Something’s odd about David Novak’s office. Look at the knickknacks on his desk — a rubber chicken, a set of teeth on skinny legs with oversize feet; on the coffee table, a plastic hog and a red clay roof tile. Framed photos have taken over every square inch of wall space and, strangely, most of the ceiling, showing Novak not with Presidents and sports stars but with people you’ve never seen. If you didn’t know, you wouldn’t guess that Novak is CEO of Yum Brands, a Fortune 500 company (No. 201), one of the corporate world’s great financial performers, though it operates in a notoriously competitive industry. You certainly wouldn’t suspect that those odd office features aren’t just personal quirks — that they’re actually essential elements in a leadership system that has produced the company’s knockout performance.
Novak, 60, may be the business world’s ultimate team builder. Over the past 30 years, he has developed a discipline for nurturing and developing leaders that centers on recognition (though that is by no means its only important element), and those knickknacks are among the scores of bizarre prizes that Yum gives out; the photos show him giving awards to employees around the world. “I don’t have one piece of artwork,” he says. “This has got to be the cheapest office in corporate America. But it’s the best. People want to see the CEO’s office, and when they come in, they understand what’s important in our company.”
If that sounds hopelessly warm and fuzzy, consider the cold, hard results: Since Yum was spun off from PepsiCo in 1997, its stock has returned 16.5% compounded annually, vs. the S&P 500’s 3.9% over that period. The company has been opening a new restaurant every 14 hours or so for 16 years and isn’t slowing down, which is why it’s the world’s largest restaurant company by units, with some 39,000 KFC, Pizza Hut, and Taco Bell locations worldwide. No one who follows Yum doubts that Novak’s team-building framework is at the heart of the company’s success.
Little wonder that the world wants to know more about how he does it, especially now, as business leaders realize that high-performing teams are increasingly a competitive advantage. They see the stunning success of Apple, which has integrated its employees’ efforts more adeptly than any other company and has created more shareholder wealth relative to capital than any business on earth. Microsoft’s top-to-bottom reorganization in July was an effort to capture some of that team magic. Most other companies want some too.
So Novak’s phone rings with requests from fellow CEOs to come to their place and teach. Caterpillar chief Doug Oberhelman invited him to address the equipment maker’s top leaders last year and says, “He stole the show.” Marriott International CEO Arne Sorenson asked him to address 1,000 hotel managers from around the world. “He is a rocket booster on stage,” says Marriott executive vice president Kathleen Matthews. “He has an authentic core and seems to truly believe what he preaches.”
He is an unusually approachable CEO, intense and tightly wound yet entirely informal. His open manner and flat accent are hard to place because he had lived in 23 states by the seventh grade; his father was a map surveyor for the federal government. Despite all the moving, Novak recalls his childhood as “idyllic.” He finally got to stay in one place when he went to the University of Missouri, getting a journalism degree with a major in advertising. That led to an ad-agency job working on the Pizza Hut account, then to a marketing job at Pizza Hut, owned by PepsiCo, in Wichita.
Novak is transparent about why creating better teams is a passion. It’s not because he’s naturally a touchy-feely guy, though he now asks employees to go through exercises in deep self-reflection and relationship evaluation, and does so himself. “I think I’ve become that,” he says. “But I think I was intensely competitive from the day I was born. I think I’ve always wanted to win. And what I realized early on is, you can’t win without people.”
That realization has developed into a large-scale leadership-development program that Novak calls Taking People With You. He teaches a three-day version of it to small groups of managers four or five times a year and has reached more than 4,000 managers. But that’s not many in a company of 1.5 million employees. So the training cascades through the organization until it reaches restaurant general managers — “our No. 1 leaders,” says Novak, “because they build up teams that are closest to the customers.” Yum operates in 130 countries, so the training materials are in 11 languages, including Thai and Bahasa (spoken in Malaysia).
A fundamental insight of the program is that team building is not, first, about the team. It’s about you. A lot of Taking People With You asks participants to look inside themselves. They rate themselves on truthfulness, reliability, openness, and self-centeredness. They think about how they treat other team members and how they view others’ mistakes. In Novak’s program you’re not fit to build a team until you’ve worked hard on yourself. Only then does the program get into forming strategy, communicating it, and gaining alignment, plus the nuts and bolts of organization and process.
Almost the last topic in Taking People With You is recognition, though that’s what the Yum organization is most famous for in the business world. In fact, the power of recognition was Novak’s first big insight into building teams.
Management writer Stan Slap argues that one of the most powerful actions a leader can take is to reveal his moments of truth — “the stories of how you know your values are real to you, where they came from, and how you learned them.” Novak has never been shy about revealing his moment. Rising in the ranks at PepsiCo, when he ran operations at Pepsi Bottling, he was in St. Louis conducting a 6 a.m. meeting with route salesmen and asked them what was and wasn’t working in merchandising. They all said the same thing: “Bob is the expert in that area. He can tell you how it’s done.” “Bob taught me more in one day than I’d learned in two years on the job.” Novak looked over at Bob, who was crying. Novak asked what was wrong. Bob had been with the company over 40 years and was retiring in two weeks. He said, “I never knew anyone felt this way about me.”
