No Rules Rules: Netflix and the Culture of Reinvention

Metadata

• Title: No Rules Rules: Netflix and the Culture of Reinvention
• Author: Reed Hastings and Erin Meyer
• Book URL: https://amazon.com/dp/B081Y3R657?tag=malvaonlin-20
• Open in Kindle: kindle://book/?action=open&asin=B081Y3R657
• Last Updated on: Sunday, October 4, 2020

Highlights & Notes

Policies and control processes became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere. I was sorry to see them go, but I believed that this was what happens when a company grows up.

To survive, we needed to change. But we had selected and conditioned our employees to follow process, not to think freshly or shift fast. We were unable to adapt and, in 1997, ended up selling the company to our largest competitor.

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. This also makes for a happier, more motivated workforce as well as a more nimble company.

• Build up talent density. At most companies, policies and control processes are put in place to deal with employees who exhibit sloppy, unprofessional, or irresponsible behavior. But if you avoid or move out these people, you don’t need the rules. 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.

• Increase candor. Talented employees have an enormous amount to learn from one another. But the normal polite human protocols often prevent employees from providing the feedback necessary to take performance to another level. 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.

• Reduce controls. Start by ripping pages from the employee handbook. Travel policies, expense policies, vacation policies—these can all go. Later, as talent becomes increasingly denser and feedback more frequent and candid, you can remove approval processes throughout the organization, teaching your managers principles like, “Lead with context, not control,” and coaching your employees using such guidelines as, “Don’t seek to please your boss.”

From: Reed Hastings Date: May 31, 2015 Subject: Peace Corps and book Erin, I was Peace Corps Swaziland (1983–85). Now I’m the CEO of Netflix. I loved your book and we are having all of our leaders read it. I’d love to have coffee sometime. I’m in Paris often. Small world! Reed

Every employee has some talent. When we’d been 120 people, we had some employees who were extremely talented and others who were mildly talented. Overall we had a fair amount of talent dispersed across the workforce. After the layoffs, with only the most talented eighty people, we had a smaller amount of talent overall, but the amount of talent per employee was greater. Our talent “density” had increased.

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.

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.

If you have adequate performers, it leads many who could be excellent to also perform adequately. And if you have a team consisting entirely of high performers, each pushes the others to achieve more.

We would coach our managers to have the courage and discipline to get rid of any employees who were displaying undesirable behaviors or weren’t performing at exemplary levels. I became laser-focused on making sure Netflix was staffed, from the receptionist to the top executive team, with the highest-performing, most collaborative employees on the market.

▶ TAKEAWAYS FROM CHAPTER 1 Your number one goal as a leader is to develop a work environment consisting exclusively of stunning colleagues. Stunning colleagues accomplish significant amounts of important work and are exceptionally creative and passionate. Jerks, slackers, sweet people with nonstellar performance, or pessimists left on the team will bring down the performance of everyone. Toward a Culture of Freedom and Responsibility Once you have high talent density in place and have eliminated less-than-great performers, you are ready to introduce a culture of candor.

When giving and receiving feedback is common, people learn faster and are more effective at work.

HIGH PERFORMANCE + SELFLESS CANDOR = EXTREMELY HIGH PERFORMANCE

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.

It’s stressful and unpleasant to hear what we are doing poorly, but after the initial stress, that feedback really helps. Most people intuitively understand that a simple feedback loop can help them get better at their jobs.

A feedback loop is one of the most effective tools for improving performance. We learn faster and accomplish more when we make giving and receiving feedback a continuous part of how we collaborate. Feedback helps us to avoid misunderstandings, creates a climate of co-accountability, and reduces the need for hierarchy and rules.

When considering whether to give feedback, people often feel torn between two competing issues: they don’t want to hurt the recipient’s feelings, yet they want to help that person succeed.

I recommend instead focusing first on something much more difficult: getting employees to give candid feedback to the boss. This can be accompanied by boss-to-employee feedback. But it’s when employees begin providing truthful feedback to their leaders that the big benefits of candor really take off.

The higher you get in an organization, the less feedback you receive, and the more likely you are to “come to work naked” or make another error that’s obvious to everyone but you. This is not just dysfunctional but dangerous. If an office assistant screws up a coffee order and no one tells him, it’s no big deal. If the chief financial officer screws up a financial statement, and no one dares to challenge it, it sends the company into crisis.

