No Rules Rules by Reed Hastings and Erin Meyers

1. Intro from Uprise

Summary: Unlike other tech giants (ex. Amazon), Netflix created culture around reducing or eliminating processes and rules. Netflix’s CEO, Reed Hastings, founded his first company, Pure Atria, in 1991 and sold it 1996. There he instilled rules and processes that helped incremental innovation and error reduction when coding, but stifled creativity and true innovation. With Netflix, he intentionally, created culture that shunned rules and processes. Instead, focused on extreme employee trust, ownership, and autonomy to foster step change innovations and attract most talented and innovative people. “It’s Jazz, not a symphony.”

[Vs Amazon, founded by Jeff Bezos, former Wall Street technologist that worked at legendary hedge fund, DE Shaw. DE Shaw, like most other investment funds, had strict and standardized investment processes and investment memo’s. Jeff took these processes and engrained them into Amazon’s culture and innovation cycle. Ex. highly standardized processes such as using 1-6 page narratives, similar to investment memo’s, are used for to make 99% of decisions and to communicate 99% of new ideas.]

Not industrial manufacturer:Industrial and manufacturing companies that dominated global business over the past few hundred years, strived because of their strict processes that helped avoid errors while reducing costs [see widely adopted and famous Toyota Production System, or TPS, for a case study]. In software, however, single great innovations or products can be worth $100B+. This requires disruptive ideas.

• [Disruptive, creative cultures build disruptive innovation; not process-oriented, manufacturing one,]

Netflix’s story: When Reed first met with John Antioco, CEO of multi-billion dollar company, Blockbuster, in early 2000, Netflix had under 10K subscribers in its DVD rental by mail business. Blockbuster was owned by Viacom, largest global media company in world. John turned down opportunity to buy Netflix for $50M, Netflix went public in 2002, and Blockbuster went bankrupt in 2010, its legacy anchor to physical stores made it difficult to turn the ship in time [i.e. they failed Clay Christianson’s Innovators Dilemma problem]. Netflix, however, not only disrupted Blockbuster, but soon thereafter, in mid 2000’s, disrupted itself by creating a separate business, product focused on streaming content.

2. Six Steps to create culture of freedom and responsibility

Safety Tip: To transform culture, you must do steps in order or it will fail

2.1. Talent Density

80>120: When dot com bubble burst in 2001, Netflix had to lay off 40 of its 120 people. Surprisingly, smaller team got more done, worked more effectively, worked harder, and worked with more passion than ever before à Reed’s first cultural epiphany, Talent Density matters!

Talent Density = average talent of all individuals on team

• High Talent Density à Virtuous Upward Spiral; Low à Vicious Downward Spiral
• “When every member is excellent, performance spirals upward as employees learn from and motivate one another.”
• Even one mediocre person drains manager’s time, reduces intelligence of group meetings, and forces talented people to find ways to work around mediocre person
• Great people value working with other great, collaborative people more than slightly more money or free gourmet food

Evidence: Professor Felps performed studies showing that just one “bad actor” brought down entire team’s performance by 30-40%; Additionally, behaviors and personalities were infectious: when bad actor slacked, rest of group slacked more, when bad actor was a jerk, rest of group became more jerkish; worst was when bad actor was depressed pessimist. [Comedian, Jo Koy, jokes that these people are “Energy Vampires”]

2.2. Selfless Candor and Belonging Cues

Safety in numbers: Constructive criticism creates fight or flight reactions, releasing cortisol in our body, especially when received in front of others, because we are wired to find safety in numbers and watch for signs of rejection from groups. Positive feedback release oxytocin, which makes people feel good and connected and loved.

Value of candor:Cultures where people say openly what they really think and feel, helps reduce backstabbing and corporate politics, which enables teams to move faster, learn faster, adapt faster, and work more effectively.

Golden rule:“Only say about someone what you will say to their face.”

Selfless Candor= Saying what you really think and feel with positive intent

“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.”

Reed would famously make his 360 degree written feedback public for anyone at Netflix to see, as well as giving Belonging Cues to writers

Belonging Cues= Any action or signal that person uses to make another person feel like they belong to group; at Netflix, this is often used to validate those who provide feedback, especially upward feedback; Can be gestures, tones of voice, thanking someone - Daniel Coyle, The Culture Code

Feedback guidelines

• 1) “Aim to assist”:Make sure that you have positive intentions and are not just trying to vent or attack someone
• 2) “Actionable”: Should be something receiver can implement

Receiving Feedback guidelines

• 1) “Appreciate”: Thank the person providing it given that it may be effort for them to do so, risky, and uncomfortable; don’t defend or provide excuses
• 2) “Accept or discard”: “You are required to listen and consider all feedback…the decision to react to the feedback is entirely up to the recipient.”

