No Rules Rules: Netflix and the Culture of Reinvention

By Reed Hastings and Erin Meyer, September/2020 (320p.)

 

Co-authored by Netflix founder/CEO, Reed Hastings, and ENSEAD professor, Erin Meyer, this is a unique book with precious insights and advice on how to build a high-performing culture like that of Netflix.  Reed Hastings’ credibility runs high these days, not only because of how well Netflix stock has done (40% annualized return since the IPO), but also because like Jobs and Bezos, he revolutionized an industry and succeeded in making the world a better place.  What is unique about this book is that it often reads like an autobiography, but is structured as a prescriptive management book, with the help of a renowned Professor who specializes in corporate cultures.  Reed and Meyer give readers a granular understanding of how Netflix’s culture puts people ahead of process, innovation ahead of efficiency, and context ahead of controls.  They claim that this is the secret sauce of Netflix, and while Reed tells us in detail how to replicate it, I don’t think he worries that others will copy because he knows how hard it is to achieve and maintain, and that most organizations, including the incumbent media companies he competes with, are not only incapable, but unwilling to make the shift.

Source:  Bloomberg

While most of the management concepts discussed in the book are not new, they are well presented and supported by excellent examples and citations of academic research. Reed makes a big deal about keeping only the best people, for instance, which is basically common sense.  It doesn’t take an MBA to recognize that “managing mediocre-performing employees is harder and more time consuming,” but it probably still happens more than most realize. “If you’re serious about talent density,” he explains,  “you have to get in the habit of doing something a lot harder: firing a good employee when you think you can get a great one. One of the reasons this is so difficult in many companies is because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family.”  According to Reed, teams at high-performing businesses are more like professional sports teams than families.  “On a pro baseball team, the players have great relationships. These players are really close. They support one another. They celebrate together, console one another, and know each other’s plays so well that they can move as one without speaking. But they are not a family. The coach swaps and trades players in and out throughout the year in order to make sure they always have the best player in every position.”

Like Ray Dalio of Bridgewater, Reed believes in building a culture of radical transparency, but unlike Ray, who’s been known to shout insults at his team members when they disappoint, and who reportedly has cameras and recorders monitoring his employees, Reed takes a different approach to achieving radical transparency by fostering a culture of trust and honest feedback with context – that is, one that is anchored to a common goal (do what’s best for the company), by inspiring reflection without destroy morale and causing unnecessary anxiety. “Only say about someone what you will say to their face,” is a motto that both Netflix and Bridgewater share, but in Reed’s view, any company that is seeking to drive talent density and radical transparency should have no tolerance for jerks, even the most brilliant ones. “We’ve all worked with people who are obviously brilliant,” he explains. “You know the type: bursting with amazing insights, articulate, able to solve problems with a single blow. The denser the talent in your organization, the more brilliant people you’re likely to have on the team. But with a lot of brilliant people running around, you run a risk. Sometimes really talented people have heard for so long how great they are, they begin to feel they really are better than everybody else. They might smirk at ideas they find unintelligent, roll their eyes when people are inarticulate, and insult those they feel are less gifted than they are. In other words, these people are jerks.” … If you are promoting a culture of candor on your team, you have to get rid of the jerks. Many may think, ‘This guy is so brilliant, we can’t afford to lose him,’ but it doesn’t matter how brilliant your jerk is, if you keep him on the team you can’t benefit from candor.”  He then proceeds to give a real-life example for context:  “Paula was exceptionally creative and had an extensive network, which was an enormous asset. She put in long hours reading scripts and visualizing how to turn a potential TV series into a big hit. Paula tried to live the Netflix culture by being forthcoming and candid in all instances. Often in meetings Paula spoke forcefully, repeating herself, sometimes pounding on the table to make her point. She frequently spoke over people if they weren’t getting her gist. Paula was clearly very efficient too, working on her computer while others were speaking, especially if she didn’t agree with their points. If people were long-winded or slow to get to the point, she would interrupt them and let them know, then and there. Paula did not feel she was being a jerk, just that she was living the Netflix culture with her honest feedback. Yet because of her difficult behavior, Paula no longer works at Netflix.”         