Later I ran into Ted in the men’s washroom. He asked how my first day was going so I told him, “Wow Ted, I couldn’t believe the way that guy was going at you in the meeting.” Ted looked totally mystified. He said, “Brian, the day you find yourself sitting on your feedback because you’re worried you’ll be unpopular is the day you’ll need to leave Netflix. We hire you for your opinions. Every person in that room is responsible for telling me frankly what they think.”

AIM TO ASSIST: Feedback must be given with positive intent. Giving feedback in order to get frustration off your chest, intentionally hurting the other person, or furthering your political agenda is not tolerated. Clearly explain how a specific behavior change will help the individual or the company, not how it will help you. “The way you pick your teeth in meetings with external partners is irritating” is wrong feedback. Right feedback would be, “If you stop picking your teeth in external partner meetings, the partners are more likely to see you as professional, and we’re more likely to build a strong relationship.” ACTIONABLE: Your feedback must focus on what the recipient can do differently. Wrong feedback to me in Cuba would have been to stop at the comment, “Your presentation is undermining its own messages.” Right feedback was, “The way you ask the audience for input is resulting in only Americans participating.” Even better would have been: “If you can find a way to solicit contributions from other nationalities in the room your presentation will be more powerful.”

APPRECIATE: Natural human inclination is to provide a defense or excuse when receiving criticism; we all reflexively seek to protect our egos and reputation. When you receive feedback, you need to fight this natural reaction and instead ask yourself, “How can I show appreciation for this feedback by listening carefully, considering the message with an open mind, and becoming neither defensive nor angry?”

You are required to listen and consider all feedback provided. You are not required to follow it. Say “thank you” with sincerity. But both you and the provider must understand that the decision to react to the feedback is entirely up to the recipient.

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.”

A culture of candor does not mean that you can speak your mind without concern for how it will impact others. On the contrary, it requires that everyone think carefully about the 4A guidelines. This requires reflection and sometimes preparation before you give feedback, as well as monitoring and coaching from those in charge.

If you have a group of people who are highly talented, thoughtful, and well-meaning, you can ask them to do something that is not at all natural but nonetheless incredibly helpful to a company’s speed and effectiveness. You can ask them to give each other loads of candid feedback and challenge authority.

▶ TAKEAWAYS FROM CHAPTER 2 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, following the 4A guidelines. 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. With talent density and candor in place, you are ready to begin releasing controls and offering more workplace freedom. Toward a Culture of Freedom and Responsibility Most organizations have a wide variety of control processes to make sure employees are behaving in ways that benefit the company. Control mechanisms include policies, approval procedures, and management oversight. First focus on developing a high-talent-density workplace. Second develop a culture of candor, assuring that everyone gives and receives a lot of feedback. With a climate of candor, the boss is no longer the primary individual to correct an employee’s undesirable behavior. When the entire community speaks openly about which individual behaviors advance the company, and which don’t, the boss doesn’t have to get so involved in overseeing an employee’s work.

I want that manager to say, “Let’s give Sherry a promotion because she’s making a huge impact,” not because she’s chained to her desk. What if Sherry’s accomplishing amazing things working a twenty-five-hour week from a hammock in Hawaii? Well, let’s give her a big raise! She’s extremely valuable.

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.

He was living proof of why companies benefit when their employees take vacations. 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.

Most important, the freedom signals to employees that we trust them to do the right thing, which in turn encourages them to behave responsibly.

Without a policy, the example the bosses set would become incredibly important.

With the absence of a policy, most people look around their department to understand the “soft limits” of what’s acceptable.

“What we say as leaders is only half the equation,” Greg explains. “Our employees are also looking at what we do. If I say, ‘I want you to find a sustainable and healthy work-life balance,’ but I’m in the office twelve hours a day, people will imitate my actions, not follow my words.”

He didn’t create rules or nag. He just modeled the behavior and communicated expectations.

In the absence of written policy, every manager must spend time speaking to the team about what behaviors fall within the realm of the acceptable and appropriate.

The clearer the manager is when setting context, the better.

The Netflix ethos is that one superstar is better than two average people.

