Book Review: No Rules Rules: Netflix and the Culture of Reinvention

In: BlogDate: Mar 23, 2022By: Henry Stewart

For me the best business books include stories and No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings and Erin Meyer is packed with them. By the end you will understand all about the remarkable Netflix culture. And you will be challenged.

Reed Hastings, founder of Netflix, has teamed up with Erin Meyer, a Professor at INSEAD business school and author of The Culture Map. She interviewed 200 Netflix staff and so produces an interesting balance to the normal totally gung-ho approach of a book like this.

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Adequate performance gets a generous severance package

That is the controversial proposal that was originally shared in the Netflix Culture Deck. As Erin points out, this appears to violate the principles of 'psychological safety', that if you want to encourage innovation you should develop an environment "where people feel safe to dream, to speak up and take risks."

Reed explains that this approach results from 2001 when Netflix had to make redundancies and kept those they saw as most talented: "we'd just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas. Suddenly, we were doing far more work — with 30% fewer employees... We learned that a company with really dense talent is a company everyone wants to work for."

A team not a family

Since then Netflix has focused on building 'talent density'. Many companies describe themselves as like a family. Netflix does not. Their comparison is to a sports team where, if your performance drops, you could be on the way out.

Reed argues, "a team with one or two merely adequate performers brings down the performance of everyone on the team."

The Keeper Test

Every manager at Netflix is encouraged to consider, for each of their people: "If a person on your team were to quit tomorrow, would you try to change their mind?"

If the answer is no, then it’s time to let them go. There is no four month PIP (Performance improvement plan). They are paid off straight away.

In turn employees are encouraged to ask 'The Keeper Test Prompt': "If I were thinking of leaving, how hard would you work to change my mind?" And — if you wouldn't work hard — what do I need to change?

Reed sees this as different from 'rank-and-yank', used previously by Microsoft and General Electric to fire the 10% worst performers in any team.

Hire "rock stars"

Reed argues that, in creative jobs, the best performers are not just twice as good as the average ones but often 25 or 100 times better: "I could hire 10 to 25 average engineers or I could hire one 'rock-star' and pay significantly more than what I'd pay the others. We’d be relying on one tremendous person to do the work of many. But we'd pay tremendously."

No pay-per-performance bonuses

At most US companies senior employees get a substantial part of their salary in bonuses. This is not the case at Netflix, where creative people are paid at the top of the market. Each year they assess what that level is for each person and increase their salary appropriately.

Intriguingly, Netflix staff are encouraged to take calls from recruiters and turn up for interviews with other employers. They are then expected to feed back the salaries and, apparently, if it's more than they are earning they are likely to get a rise.

"At Netflix, we base salaries on the market, not on performance."

A culture of freedom and responsibility

The other side of Netflix culture is a remarkable level of trust. Jennifer Nierva describes how at her previous job with Hewlett-Packard, she had to get 20 levels of approval to employ consultants on a $200,000 contract. It took her six weeks and endless frustrating phone calls.

Joining Netflix she came up with a $1 million marketing proposal and asked her boss who she had to get to sign it off. "Nobody," was the answer. "Just sign it and send it back."

As Reed explains, "At most companies, the boss is there to approve or block the decisions of employees. This is a surefire way to limit innovation and slow down growth. When the boss steps out of the role of 'decision approver,' the entire business speeds up and innovation increases."

When Sheryl Sandberg, Chief Operating Officer at Facebook, spent a day shadowing Reed she commented: "The amazing thing was to sit with you all day long and see that you didn’t make one decision!"

Lead with context, not control

Netflix is not of course a self-managing organisation. Instead of telling people what to do, though, managers are expected to set the context.

Adam Del Deo, head of Netflix's documentaries, was wondering whether to increase his $2.5 million bid for the documentary Icarus. He asked his boss, Ted Sarandos, if he should bid more.

Ted responded not with a decision but with context: "Is it THE ONE? Is it going to be a massive hit? If it's THE ONE, get the movie."

As Reed continues, "When one of your people does something dumb, don't blame that person. Instead, ask yourself what context you failed to set."

Farm for Dissent

But Netflix staff are not expected to make decisions on their own. Instead the approach is similar to the Advice Process: "We don't expect employees to get approval from their boss before they make decisions. But we do know that good decisions require a solid grasp of the context, feedback from people with different perspectives, and awareness of all the options."

If someone uses the freedom Netflix gives them to make important decisions without soliciting others' viewpoints, Netflix considers that a demonstration of poor judgment.

If you are a Netflix employee with a proposal, you create a shared memo explaining the idea and inviting dozens of your colleagues for input. They will then leave comments electronically in the margin of your document, which everyone can view.

"Farm for dissent. Socialize the idea. Test it out. This sounds a lot like consensus building, but it's not. With consensus building the group decides; at Netflix a person will reach out to relevant colleagues, but does not need to get anyone's agreement before moving forward. They are the Informed Captain."