Netflix’s views on compensation may seem unorthodox outside of Silicon Valley or Wall Street, but paying top dollars for top performers is also not a new concept. Reed quotes Bill Gates to make his point:  “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth ten thousand times the price of an average software writer,” but then he also quotes a former Microsoft employee who spoke with the magazine Vanity Fair about the company’s old-school management style under Bill Gates: “If you were on a team of ten people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review. It leads to employees focusing on competing with each other rather than competing with other companies. … One Microsoft engineer reportedly said: People will openly sabotage other people’s efforts.” The book is critical of most strategies used for keeping the best talent, and they offer convincing research showing that big bonuses actually reduce performance. Forgetting annual bonuses and focusing on paying the highest salaries, is one way Netflix drives performance and retains talent.  Another is to proactively pay team members based on their market worth instead of performance.  “We told all managers that they shouldn’t wait for their people to come to them with a competitor’s offer before raising salaries. If we didn’t want to lose an employee and we saw her market value rising, we should increase her pay accordingly. … If you can’t afford to pay your best employees top of market, then let go of some of the less fabulous people in order to do so. That way, the talent will become even denser.” 

I got a lot out of this book and appreciated Reed’s candidness, humility, and knack for analogies.  “Candor is like going to the dentist,” he explains in Section 3, titled Techniques to Reinforce a Culture of Freedom and Responsibility.Even if you encourage everyone to brush daily, some won’t do it. Those who do may still miss the uncomfortable spots. A thorough session every six to twelve months ensures clean teeth and clear feedback.”  But my favorite analogy came right at the end, when he compares old-school management styles to the No Rules style adopted by Netflix:  “During the industrial era, many of the best companies operated like symphonic orchestras, with synchronicity, precision, and perfect coordination as the goal. Instead of a musical score and a conductor, it was processes and policies that guided their work. … In today’s information age, in many companies and on many teams, the objective is no longer error prevention and replicability.   On the contrary, it’s creativity, speed, and agility. A lot of little mistakes, while sometimes painful, help the organization learn quickly and are a critical part of the innovation cycle. In these situations, rules and process are no longer the best answer. A symphony isn’t what you’re going for. Leave the conductor and the sheet music behind. Build a jazz band instead. Jazz emphasizes individual spontaneity. The musicians know the overall structure of the song but have the freedom to improvise, riffing off one another, creating incredible music.” 

So in conclusion, this was an amazing book that I would highly recommend to most people, regardless of their interests or purpose.  One does not have to like the topic, or even Netflix, to appreciate how powerful it can be to get culture right.  As Costco co-founder Jim Sinegal famously proclaimed: “Culture is not the most important thing, it’s the only thing.”  But as Reed Hastings warns in the book’s closing paragraph: “Culture isn’t something you can build up and then ignore.”

Best regards,

Adriano


Highlighted Passages:

 

Introduction

It was not obvious at the time, even to me, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context not control, has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us.

In a 2018 survey conducted by Hired (a dot-com marketplace for tech talent), tech workers rated Netflix as the No. 1 company they’d most like to work for, beating companies like Google (No. 2), Elon Musk’s Tesla (No. 3), and Apple (No. 6).

Blockbuster’s story is not an anomaly. The vast majority of firms fail when their industry shifts. Kodak failed to adapt from paper photos to digital. Nokia failed to adapt from flip phones to smartphones. AOL failed to adapt from dial-up internet to broadband. My own first business, Pure Software, could not adapt to changes in its industry either because our company culture wasn’t optimized for innovation or flexibility.

If you give employees more freedom instead of developing processes to prevent them from exercising their own judgment, they will make better decisions and it’s easier to hold them accountable. … If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.

When talented staff members get into the feedback habit, they all get better at what they do while becoming implicitly accountable to one another, further reducing the need for traditional controls.

Section One: First Steps to a Culture of Freedom and Responsibility

We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.

In hindsight, I understood that a team with one or two merely adequate performers brings down the performance of everyone on the team. If you have a team of five stunning employees and two adequate ones, the adequate ones will sap managers’ energy, so they have less time for the top performers, reduce the quality of group discussions, lowering the team’s overall IQ, force others to develop ways to work around them, reducing efficiency, drive staff who seek excellence to quit, and show the team you accept mediocrity, thus multiplying the problem. For top performers, a great workplace isn’t about a lavish office, a beautiful gym, or a free sushi lunch. It’s about the joy of being surrounded by people who are both talented and collaborative. People who can help you be better. When every member is excellent, performance spirals upward as employees learn from and motivate one another.