GIVE FREEDOM TO GET RESPONSIBILITY

We’d found a way to give our high performers a little more control over their lives, and that control made everybody feel a little freer. Because of our high-talent density, our employees were already conscientious and responsible. Because of our culture of candor, if anyone abused the system or took advantage of the freedom allotted, others would call them out directly and explain the undesirable impact of their actions.

Giving employees more freedom led them to take more ownership and behave more responsibly.

Freedom is not the opposite of accountability, as I’d previously considered. Instead, it is a path toward it.

It only served to underline why setting rules and policies can never work well. Real life is so much more nuanced than any policy could ever address.

Today the entirety of the travel and expense policy still consists of these five simple words: ACT IN NETFLIX’S BEST INTEREST

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.

Usually after just one or two conversations clarifying context your employees will get the hang of how to spend the company’s money wisely and that will pretty much take care of it. When employees realize their managers are keeping an eye on expenses, they aren’t likely to test the limits much.

This is the nub of F&R. 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 offer freedom, even if you set context and clarify the ramifications of abuse, a small percentage of people will cheat the system. When this happens, don’t overreact and create more rules. Just deal with the individual situation and move forward.

But this is the most important message of this chapter: even if your employees spend a little more when you give them freedom, the cost is still less than having a workplace where they can’t fly. If you limit their choices by making them check boxes and ask for permission, you won’t just frustrate your people, you’ll lose out on the speed and flexibility that comes from a low-rule environment.

I don’t want rules that prevent employees from making good decisions in a timely way.

“Act in Netflix’s best interest.” That freedom enabled him to use good judgment to do what was right for the company. But freedom isn’t the only benefit of removing your expense policy. The second benefit is that the lack of process speeds everything up.

Processes provide management with a sense of control, but they slow everything way down.

The organization with the policy is not necessarily the one saving money.

The trust you offer will in turn instill feelings of responsibility in your workforce, leading everyone in the company to have a greater sense of ownership.

▶ TAKEAWAYS FROM CHAPTER 3A (VACATION) When removing your vacation policy, explain that there is no need to ask for prior approval and that neither the employees themselves nor their managers are expected to keep track of their days away from the office. It is left to the employee alone to decide if and when he or she feels like taking a few hours, a day, a week, or a month off work. When you remove the vacation policy, it will leave a hole. What fills the hole is the context the boss provides for the team. Copious discussions must take place, setting the scene for how employees should approach vacation decisions. The practices modeled by the boss will be critical to guide employees as to the appropriate behavior. An office with no vacation policy but a boss who never vacations will result in an office that never vacations.

▶ TAKEAWAYS FROM CHAPTER 3B (TRAVEL AND EXPENSE) When removing travel and expense policies, encourage managers to set context about how to spend money up front and to check employee receipts at the back end. If people overspend, set more context. With no expense controls, you’ll need your finance department to audit a portion of receipts annually. When you find people abusing the system, fire them and speak about the abuse openly—even when they are star performers in other ways. This is necessary so that others understand the ramifications of behaving irresponsibly. Some expenses may increase with freedom. But the costs from overspending are not nearly as high as the gains that freedom provides. With expense freedom, employees will be able to make quick decisions to spend money in ways that help the business. Without the time and administrative costs associated with purchase orders and procurement processes, you will waste fewer resources. Many employees will respond to their new freedom by spending less than they would in a system with rules. When you tell people you trust them, they will show you how trustworthy they are.

1. We would find new ways to increase talent density. In order to attract and retain the best people, we would have to make sure that we offered the most attractive methods of compensation.

2. We would find new ways to increase candor. If we were going to remove controls, we would need to make sure that our employees had all the information they needed to make good decisions without management oversight. This would require increasing organizational transparency and eliminating company secrets. If we wanted employees to make good decisions for themselves, they would have to understand as much about what was going on in the business as those at the top.

The success of Netflix is founded on these types of unlikely stories: small teams consisting exclusively of significantly above-average performers—what Reed refers to as dream teams—working on big hairy problems.

At most places, there are some great employees and some just okay ones. The okay ones are managed while the stars are relied upon to give everything they can. At Netflix, it’s different. We live in a walled garden of excellence, where everyone is a high performer. You go into these meetings and it’s like the talent and brain power in the room could generate the office electricity. People are challenging one another, building up arguments, and each of them is practically smarter than Stephen Hawking. That’s why we get so much done at such incredible speed here. It’s because of the crazy high talent density.