Leaders need to regularly talk about the difference between selfless Candor and “Brilliant Jerk”; Cultures of candor can quickly break down if you have even one jerk

Remember: “’Never give criticism when you’re still angry’ and ‘Use a calm voice when giving corrective feedback’”

2.3. No vacation/expense policy

“When it comes to how we judge performance… hard work is irrelevant.”

“Time off provides mental bandwidth that allows you to think creatively and see your work in a different light. If you are working all the time, you don’t have the perspective to see your problem with fresh eyes.”

• Karoshi= Japanese word for business people that work so many hours in a row that they literally die from exhaustion at office

Vacation guidelines

• Unlimited vacation policies only work if leaders take vacation and make their vacations public; they will set the tone for what “right” level of vacation to take and people will anchor to that

• Reed would typically take at least 6 weeks vacation per year

• Should still set vacation parameters such as times of year when you should or shouldn’t take vacation, how much notice to give

• With 1 and 2, people get called out for bad behavior

“Freedom is not the opposite of accountability…it is a path toward it.”

• “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.”

Why no expense policy?So that no talented person at Netflix has to waste their time with it because it will be a signal that employees can’t be trusted and it will stifle their freedom and creativity

• Some people will cheat but in aggregate it is worth providing freedom still

• Biggest benefit is lack of process just speeds everything up and some employees actually spend less when policy is lifted

• In practice, managers and/or audit team still review all expenses to make sure there is no abuse

2.4. Pay top of personal market

“Rock-star principle”:Research study found for entry level engineers, top coders were 10-25x faster than bottom coders; At Netflix, it is 100x+

• Jobs are divided into “Creative” jobs (ex. Software engineers, strategy, product leaders) and “Operational” (ex. Window washer); Operational jobs top performers are only 2x better; creative jobs are 10x+

• Pays middle of market for operational jobs, top for creative jobs

No bonuses:Bonuses typically rely on setting goals at beginning of year and then trying to achieve them to hit bonus; this reduces company’s and employees ability to adapt.

• Research has confirmed that bonuses work for operational jobs but not for creative jobs; Large, performance tied bonuses are actually inversely correlated with creative jobs

• Hypothesis that explains this phenomena is “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… Big salaries, not merit bonuses, are good for innovation.”

“In a high-performance environment, paying top of market is most cost-effective in the long run. It is best to have salaries a little higher than necessary, to give a raise before an employee asks for it, to bump up a salary before that employee starts looking for another job, in order to attract and retain the best talent on the market year after year. It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place.”

• Over time, each employee typically becomes more valuable but companies often have fixed rules for how much salaries can increase per year; this encourages employees to leave

Don’t decrease comp:Avoid decreasing someone’s salary, even when market demand changes (unless they move to lower cost geography); Instead, they let people go if needed

Encourage market tests and employees to develop their own networks, take recruiter calls and even interview and then tell Netflix what market rates are so that Netflix can proactively raise salaries

• Most other companies treat this as treason

2.5. Open the books

Why? When you share secrets with someone, it gives them huge feelings of loyalty and trust; it also makes them smarter because they have more context to make smart decisions

• Ex. Netflix shares subscriber numbers with everyone, even though it can easily be used for insider trading as it’s the most sought after number on wall street

• Occasionally this leads to people stealing trade secrets and confidential data, which can lead to lawsuits and headaches but still worth cost overall

Sunshining = Leaders share big things, little things, bad things, good things with everyone; including learnings from one’s own mistakes

Examples

• With tentative company re-orgs, share it; Although it causes, it is better than rumors and it will engender more trust

• Any lockers or locked areas are signals that we can’t trust each other

• When someone gets fired, tell others why that person got fired if others can learn from it and “save the spin for the gym”

Exceptions:Don’t announce personal, non-work related issues

Pratfall Effect:Someone’s appeal increases when they share their own mistakes if they are perceived as competent; if not, this just reinforces people’s view of their incompetence