The problem turned around when we started going to a marriage counselor. He got each of us to talk about our resentments. I began to see our relationship through my wife’s eyes. She didn’t care about money. She’d met me, in 1986, at a party for returned Peace Corps volunteers and had fallen in love with the guy who’d just spent two years teaching in Swaziland. Now she found herself hitched to a guy obsessed with business success. What was there for her to be excited about? Giving and receiving transparent feedback helped us so much. I saw I’d been lying to her. While I was saying things like, “Family is the most important thing to me,” I’d been missing dinners at home and working all hours of the night. I see now that my words were worse than platitudes. They had been lies. We both learned what we could do to be better partners, and our marriage came back to life. (We’ve now been married twenty-nine years and have two grown kids!)

That’s when we coined the expression “Only say about someone what you will say to their face.” I modeled this behavior as best I could, and whenever someone came to me to complain about another employee, I would ask, “What did that person say when you spoke to him about this directly?” This is pretty radical. In most situations, both social and professional, people who consistently say what they really think are quickly isolated, even banished. But at Netflix, we embrace them. We work hard to get people to give each other constructive feedback—up, down, and across the organization—on a continual basis.

At Netflix, it is tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful. After all, you could help the business—but you are choosing not to.

If someone calls out a mistake you are making in front of your tribe, the amygdala, the most primitive part of the brain, which is on constant watch for danger, sets off a warning: “This group is about to reject you.” Our natural animalistic impulse in the face of this is to flee.

We’ve all worked with people who are obviously brilliant. You know the type: bursting with amazing insights, articulate, able to solve problems with a single blow. The denser the talent in your organization, the more brilliant people you’re likely to have on the team. But with a lot of brilliant people running around, you run a risk. Sometimes really talented people have heard for so long how great they are, they begin to feel they really are better than everybody else. They might smirk at ideas they find unintelligent, roll their eyes when people are inarticulate, and insult those they feel are less gifted than they are. In other words, these people are jerks. If you are promoting a culture of candor on your team, you have to get rid of the jerks. Many may think, “This guy is so brilliant, we can’t afford to lose him.” But it doesn’t matter how brilliant your jerk is, if you keep him on the team you can’t benefit from candor. The cost of jerkiness to effective teamwork is too high. Jerks are likely to rip your organization apart from the inside. And their favorite way to do that is often by stabbing their colleagues in the front and then offering, “I was just being candid.” Even at Netflix, where we preach “No Brilliant Jerks,” we often have an employee who has difficulty finessing the boundaries. When this happens, you need to jump in. Original Content Specialist Paula was one example. Paula was exceptionally creative and had an extensive network, which was an enormous asset. She put in long hours reading scripts and visualizing how to turn a potential TV series into a big hit. Paula tried to live the Netflix culture by being forthcoming and candid in all instances. Often in meetings Paula spoke forcefully, repeating herself, sometimes pounding on the table to make her point. She frequently spoke over people if they weren’t getting her gist. Paula was clearly very efficient too, working on her computer while others were speaking, especially if she didn’t agree with their points. If people were long-winded or slow to get to the point, she would interrupt them and let them know, then and there. Paula did not feel she was being a jerk, just that she was living the Netflix culture with her honest feedback. Yet because of her difficult behavior, Paula no longer works at Netflix.

Early in my time at Netflix, an engineer in my group made a big mistake in my area of expertise and sent an email that dodged responsibility and showed no path to fix it. I was upset and called the engineer: my intent was to put him on the right path. I was blunt and criticized his actions. I didn’t enjoy doing so, but I felt I was doing a good thing for the company. A week later, his manager stopped by my desk unexpectedly. He told me that he was aware of my exchange with the engineer and didn’t think I was technically wrong, but did I know that the engineer had been demotivated and unproductive since I talked to him and was it my intent to make his staff unproductive? No, of course not. The manager continued: Do you think you could have told my engineer what you needed to, in a way that left him feeling positive and motivated to fix it? Sure, I probably could do that. Good. Always do that in the future, please. I did. The conversation lasted less than two minutes and was immediately effective. Notice that he did not accuse me of being a jerk. Rather, he asked: (1) “Are you intending to hurt the company?” and (2) “Are you able to act decently?” There’s really only one right answer to those questions. If he had just said, “You are a jerk,” I may have replied, “No, I’m not,” but by asking questions instead, it put the onus on me to think about the answer and triggered a moment of self-reflection.