The high talent density at Netflix is the engine that drives Netflix success. Reed learned this simple but critical strategy after the layoffs in 2001. More complicated was figuring out what steps to take in order to attract and retain that top talent.

The researchers expected to find that the best of the nine programmers would outperform his average counterpart by a factor of two or three. But of the group of nine, all of whom were at least adequate programmers, the best far outperformed the worst. The best guy was twenty times faster at coding, twenty-five times faster at debugging, and ten times faster at program execution than the programmer with the lowest marks. The fact that one of these programmers would so dramatically outperform another has caused ripples across the software industry ever since, as managers grapple with how some programmers can be worth so much more than their perfectly adequate colleagues. With a fixed amount of money for salaries and a project I needed to complete, I had a choice. 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).

If you’re hiring someone for an operational position, say window washer, ice-cream scooper, or driver, the best employee might deliver double the value of the average. A really good scooper can probably fill two or three times the number of cones an average one could. A really good driver might have half the average number of accidents. But there’s a cap on how much value one ice-cream scooper or one driver can deliver. For operational roles, you can pay an average salary and your company will do very well.

We determined that for any type of operational role, where there was a clear cap on how good the work could be, we would pay middle of market rate. But for all creative jobs we would pay one incredible employee at the top of her personal market, instead of using that same money to hire a dozen or more adequate performers. This would result in a lean workforce. 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.

A large part of the top talent’s pay is contingent on performance.

Pay-per-performance bonuses seem to make a lot of sense. Part of an employee’s pay is guaranteed and part of it (usually 2 to 15 percent but up to 60 or even 80 percent for senior executives) is linked to performance. If you bring a lot of value to the company, you get your bonus. If you miss your goals, you don’t get paid. What could be more logical? Performance-related bonuses are almost universally deployed in the US, and frequently elsewhere. But Netflix doesn’t use them.

I learned from that exchange with Leslie that the entire bonus system is based on the premise that you can reliably predict the future, and that you can set an objective at any given moment that will continue to be important down the road. 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.

Beyond that, I don’t buy the idea that if you dangle cash in front of your high-performing employees, they try harder. High performers naturally want to succeed and will devote all resources toward doing so whether they have a bonus hanging in front of their nose or not. I love this quote from former chief executive of Deutsche Bank John Cryan: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.” Any executive worth her paycheck would say the same.

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.

By avoiding pay-per-performance bonuses you can offer higher base salaries and retain your highly motivated employees. All this increases talent density. But nothing increases talent density more than paying people high salaries and increasing them over time to assure they remain top of market.

Were any of the programmers on his current team good enough to take the job at Apple that Devin had just left? No. Would three of Han’s current employees collectively be able to make the same contribution that Devin could make? No. If a fairy godmother suggested he could silently and without duress swap a few of his current programmers for Devin, would that be good for the company? Yes.

The answer to this question is that when it comes to review time, instead of looking at what that employee is worth on the market, most companies use “raise pools” and “salary bands” to determine raises.

Research confirms what João and Sugarplum already suspected. You’ll get more money if you change companies than if you stay put. In 2018, the average annual pay raise per employee in the US was about 3 percent (5 percent for top performers). For an employee quitting her job and joining a new company, the average raise was between 10 percent and 20 percent. Staying in the same job is bad for your pocketbook.

João makes a strong case. So why do companies still follow the normal raise methods? Reed’s theory is that the raise pools and salary bands used at most companies worked well when employment was often for life and an individual’s market value wasn’t likely to skyrocket in a matter of months. But clearly those conditions don’t apply anymore, given how fast people switch jobs today and the changing nature of our modern economy. But the pay-top-of-market model at Netflix is so unusual that it is hard to understand.

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.

Figuring out top of market can take a lot of time, but not as much time as finding and training a replacement when your best people leave for more money at another company.

If you really want to know what you’re worth, talk to recruiters.

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.

To retain your top employees, it’s always better to give them the raise before they get the offers.

“It’s disloyal to sneak around and hide who you are speaking to, but openly interviewing and giving Netflix the salary data benefits all of us.”