Mistakes

While you may be fired if you are felt to be performing only adequately you won’t get fired for getting something wrong. "At Netflix, we try to shine a bright light on every failed bet. We encourage employees to write open memos explaining candidly what happened, followed by a description of the lessons learned."

"Don't seek to please your boss. Seek to do what is best for the company"

"At most companies, even at those who have leaders who don't micromanage, employees seek to make the decision the boss is most likely to support."

There are lots of examples in the book of where Netflix staff do the opposite of what the boss would support. In one case senior director Ted Sarandos is discussing the release of The Blacklist Season 2 and a guy four levels down hierarchically from Ted "pipes up and tells him he was missing something and hadn't understood the licence deal." At the end of the session Ted thanks him for his contribution.

"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."

No Rules Rules

Netflix is famous for its vacation policy ("take some") and its expenses policy ("act in Netflix's best interest").

On the need for holidays, Reed gives the example of a guy who "often went to an isolated place. Each time he came back he had a fantastic new idea for how to move the business forward." However unlimited vacation depends crucially on the example from managers. While Reed takes six weeks off a year, Erin makes clear that some managers take less. In turn their staff feel unable to take advantage of the policy.

Interestingly the expenses policy was originally "spend money as if it were your own" but this didn’t work for those who were profligate spenders in their personal life. Reed reckons the expenses policy probably results in 10% extra spending (due to business class travel on airlines) but is well worth it in terms of trust and speed: "Approval policies, decision making by committee, and contract sign-offs all put hurdles in front of your employees so that they can't move quickly."

This is in contrast to his previous company, Push Software. There they had all sorts of policies: "we had, without much thought, dummy-proofed the work environment. The result was that only dummies wanted to work there."

Total transparency

At Happy we make all finances available to our staff and teach them how to use them. However, we are a private company. For a publicly traded company like Netflix, there are strict rules on what can be shared. If anybody uses information to buy shares, knowing they are set to go up, it can be a criminal offence.

Before they show the figures, they show this slide: "You go to jail if you trade on this... Or if your friend does. Confidential. Do not share."

Pump up candour

Netflix takes feedback seriously, at every level. Staff are expected to provide others with clear candour to help them improve.

It is so embedded that Erin describes how, as an outside speaker, she received clear feedback in the middle of her talk. Giving a presentation on international cultural differences, she was told her facilitating was undermining her message, as she always went to the first people to raise their hands — who were normally Americans. And it meant she was able to change her approach for the rest of the talk.

Initially there was an annual survey based on 'Stop, Start, Continue' (what should this person stop doing, start doing, continue doing). However now the most common approach is to hire a private room in a restaurant for a team and, over the meal, get everybody to provide feedback to each of their colleagues.

A core principle here is: "Only say about someone what you will say to their face."

It sounds impressive. We all know we would like to improve but few companies provide true radical candour.

Erin reveals the figures from a survey: "57% of respondents claim they would prefer to receive corrective feedback to positive feedback. 72% felt their performance would improve if they received more corrective feedback. 92% agreed with the comment, 'Negative feedback, if delivered appropriately, improves performance.'

"With candor, high performers become outstanding performers. Frequent candid feedback exponentially magnifies the speed and effectiveness of your team or workforce. Set the stage for candor by building feedback moments into your regular meetings. Coach your employees to give and receive feedback effectively. As the leader, solicit feedback frequently and respond with belonging cues when you receive it. Get rid of jerks as you instill a culture of candor."

Stop Being Busy

Among all this I love the fact that Reed is not one of those executives who works all hours and is endlessly busy. In February 2020, just before the pandemic, I wrote a LinkedIn post stating that, as a CEO, I was not busy. I argued that senior people "need to step out of the way, stop with the endless meetings and get a life."

However I am head of a 25 person company. Reed Hastings runs a $25 billion enterprise, employing ten thousand people. So I am delighted to find he agrees. Reed "believes so deeply in dispersed decision-making that, by his model, only a CEO who is not busy is really doing his job."

The results have been astounding. $10,000 invested in Netflix at its public offering in 2002 would be worth $3.5 million now. Netflix now has a higher revenue per employee even than Apple. And, according to a 2018 survey from Hired, Netflix rates no. 1 (above Apple and Google) as the place tech workers would most like to work for.

The reasons are set out clearly in this book. Read it and be challenged.

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Henry Stewart, Founder and Chief Happiness Officer

Henry is founder and Chief Happiness Officer of Happy Ltd, originally set up as Happy Computers in 1987. Inspired by Ricardo Semler’s book Maverick, he has built a company which has won multiple awards for some of the best customer service in the country and being one of the UK’s best places to work.

Henry was listed in the Guru Radar of the Thinkers 50 list of the most influential management thinkers in the world. "He is one of the thinkers who we believe will shape the future of business," explained list compiler Stuart Crainer.

His first book, Relax, was published in 2009. His second book, the Happy Manifesto, was published in 2013 and was short-listed for Business Book of the Year.

You can find Henry on LinkedIn and follow @happyhenry on Twitter.

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