Today, in the information age, what matters is what you achieve, not how many hours you clock, especially for the employees of creative companies like Netflix. I have never paid attention to how many hours people are working. When it comes to how we judge performance at Netflix, hard work is irrelevant.

If you are working all the time, you don’t have the perspective to see your problem with fresh eyes.

Unlimited holiday is easy to implement—you just have to create an environment of trust, and ours is built through three company rules: (1) always act in the best interests of the company, (2) never do anything that makes it harder for others to achieve their goals, (3) do whatever you can to achieve your own goals.

Gerald Pruckner, a researcher at the University of Linz, and Rupert Sausgruber from the Vienna University of Economics, set up a study to find out how people would respond in just this type of scenario. They sold newspapers out of a box with no monitoring. The price was posted and passersby were supposed to put their payment into a slot if they took a copy. There was a message reminding people to be honest. About two thirds of people who took the paper didn’t pay for it. That’s a lot of dishonest people. It would be naive to believe only the honest third work for you.

Before you spend any money imagine that you will be asked to stand up in front of me and your own boss and explain why you chose to purchase that specific flight, hotel, or telephone. If you can explain comfortably why that purchase is in the company’s best interest, then no need to ask, go ahead and buy it. But if you’d feel a little uncomfortable explaining your choice, skip the purchase, check in with your boss, or buy something cheaper.

I told them I would never look at their expense reports, but that finance audits ten percent of all expenses annually. I trust them to behave frugally and carefully with the company’s money and if finance finds any monkey business, that employee will be immediately fired. It’s not one strike and a warning; it’s “abuse the freedom and you’re out”—plus you’ll be used as an example to others for what not to do. … If your people choose to abuse the freedom you give them, you need to fire them and fire them loudly, so others understand the ramifications. Without this, freedom doesn’t work. … When you tell people you trust them, they will show you how trustworthy they are.

Section Two: Next Steps to a Culture of Freedom and Responsibility

That’s why we get so much done at such incredible speed here. It’s because of the crazy high talent density. … I could hire ten to twenty-five average engineers or I could hire one “rock-star” and pay significantly more than what I’d pay the others, if necessary. Since then I have come to see that the best programmer doesn’t add ten times the value. She adds more like a hundred times. Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying: “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth ten thousand times the price of an average software writer.” In the software industry, this is a known principle (although still much debated). … We’d be relying on one tremendous person to do the work of many. But we’d pay tremendously.

I’ve also found having a lean workforce has side advantages. Managing people well is hard and takes a lot of effort. Managing mediocre-performing employees is harder and more time consuming. By keeping our organization small and our teams lean, each manager has fewer people to manage and can therefore do a better job at it. When those lean teams are exclusively made up of exceptional-performing employees, the managers do better, the employees do better, and the entire team works better—and faster.

But at Netflix, where we have to be able to adapt direction quickly in response to rapid changes, the last thing we want is our employees rewarded in December for attaining some goal fixed the previous January. The risk is that employees will focus on a target instead of spot what’s best for the company in the present moment.

We presented eighty-seven participants with an array of tasks that demanded attention, memory, concentration, and creativity. We asked them, for instance, to fit pieces of metal puzzle into a plastic frame, and to throw tennis balls at a target. We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third a medium-level bonus, and the last third could earn a high bonus based on how well they performed. We did this first study in India, where the cost of living is low, so we could pay people amounts substantial to them but within our budget. The lowest bonus was 50 cents—equivalent to what participants could receive for a day’s work. The highest bonus was $50, five months’ pay. The results were unexpected. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks. We replicated these results in a study at the Massachusetts Institute of Technology, where undergraduate students were offered the chance to earn a high bonus ($600) or a lower one ($60) by performing one task that called for some cognitive skill (adding numbers) and another one that required only a mechanical skill (tapping a key as fast as possible). We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance. … This finding makes perfect sense. Creative work requires that your mind feel a level of freedom. If part of what you focus on is whether or not your performance will get you that big check, you are not in that open cognitive space where the best ideas and most innovative possibilities reside. You do worse. I’ve certainly found this to be true at Netflix. People are most creative when they have a big enough salary to remove some of the stress from home. But people are less creative when they don’t know whether or not they’ll get paid extra. Big salaries, not merit bonuses, are good for innovation.

This time he said, “Your performance has been excellent, and I’m delighted to have you on this team. The market for your position hasn’t changed much, so I’m not planning on giving you a raise this year.” That seemed fair to me. Matias said if I didn’t think so, I should come to him with some data showing the current market for my position.