In order to fortify the talent density in your workforce, for all creative roles hire one exceptional employee instead of ten or more average ones. Hire this amazing person at the top of whatever range they are worth on the market. Adjust their salary at least annually in order to continue to offer them more than competitors would. 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.

TAKEAWAYS FROM CHAPTER 4 The methods used by most companies to compensate employees are not ideal for a creative, high-talent-density workforce. Divide your workforce into creative and operational employees. Pay the creative workers top of market. This may mean hiring one exceptional individual instead of ten or more adequate people. Don’t pay performance-based bonuses. Put these resources into salary instead. Teach employees to develop their networks and to invest time in getting to know their own—and their teams’—market value on an ongoing basis. This might mean taking calls from recruiters or even going to interviews at other companies. Adjust salaries accordingly. Toward a Culture of Freedom and Responsibility Now that your talent density is increasing you are almost ready to take dramatic measures to increase employee freedom. But first you’ll need to take candor up a notch. At most companies, the majority of employees—even if they are highly talented—can’t be given significant levels of decision-making freedom, because they don’t know all the company secrets that allow top management to make informed decisions. Once you have a company full of those rare responsible people who are self-motivated, self-aware, and self-disciplined, you can begin to share with them unprecedented amounts of company information—the type of knowledge most companies keep under lock and key.

There is no better way to build trust quickly than to shine a light directly on a would-be secret.

When we discussed that case at Aspen, one of the other leaders didn’t agree with Jack’s approach: “I see my job as holding an umbrella over my workers to protect them from getting distracted by stuff that doesn’t have anything to do with their work. I hire them each to do something they excel at and love doing. I don’t want them to have to waste hours hearing about business details that they don’t care about, and that isn’t their strength.” I disagreed: “This guy Jack managed to instigate feelings of ownership by guiding people to understand the reasons behind the work they are doing. I don’t want my employees to feel like they’re working for Netflix; I want them to feel like they are part of Netflix.” That’s when I decided, if you’re going to work at Netflix, no one is going to hold an umbrella over your head. You’re going to get wet.

Back at work we started holding “all-hands” meetings every Friday. Patty McCord would stand on a chair like a town crier to get everyone’s attention and we would head out into the parking lot, which was the only place we had enough space for everyone in the company. I would pass out copies of the P&L and we would go through the weekly metrics. How many shipments had we done? What was the average revenue? How well were we able to fill client requests for their first and second choice of movies? We also created a strategy document that was filled with information we wouldn’t want our competitors to know, and posted it on the bulletin board next to the coffee machine. We opened this information up to build feelings of trust and ownership in our employees, in the hope of getting the same reaction from the workforce as Jack Stack did. And it worked. I closed that umbrella, and no one complained. Since then all financial results, as well as just about any information that Netflix competitors would love to get their hands on, has been available to all of our employees. Most notable is the four-page “Strategy Bets” document on the home page of the company’s intranet.

The more employees at all levels understand the strategy, financial situation, and the day-to-day context of what’s going on, the better they become at making educated decisions without involving those above them in the hierarchy.

For our employees, transparency has become the biggest symbol of how much we trust them to act responsibly. The trust we demonstrate in them in turn generates feelings of ownership, commitment, and responsibility.

But when one employee abuses your trust, deal with the individual case and double your commitment to continue transparency with the others. Do not punish the majority for the poor behavior of a few.

It’s not our job at Netflix to get involved in your housing situation or any other major aspect of your life. But it is our job to treat you like an adult and give you all the information we have, so that you can make informed decisions.

We “spin” by selectively sharing the facts, overemphasizing the positive, minimizing the negative, all in an attempt to shape the perception of others.

Spinning the truth is one of the most common ways leaders erode trust. I can’t say this clearly enough: don’t do this. Your people are not stupid. When you try to spin them, they see it, and it makes you look like a fraud. Speak plainly, without trying to make bad situations seem good, and your employees will learn you tell the truth.

I recommend our managers seek to be as transparent as possible while also ensuring they can respond yes to the question, “Would I feel comfortable showing the person I let go of the email I sent?”

When it comes to personal struggles, an individual’s right to privacy trumps an organization’s desire for transparency.

Generally, I believed that if the dilemma is linked to an incident at work, everyone should be informed. But if the dilemma is linked to an employee’s personal situation, it’s up to that person to share details if he chooses.