2.6. No decision making approvals needed

Don’t need bosses alignment or approval but should keep them informed

• If manager doesn’t trust person to make their own decisions, then manager should replace them

• Safety tip 1: This leads to making more mistakes so it wouldn’t work in industries like healthcare where mistakes lead to deaths, but in creative fields where disruptive innovations are important and mistakes are tolerated, this leads to more ownership and innovation

• Safety tip 2: Dispersed decisions require open books

How to innovate at Netflix

• 1) “Farm for dissent” or “socialize” idea

• 2) Pilot ideas

• 3) “Informed Captain” decides

• 4) Celebrate success, sunshine failures:
Make sure informed captains aren’t punished or shamed for making a single bad decision; Ask them to share their learnings

Informed Captain = Responsible for socializing ideas and seeing whether or not people like it or dislike and why, but instead of making consensus based decision, is the sole person to make decision

3. Three steps to reinforce it

3.1. The Keeper Test

Keeper Test= “IF I WERE THINKING OF LEAVING, HOW HARD WOULD YOU WORK TO CHANGE MY MIND?”

• Often you have to fire a good employee to get a great one

Sports Team, Not Family:For many centuries though, most businesses were family run so this concept stuck around (ex. greeters at Walmart were taught to think of themselves as part the “Walmart family”)

Netflix is more like a professional sports team, which needs every position to be filled by best person possible

Its ok to have a bad game or maybe even a bad season (if person has great potential), but eventually they need to be replaced

“Adequate performance gets generous severance”- this is to avoid putting people on PIPs, which are very expensive (typically 4 month improvement plan + tons of Mgr and HR time)

No forced performance bell curve – “Stack ranking sabotages collaboration and destroys the joy of high-performing teamwork.”

• “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.”

• Vanity Fair’s article on “Microsoft’s Lost Decade” talked about how much people would stab each other in back while appearing outwardly to be helpful so that they would do better on bell curve

• On avg, Netflix has 8% involuntary turnover and 3-4% voluntary

“In white-water kayaking they teach you to look at the clear, safe water next to the dangerous hole you want to avoid. Experts have found that if you stare at what you are desperate to avoid, you are actually more likely to paddle into it.”

3.2. A circle of feedback

Performance don’t work because it is feedback typically only from one person (boss) and goes only one direction (boss to Direct reports) and often they are based on goals, which Netflix doesn’t use.

Written 360’s:

• Netflix does 360 written feedback with people putting their names to reflect their open candor culture and so people don’t feel safe putting unhelpful or hurtful comments

• Anyone can give feedback to anyone, instead of person just asking for people to give them feedback

• Leaders are encouraged to share their 360 feedback with direct reports and team

• “Reverse Accountability”
= Direct reports feel obligated to provide their boss honest feedback

Live 360’ (optional):Provide feedback live in small group of under 8 people over dinner or lunch for a few hours. Everyone should get some tough feedback so that no one feels signaled out. Each person provides “actionable gifts” of feedback with roughly one quarter positive and three quarters actionable feedback, while avoiding non-actionable positivity (e.g., “I love working with you”); First few people will set tone for group so make sure first receiver will be receptive and open and first few givers will be tough, constructive, and respectful. Often boss is first receiver.

3.3. Lead with context, not control

Control or rule based systems of governance work best when error prevention is important [ex. read “Checklist Manifesto” about importance of rules and checklists in performing surgeries]

• Context is best when you are trying to inspire innovation because it provides freedom to dream and space to make mistakes

Leading with context example: As a parent, talk to your child about dangers of excessive drinking and DUI’s; once they understand danger, let them go to parties without setting rules.

Tightly coupled systems:Each component in system is related to other components; there are many interdependencies; decision making usually must come from top or be made centrally vs. Loosely coupled systems– there are fewer interdependencies and enables decentralized decisions

North Star= Direction team is running

• “Highly aligned, loosely coupled”– this is Netflix’s mantra; Loose coupling only works if everyone has shared vision / mission for where they are going

• To ensure North Star alignment, Reed worked ~3K hours per year, spent 250 hours meeting 1x1 with ~500 directors for 30min and 500 hours meeting with 125 VPs 1 hour quarterly

4. Scaling globally

For candor especially, you need to adapt your culture and styles to local culture to ensure that candor still occurs (ex. With cultures that aren’t direct, you need more written and formal feedback)

Buy on Amazon