It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place. … After Ted told this story he said: “George was right to go interview at a competitor to find out what his worth is—and we would be stupid not to pay him his top-of-market value, now that we know also. In addition, if there are other people on Neil’s team who Google would offer that same job to, we should up their salaries to the same level. That’s their current market value.”

After that, we told all managers that they shouldn’t wait for their people to come to them with a competitor’s offer before raising salaries. If we didn’t want to lose an employee and we saw her market value rising, we should increase her pay accordingly. … If you can’t afford to pay your best employees top of market, then let go of some of the less fabulous people in order to do so. That way, the talent will become even denser.

According to a study by Michael Slepian, a professor of management at Columbia Business School, the average person keeps thirteen secrets, five of which he or she has never shared with anyone else. A typical manager, I would suggest, has even more. According to Slepian, if you are anything like an average person, there’s a 47 percent chance that one of your secrets involves a violation of trust, a 60-plus percent chance that it involves a lie or a financial impropriety, and a roughly 33 percent chance that it involves a theft, some sort of hidden relationship, or unhappiness at work. That’s a lot of confidential content to be keeping in your closet, and it takes a psychological toll: stress, anxiety, depression, loneliness, low self-esteem. Secrets also take up a lot of space in our brains. One study showed people spend twice as much time thinking about their secrets as they do actively concealing them. On the other hand, when you share a secret, it floods the receiver with feelings of confidence and loyalty. If I tell you some huge mistake I made or share information that could sabotage my success, you think, Well, if she’d tell me that, she’d tell me anything. Your trust in me skyrockets. There is no better way to build trust quickly than to shine a light directly on a would-be secret.

Just about all managers like the idea of transparency. But if you’re serious about creating a high sharing environment, the first thing to do is to look at the symbols around your office that may accidentally be suggesting to everyone that secrets are being kept.

The most crippling problem in business is sheer ignorance about how business works. What we see is a whole mess of people going to a baseball game and nobody telling them what the rules are. That game is business. People try to steal from first base to second base, but they don’t even know how that fits into the big picture.

Netflix is, of course, a subscription-based business, so in order to derive our revenue, you multiply the average price of a subscription (which everyone knows) by our number of subscribers. This number is top secret until we report it publicly once a quarter. Any investor who gets it early can illegally use it to trade Netflix stock and make a lot of money. If someone from Netflix leaks it, he or she could go to jail. … There were four hundred managers in this big auditorium and after Reed gave a short hello they turned the lights off onstage and put up a white slide that read in black block letters: YOU GO TO JAIL IF YOU TRADE ON THIS . . . OR IF YOUR FRIEND DOES. CONFIDENTIAL. DO NOT SHARE.

Humility is important in a leader and role model. When you succeed, speak about it softly or let others mention it for you. But when you make a mistake say it clearly and loudly, so that everyone can learn and profit from your errors. In other words, “Whisper wins and shout mistakes.”

On the other hand, there is also research showing that if someone is already viewed as ineffective, they only deepen that opinion by highlighting their own mistakes. In 1966, psychologist Elliot Aronson ran an experiment. He asked students to listen to recordings of candidates interviewing to be part of a quiz-bowl team. Two of the candidates showed how smart they were by answering most of the questions correctly, while the other two answered only 30 percent right. Then, one group of students heard an explosion of clanging dishes, followed by one of the smart candidates saying, “Oh my goodness—I’ve spilled coffee all over my new suit.” Another group of students heard the same clamor, but then heard one of the mediocre candidates saying he spilled the coffee. Afterward, the students said they liked the smart candidate even more after he embarrassed himself. But the opposite was true of the mediocre candidate. The students said they liked him even less after seeing him in a vulnerable situation. This tendency has a name: the pratfall effect. The pratfall effect is the tendency for someone’s appeal to increase or decrease after making a mistake, depending on his or her perceived ability to perform well in general. In one study conducted by Professor Lisa Rosh from Lehman College, a woman introduced herself, not by mentioning her credentials and education, but by talking about how she’d been awake the previous night caring for her sick baby. It took her months to reestablish her credibility. If this same woman was first presented as a Nobel Prize winner, the exact same words about being up all night with the baby would provoke reactions of warmth and connection from the audience.