“That had a very powerful impact on me,” says Novak. He realized that the business had missed a major opportunity for more people to learn from Bob and that Bob was surely not the only employee whose abilities were underappreciated. More deeply, Novak resolved that he “would never let a person like Bob go through his entire career without being thanked for what he did and encouraged to find out how much more he could do.”
Not long after, Novak was put in charge of KFC. The U.S. division hadn’t hit its profit target in eons. Headquarters blamed the franchisees, who blamed headquarters. In that poisonous atmosphere, Novak decided to change the culture in a way that would improve the team. “I think business is fun,” he says. “I think people would much rather work in a fun environment. But people want to win. So I wanted to create a team that was hardworking, very competitive, but we had fun. And I thought the biggest thing I could do was tap into the universal need for recognition.”
Thus was born the Rubber Chicken Award, known internally as “the floppy chicken.” Novak gave away hundreds of them in his years running KFC before he became Yum’s chief and started giving his Walk the Talk Award, which is the teeth on legs. “It was absolutely amazing how that took off,” he recalls. Today Yum managers around the world give their own versions — the roof tile in Novak’s office is from the Pizza Hut franchisee in El Salvador; the plastic hog is a razorback from an Arkansas franchisee.
Those citations all seem kind of silly, at most an amusing diversion from real work. But Novak is convinced that they’re much more, that they’re the key to Yum’s extraordinary performance. “If people were asked, ‘What’s our inherent competitive advantage?’, they’d say it’s our culture,” Novak observes. “And I’d say, ‘Well, how did we get there?’ I think the reason we got there is that we took recognition and had more fun with it than most people do.”
As in all things, the way it’s done makes all the difference. Every company offers recognition — a trophy, a plaque, a ceremonial dinner. It typically accomplishes little, for two big reasons: It happens long after the performance that’s being recognized, and it’s impersonal. The Yum version is the opposite. Faster is better. “You go into a meeting, and somebody blows you away by something,” Novak says. “You get up, go back to your office, get your Yum award out, and you go back and say, ‘God, that’s so great.’ Boom! You give him a recognition award. That’s the best recognition of all.”
And it must be personal. Every Yum acknowledgement — a rubber chicken, a cheesehead (used at Pizza Hut), a roof tile — can be written on, and it must carry a handwritten message. “You want to give away a piece of yourself,” says Novak.
KFC turned around dramatically, and Novak is certain that teamwork did it: “I changed out a couple of people, and that made a difference, but the biggest thing is I got the existing team working at a much higher level together.” His experience there became the foundational example that his brand of fostering collaboration works. He told his top managers there would be no more badmouthing the franchisees, and then he spent significant time visiting franchisees and listening. “That was the beginning of a new relationship,” he recalls. He brought back what he’d learned and asked his executives what they thought. The result: “I found that once everybody saw the same reality, their ideas were pretty similar to my ideas, and then it was not my plan, it was our plan.” KFC resumed growing, and profits nearly doubled in three years. “What really made the difference,” he says, “was the idea that if we trusted each other, we could work together to make something happen that was bigger than our individual capabilities.”
For Yum, the greatest value of effective teams shows up in the daily operations of those 39,000 restaurants, where Novak knows he still has work to do. “At our headquarters around the world, we’re really good. At our restaurants, it’s more hit-and-miss,” he says. “Our culture, our work environment — we want our customers to feel it. We’ve had that happen in some restaurants, and there are too many where it’s not happening. That’s the unfinished business we have.”
Another bit of eternally unfinished business is keeping the top team together, one of the toughest challenges for any successful company. Yum has done it and is even attracting high-level employees from companies that are famous as dream employers. Recent hires have come from Coca-Cola, Procter & Gamble, General Electric, and other giants. “I find that the No. 1 reason they’re coming is that they’ve heard about our culture,” says Novak. “People want to work in a great environment where they can have fun.”
He’s having fun. A key to Novak’s effectiveness is that his work meets some of his deepest life needs, including winning. “I love winning, and that’s always been in me,” he says. “When you get in business, now you’ve got a different game. You’re no longer playing Little League baseball. You’re in the game of business, so for me my work is my hobby. I’ve never felt like I’ve ever gone to work. I can’t believe I get paid for this.”
The deepest explanation of Novak’s success may be that the way he wins — building the recognition culture, spreading the Taking People With You program — is actually fulfilling his life’s purpose. “Why am I on earth?” he asks. “I’m on earth to encourage others, lift lives, help create leaders, inspire people, recognize others. When I’m spending time doing that — those are my best days.” There seems zero reason to doubt Novak’s sincerity. But if it all still seems too saccharine for you, just think of that 16.5% compound annual return on the stock.
You’ll never see a rubber chicken the same way again.
This story is from the August 12, 2013 issue of Fortune.