker Real Medlies. It’s a ready-to-eat Quaker Oats with nuts and seeds and fruit that you eat off the little cup. You just add hot water, wait two minutes, and you eat it. We could never have done that with such great quality, with such great taste, if we didn’t have all those tastes and flavoring capabilities in our core flavoring portfolio for snacks and beverages.
So the way you make money in “good for you” is you piggyback off all the technologies that exist in the big “fun for you” portfolio, and that’s why these portfolios work so beautifully together.
Right, so you’ve made these changes with the food and beverage portfolio. But is it over? In other words, are the demands going to continue to change in terms of consumer tastes and preferences? Do you feel like you’ve hit a stop point?
I don’t think any company hits a stop point because the world around us is changing in such profound ways. So, I think we have the core platforms in place but we have a lot more to do to expand in Africa, to expand in Latin America.
For example, in India, we are doing local breakfasts with Quaker Oats. We’ve just got started. We are doing Quaker Congee in China, but we have so much to do in other parts of the world.
So I wouldn’t say it’s done. I think the big transformation is done. Now it’s — you know — the ship is sailing slowly and all these little speed boats are getting off of it, doing their little journeys during the day and then coming back to the mother ship.
I love how you say Quaker Congee. I’ve always thought that Congee and oatmeal are so similar, and it’s interesting that you’re going to connect them.
See, great minds think alike.
Well, I don’t know about that. (laughter) But interesting. It’s a big market, too. Millennials, Indra — millennials as customers, millennials as employees — this is a big question — Do they really think differently, do they really behave differently, or are they just young people like we’ve always had young people throughout the history of time?
This crop of young people is a different bunch. And many years ago, you had a wonderful cover of Fortune which said, “You gave birth to them, now you manage them.” Remember that? (laughter)
I do remember that.
I tell you, that was prescient because I have a couple of millennials at home, I gave birth to them, I’ve got to manage them. It’s not that easy.
Everything I do — I mean I just have to open my car window, they’ll go, “Don’t pollute.” Like, “Don’t breathe, you’re polluting.” So they are very environmentally conscious. They want to change the world. They’re idealistic, which is great because you feel like the future is in good hands.
The problem is, they hold you accountable for everything you do. And so, you can’t even go home without being judged. I remember a conversation my daughter was having with her friends around the breakfast table. You know, I’m this mother that hovers. So the only way to find out what your kids are doing is to hover around the room as they’re talking with friends and with your ear firmly glued to the conversation.
So, mysteriously, I had to keep going into the breakfast room to find milk every 5 minutes. I’m listening to the conversation. It goes, “You know, big companies, they’re terrible. They pollute. They do terrible things to the water supply.” She was an environmental science student. And I’m listening to this conversation, going, “This is horrible, my own daughter sitting there talking about big companies. I run one of those.” (laughter)
So I call her in, I said, “Read all the documents. Read our performance of purpose. Read what we are doing.” And she read all of this, and the next time this group of kids got together, and they started the same, “Big companies are terrible,” my daughter — who typically is more critical than any of those other kids actually — said, “But let’s wait, let me tell you PepsiCo’s story.” And she told them PepsiCo’s story.
And in my life, I tell you, that was a big turning point, to get my first daughter’s praise and acceptance that I’m doing the right thing, I thought, I’d died and gone to heaven. It was fantastic.
So I think millennials today have to be educated as to what we are doing. They have to buy into it, and they have to become missionaries for you, because they talk to so many people online everyday.
So, that’s one part. Now let me tell you the other part. I think diversity definitions in corporations have to change. We used to think about diversity as gender diversity. We’ve thought of it in the U.S. as African American, Hispanic or whatever. And we’ve sometimes thought about multinational diversity, especially at the top of the house.
What we never thought about was multigenerational diversity. And I think now we are beginning to realize that you can’t have a company where all the young people are sitting in lower levels of the organization, and the senior people are running the company. I remember the head of sales for Google was giving us a talk — he was an immigrant from India to the United States — and he said, “I watch football — American football. I like it. But my kids love it. I mean they’re passionate about American football. So they are natives, I’m migrant. I’m a migrant when it comes to that game.” And he said, “In the digital world, we have natives and migrants. The millennials are all natives. We’re all migrants, our generation.”
And in the world today, which is being disrupted so much by the digital world, if we don’t let the millennial natives of the digital world ride up to the top faster and challenge us digital migrants, we’re going to be in trouble,” because the model is going to change around us, Andy, and we’re going to wonder how it happened!
I think that’s spot on. We were talking about earlier — I was talking with some people about how the gap for our generation, with our parents, was cultural, whereas with our kids, it can be technological. And we have to be sure that we understand that gap for family reasons…and for business reasons.
Now speaking of business and family, you and I were kind of getting into it a little bit before this started. You have pretty strong feelings that family can be a part of work. And you actually communicate with your employees’ family members, writing letters to their parents, which I find to be fascinating. A little curious–
–A little uncomfortable maybe?
A little uncomfortable, maybe, yes. I wonder if you could share with us how that works?
I think a new company leader has got to bond employees to the company. We’ve worried about buying employees, we’ve worried about bouncing them when things didn’t work, but we’ve never focused on engaging them with their hearts.
So hold that thought for a second. Now let me tell you my story and I’ll link the two together.