Ask yourself these four questions: Is Sheila a stunning employee? Do you believe she has good judgment? Do you think she has the ability to make a positive impact? Is she good enough to be on your team? If you answer NO to any of these questions, you should get rid of her.

We work all day long in the world of Google, we buy stuff from Amazon, listen to music from Spotify, take Uber rides to Airbnb apartments, and spend our evenings watching Netflix. But we can’t figure out how these Silicon Valley companies move so fast and innovate so quickly. “Whatever they’re drinking at Netflix,” he concluded, “that’s what we need to be drinking.” That was a funny thing to overhear.

Netflix does not operate in a safety-critical market, like medicine or nuclear power. In some industries, preventing error is essential. We are in a creative market. Our big threat in the long run is not making a mistake, it’s lack of innovation. Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant.

Smith, however, was an entrepreneur, and that Yale paper became the basis for FedEx, which he founded in 1971. He was also a betting man: once, in the early days of FedEx, after a bank had refused to extend a crucial loan, he took the company’s last $5,000 to Las Vegas and won $27,000 playing blackjack to cover the company’s $24,000 fuel bill. Of course, Netflix doesn’t encourage its staff to go to casinos, but it does seek to instill some of Fredrick Smith’s spirit into the workforce.

The announcement provoked a customer revolt. Not only was our new model way more expensive, but it also meant customers had to manage two websites and two subscriptions instead of one. Over the next few quarters, we lost millions of subscribers and our stock dropped more than 75 percent in value. Everything we’d built was crashing down because of my bad decision. It was the lowest point in my career—definitely not an experience I want to repeat. When I apologized on a YouTube video, I looked so stressed that Saturday Night Live made fun of me.

We now say that it is disloyal to Netflix when you disagree with an idea and do not express that disagreement. By withholding your opinion, you are implicitly choosing to not help the company.

I can’t make the best decisions unless I have input from a lot of people. That’s why I and everyone else at Netflix now actively seek out different perspectives before making any major decision. We call it farming for dissent. Normally, we try to avoid establishing a lot of processes at Netflix, but this specific principle is so important that we have developed multiple systems to make sure dissent gets heard.

The person who is living and breathing the contract needs to be the person who owns and signs the contract, not a head of a function or a VP. That takes responsibility of the project away from the person who should be responsible. Obviously, I look at those contracts too. But Camille is proud of what she accomplished. This is her thing, not mine. She is psychologically invested, and I want to keep her that way. I’m not going to take ownership away from her by putting my name on the deal. Leslie was right, and we follow her example across Netflix today. At Netflix you don’t need management to sign off for anything. If you’re the informed captain, take ownership—sign the document yourself.

If Sheila’s initiative succeeds, make it clear you’re delighted. You might pat her on the back, offer her a glass of champagne, or take the entire team out to dinner. How you celebrate is up to you. The one thing you must do is show, ideally in public, that you are pleased she went ahead despite your doubts and offer a clear “You were right! I was wrong!” to show all employees it’s okay to buck the opinion of the boss. If Sheila’s initiative fails, the way you, the boss, respond is even more critical. After a failure, everyone will be watching to see what you do. One possible course of action would be to punish, scold, or shame Sheila. In 800 BC, Greek merchants whose businesses had failed were forced to sit in the marketplace with a basket over their heads. In seventeenth-century France, bankrupt business owners were denounced in the town square and, if they didn’t want to go straight to prison, had to endure the shame of wearing a green bonnet every time they went out in public. In today’s organizations, people tend to be more discreet about failure. As the boss, you could look at Sheila sideways, sigh, and whisper, “Well, I knew this would happen.” Or you could put an arm around her shoulder, and say in a friendly voice, “Next time, take my advice.” Alternatively, you could give her a short lecture about all the things the company needs to accomplish and what a shame it is to have wasted time on a failure that was so clearly predictable. (From Sheila’s point of view, a basket on the head or a green bonnet is beginning to look quite appealing.) If you adopt any of these strategies, one thing is certain. No matter what you say in the future, everyone on the team will know that “don’t seek to please your boss” is a joke, that all your talk about chips and placing bets is a charade, and that you care more about error prevention than innovation after all. We suggest instead a three-part response: Ask what learning came from the project. Don’t make a big deal about it. Ask her to “sunshine” the failure. … If you make a big deal about a bet that didn’t work out, you’ll shut down all future risk-taking.

When you sunshine your failed bets, everyone wins. You win because people learn they can trust you to tell the truth and to take responsibility for your actions. The team wins because it learns from the lessons that came out of the project. And the company wins because everyone sees clearly that failed bets are an inherent part of an innovative success wheel. We shouldn’t be afraid of our failures.

Section Three: Techniques to Reinforce a Culture of Freedom and Responsibility

Ideally, an organization could just pick carefully, and these well-chosen employees would flourish forever. The reality is tougher. No matter how careful you are, sometimes you will make hiring mistakes, sometimes people won’t grow as much as you had hoped, and sometimes your company’s needs change. To achieve the highest level of talent density you have to be prepared to make tough calls. If you’re serious about talent density, you have to get in the habit of doing something a lot harder: firing a good employee when you think you can get a great one. One of the reasons this is so difficult in many companies is because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family.

I just watched Bull Durham with my kids. On a pro baseball team, the players have great relationships. These players are really close. They support one another. They celebrate together, console one another, and know each other’s plays so well that they can move as one without speaking. But they are not a family. The coach swaps and trades players in and out throughout the year in order to make sure they always have the best player in every position.

WE ARE A TEAM, NOT A FAMILY If we are going to be a championship team, then we want the best performer possible in every position. The old notion is that an employee has to do something wrong, or be inadequate, to lose their job. But in a pro, or Olympic, sports team, the players understand the coach’s role is to upgrade—if necessary—to move from good to great. Team members are playing to stay on the team with every game. For people who value job security over winning championships, Netflix is not the right choice, and we try to be clear and nonjudgmental about that. But for those who value being on winning teams, our culture provides a great opportunity. Like any team successfully competing at the highest level, we form deep relationships and care about each other.

IF A PERSON ON YOUR TEAM WERE TO QUIT TOMORROW, WOULD YOU TRY TO CHANGE THEIR MIND? OR WOULD YOU ACCEPT THEIR RESIGNATION, PERHAPS WITH A LITTLE RELIEF? IF THE LATTER, YOU SHOULD GIVE THEM A SEVERANCE PACKAGE NOW, AND LOOK FOR A STAR, SOMEONE YOU WOULD FIGHT TO KEEP.

In a Vanity Fair article titled, “Microsoft’s Lost Decade,” journalist Kurt Eichenwald quoted a former employee: If you were on a team of ten people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review. It leads to employees focusing on competing with each other rather than competing with other companies. … One Microsoft engineer reportedly said: People will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me in the rankings

Fortunately, there is no reason to choose between high talent density and strong collaboration. With the Keeper Test we can achieve both. That’s because there is one critical way we are not like a professional sports team. On the Netflix team there is no fixed number of slots. Our sport isn’t being played to a rule book and we don’t have limits on how many people we play with. One employee doesn’t have to lose for the other to win. On the contrary, the more excellence we have on the team, the more we accomplish. The more we accomplish, the more we grow. The more we grow, the more positions we add to our roster. The more positions we add, the more space there is for high-performing talent.

During your next one-to-one with your boss ask the following question: “IF I WERE THINKING OF LEAVING, HOW HARD WOULD YOU WORK TO CHANGE MY MIND?” When you get the answer, you’ll know exactly where you stand. … In order to encourage your managers to be tough on performance, teach them to use the Keeper Test: “Which of my people, if they told me they were leaving for a similar job at another company, would I fight hard to keep?”

Candor is like going to the dentist. Even if you encourage everyone to brush daily, some won’t do it. Those who do may still miss the uncomfortable spots. A thorough session every six to twelve months ensures clean teeth and clear feedback.

Imagine, for instance, that you’re the parent of a sixteen-year-old boy. He loves to draw Japanese-style anime, solve complex sudoku problems, and play the saxophone. Lately he’s also started going to parties with older friends on Saturday nights. You’ve already told him you don’t want him to drink alcohol and drive, or get in the car with a driver who has been drinking, but every time he goes out you worry. There are two different ways you might approach this problem: You decide which parties your son can go to (and not go to) and monitor his actions while at the party. If he wants to go out on Saturday night, there is a process. First he has to explain to you who will be there and what they will be doing. Then you need to speak to the parent who owns the house where the party will be held. During that conversation you verify if there will be an adult chaperone and if alcohol will be available. From this information you decide whether or not your son can go. When you give approval, you still put a tracker on your son’s phone to assure that this is indeed the only party he goes to. This would be leading with control. The second would be to set context so that you and your son are aligned. You talk to your son about why teenagers drink and the dangers associated with drinking and driving. In the safety of your kitchen, you pour different types of alcohol into glasses and discuss how much of each you’d need to become tipsy, drunk, or blacked out and how that impacts your driving effectiveness (and overall health). You show him an educational film on YouTube about drinking and driving and all the ramifications. Once you see he clearly understands the severity of the dangers that come with drinking and driving, you let him go to whatever parties he likes without any process or oversight restricting his actions. This would be leading with context.