I became CEO in 2006, and it was a matter of some pride to my family, but not too much. So I went home to visit my mother in Madras, in India, and stayed with her. And she woke me up at 7 o’clock and said, “Come on, get ready.” I said, “I’m on vacation, how about noon today?” She said, “No, people are coming to visit, so get up.”
So she made me sort of dress up and sit there, and then a steady stream of third cousins, fifth cousins, 20th cousins, three-removed, all started to show up. And each of them would walk into the house. They would sort of look at me and say, “Oh, hello,” and then go to my mom and say, “You should feel so proud that you brought up this daughter, and you brought up your child so well.”
So, this was not about me. This was about what a good job my parents had done in bringing me up. It dawned on me that all of my executives who worked for me are also doing a damn good job, but I’d never told their parents what a great job their parents had done for them. I’d never done that.
And I thought about my kids and I said, “You know what? If I ever got a report card on them, after they’re 18, I would love it, because in the U.S., once they turn 18, we don’t get report cards. We pay their tuition, but we don’t get their report card, right?”
I know. (laughter)
And I am just dying to get the report card. I would kill to get to the report card, okay? We don’t get it. But this is good news because they’re only going to get a good report card, right? I’m not going to write anything bad because these guys are all C Suite candidates. So the first thing I did was, I wrote to the parents of all my direct reports and said —
You wrote to the parents of all your direct reports?
All my direct reports. I wrote to them and I told them the story of my going to India and what happened with my mother, and I said, “therefore I’m writing to thank you for the gift of your son, who is doing this at PepsiCo, and what a wonderful job this person is doing.” I gave a — it was a personal letter for each family member.
And it opened up emotions of the kind I have never seen. Parents wrote back to me, and all of a sudden, parents of my direct reports, who are all quite grown-up, and myself, we had our own communication.
And one executive, I remember, he went home and he said to his mom, “you know, my boss is really giving me a tough time.” And his mom told him, “Nuh-uh, not about her. She’s my friend!” (laughter)
You were working it! (laughter)
So this is one thing. And then I expanded it, and I said, okay, let’s identify the 200 people in PepsiCo, age 35 to the senior most people, who could be the future and the soul of the company. I break them into groups of 15 and then I take away for a couple of days, or 2-1/2 days. And it’s just them and me, and we talk about who they are, their story, and I get to know each of them personally.
And then after they’re through, I write to their parents also.
We had an employee who we were trying to hire. Absolute high-potential chap. He had an offer from another company down the road from us, and I wanted him real bad….He was a tough guy to hire. So I said, okay, I’m going to call his mom. (laughter) So I call his mom, and she didn’t know who I was. I introduced myself and I said, “Let me describe the situation,” and I said, “Let me tell you why coming to PepsiCo is going to be the right career decision for your son.”
So the son goes home — he has no clue I called his mom — and he says, “I’m looking at these two offers, Mom, and I’m close to accepting the other one.” And she goes, “No. You’re accepting PepsiCo.” He goes, “Since when did you know anything about PepsiCo?” And the mom said, “She called me, your CEO called me.” And this boy goes, “I had no choice!” (laughter) Can you imagine going home every day after that and a mom goes, “but you should have accepted that offer!”
First of all, I’d never want to compete against you. I mean that is unfair what you’re doing. It does remind me: One employee left to go to a rival news organization, and I asked him why, and he said, “Because my mother told me I should go work at the New York Times.”
See that? Parents have a big say.
Maybe there really is something to that. We’re getting kind of close to the end, Indra, and I want to ask you two quick questions, one about the scrutiny that you face today in terms of social media and how that’s changed your life, and then one more after that.
I think, you know, somebody once told me assume that whatever you do is going to be in the public domain. Whatever you do is going to be in the public domain, and assume that it’s always going to be in the public domain in a not-so-flattering way.
So if it’s going to be any other way, that’s great, but assume everything is going to be in the public domain. It’s not easy to accept that because you know, when you go shopping with your kids, suddenly a kid acts up. You go, “Stop talking, somebody’s going to tweet about it.”
They go, “We don’t care mom! I don’t like what you’re buying me! So I am going to get mad with you.” But you’ve got to constantly worry about what you’re saying, how you’re behaving in public, how you dress. I’m used to wearing gym clothes when I shop. Now, people will take a picture, and I go, “Oh, God, don’t take a picture of me this way, please?”
And so, it’s not easy living in that little glass house…. But all of us are learning to live in this new environment, in this new fish tank environment. I’m not sure we [CEOs} will ever get comfortable because we are again — remember — digital migrants not natives. But this is the real life today and it’s like reality show. We’re there and fair game. Everybody goes at us.
All right. I’m going to ask you one last question, and I’m going to really put you to the test, just to see how hip you are. The Superbowl is coming up, and PepsiCo is the sponsor of the halftime show, and one of the stars of the halftime show is Bruno Mars. What’s your favorite Bruno Mars tune?
(Laughs) First of all, you’ve got to be thrilled that I didn’t pick the halftime show because I’m still stuck in the ’70s and the ’60s. Remember, I’m a boomer, an aging boomer. But you know, Bruno Mars is a helluva cool guy, and my kids think he’s very cool. So I listen to Bruno Mars — We all live our lives through our kids’ eyes, so we want them to think we’re cool. (laughter) So if you listen to Bruno Mars — there’s a song called “Treasure” — this one is pretty cool.
Wow, okay. You got it, you answered the question, you passed the test, that’s bridging the gap. Please join me in thanking Indra Nooyi for coming here today.