Melissa Cobb, vice president of original animation, worked for Fox, Disney, VH1, and DreamWorks before she joined Netflix in September 2017. At DreamWorks she was the producer of the Oscar-nominated Kung Fu Panda trilogy. After twenty-four years in leadership positions, she uses two metaphors—the pyramid and the tree—to help the managers who join her team to understand the difference between a traditional leadership role and leading with context at Netflix. She explains it like this: Decision making at every organization I’d worked at before Netflix was structured like a pyramid.

But at Netflix, as we’ve discussed, the informed captain is the decision maker, not the boss. The boss’s job is to set the context that leads the team to make the best decisions for the organization.

Section Four: Going Global

As anyone who has worked internationally will tell you, feedback that’s effective in one country doesn’t necessarily work in another. For instance, the direct corrective feedback given by a German boss might seem unnecessarily harsh in the US, while an American’s tendency to give copious positive feedback might come off as excessive and insincere in Germany.

The Japanese, as the most indirect of the cultures where Netflix has an office, tend to use plenty of downgraders when giving negative feedback. But this isn’t the only technique they use to make the criticism feel softer. Often feedback is passed implicitly and barely spoken at all.

Conclusion

The Industrial Revolution has powered most of the world’s successful economies for the past three hundred years. So it’s only natural that the management paradigms from high-volume, low-error manufacturing have come to dominate business organizational practices. In a manufacturing environment, you are trying to eliminate variation, and most management approaches have been designed with this in mind. It really is a sign of excellence when a company manages to produce a million doses of penicillin or ten thousand identical automobiles with no errors. Perhaps that’s why, during the industrial era, many of the best companies operated like symphonic orchestras, with synchronicity, precision, and perfect coordination as the goal. Instead of a musical score and a conductor, it was processes and policies that guided their work. Even today, if you are running a factory, managing a safety-critical environment, or you want the same thing produced identically with great reliability, a rules-and-process symphony is the way to go. … Even during the industrial era there were pockets of the economy, such as advertising agencies, where creative thinking drove success, and they managed on the edge of chaos. Such organizations accounted for just a small percent of the economy. But now, with the growth in importance of intellectual property and creative services, the percentage of the economy that is dependent on nurturing inventiveness and innovation is much higher and continually increasing. Yet most companies are still following the paradigms of the Industrial Revolution that have dominated wealth creation for the last three hundred years. In today’s information age, in many companies and on many teams, the objective is no longer error prevention and replicability. On the contrary, it’s creativity, speed, and agility. In the industrial era, the goal was to minimize variation. But in creative companies today, maximizing variation is more essential. In these situations, the biggest risk isn’t making a mistake or losing consistency; it’s failing to attract top talent, to invent new products, or to change direction quickly when the environment shifts. Consistency and repeatability are more likely to squash fresh thinking than to bring your company profit. A lot of little mistakes, while sometimes painful, help the organization learn quickly and are a critical part of the innovation cycle. In these situations, rules and process are no longer the best answer. A symphony isn’t what you’re going for. Leave the conductor and the sheet music behind. Build a jazz band instead. Jazz emphasizes individual spontaneity. The musicians know the overall structure of the song but have the freedom to improvise, riffing off one another, creating incredible music.

Culture isn’t something you can build up and then ignore. At Netflix, we are constantly debating our culture and expecting it will continually evolve. To build a team that is innovative, fast, and flexible, keep things a little bit loose. Welcome constant change. Operate a little closer toward the edge of chaos. Don’t provide a musical score and build a symphonic orchestra. Work on creating those jazz conditions and hire the type of employees who long to be part of an improvisational band. When it all comes together, the music is beautiful.

Acknowledgments

This book describes not something I discovered during deep quiet moments of thought, but something we all discovered together, through vigorous debate, endless exploration, and ongoing trial and error. It is due to your creativity, courage, and resourcefulness that Netflix culture is what it is today.