Since then, every time I feel I’ve made a mistake, I talk about it fully, publicly, and frequently. I quickly came to see the biggest advantage of sunshining a leader’s errors is to encourage everyone to think of making mistakes as normal. This in turn encourages employees to take risks when success is uncertain … which leads to greater innovation across the company. Self-disclosure builds trust, seeking help boosts learning, admitting mistakes fosters forgiveness, and broadcasting failures encourages your people to act courageously.

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.”

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.

a leader who has demonstrated competence and is liked by her team will build trust and prompt risk-taking when she widely sunshines her own mistakes. Her company benefits. The one exception is for a leader considered unproven or untrusted. In these cases you’ll want to build trust in your competency before shouting your mistakes.

If you have the best employees on the market and you’ve instituted a culture of open feedback, opening up company secrets increases feelings of ownership and commitment among staff. If you trust your people to handle appropriately sensitive information, the trust you demonstrate will instigate feelings of responsibility and your employees will show you just how trustworthy they are.

TAKEAWAYS FROM CHAPTER 5 To instigate a culture of transparency, consider what symbolic messages you send. Get rid of closed offices, assistants who act as guards, and locked spaces. Open up the books to your employees. Teach them how to read the P&L. Share sensitive financial and strategic information with everyone in the company. When making decisions that will impact your employees’ well-being, like reorganizations or layoffs, open up to the workforce early, before things are solidified. This will cause some anxiety and distraction, but the trust you build will outweigh the disadvantages. When transparency is in tension with an individual’s privacy, follow this guideline: If the information is about something that happened at work, choose transparency and speak candidly about the incident. If the information is about an employee’s personal life, tell people it’s not your place to share and they can ask the person concerned directly if they choose. As long as you’ve already shown yourself to be competent, talking openly and extensively about your own mistakes—and encouraging all your leaders to do the same—will increase trust, goodwill, and innovation throughout the organization.

“Ted, your job is not to try to make me happy or to make the decision you think I’d most approve of. It’s to do what’s right for the business. You are not allowed to let me drive this company off a cliff!”

At Netflix, we emphasize that it’s fine to disagree with your manager and to implement an idea she dislikes. We don’t want people putting aside a great idea because the manager doesn’t see how great it is. That’s why we say at Netflix: DON’T SEEK TO PLEASE YOUR BOSS. SEEK TO DO WHAT IS BEST FOR THE COMPANY.

We don’t emulate these top-down models, because we believe we are fastest and most innovative when employees throughout the company make and own decisions. At Netflix, we strive to develop good decision-making muscles everywhere in our company—and we pride ourselves on how few decisions senior management makes.

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 (see the next chapter where we’ll learn that “adequate performance gets a generous severance”).

When the boss steps out of the role of “decision approver,” the entire business speeds up and innovation increases.

The difference is the decision-making freedom we provide. If your employees are excellent and you give them freedom to implement the bright ideas they believe in, innovation will happen.

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.

If you hope for more innovation on your team, teach employees to seek ways to move the business forward, not ways to please their bosses.

In order to encourage our employees like Kari and their managers like Jack to shift their mind-set in the direction of experimentation, we use the image of placing bets. This motivates employees to think of themselves as entrepreneurs—who typically don’t succeed without some failures.

We want all employees taking bets they believe in and trying new things, even when the boss or others think the ideas are dumb. When some of those bets don’t pay off, we just fix the problems that arise as quickly as possible and discuss what we’ve learned. In our creative business, rapid recovery is the best model.

Jack made it clear that at Netflix you don’t lose your job because you make a bet that doesn’t work out. Instead you lose your job for not using your chips to make big things happen or for showing consistently poor judgment over time.

The Netflix Innovation Cycle If you have an idea you’re passionate about, do the following: “Farm for dissent,” or “socialize” the idea. For a big idea, test it out. As the informed captain, make your bet. If it succeeds, celebrate. If it fails, sunshine it.

That’s when we added a new element to our culture. 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.

Humans are much more comfortable when going along with the herd.

I can’t make the best decisions unless I have input from a lot of people.

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.

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.

part of the reason that F&R works so well is because people do feel the burden of the responsibility that comes with the freedom and make extra efforts accordingly.

Often talented people find it liberating to be the informed captain—and many join Netflix because of this freedom. Some, like Diego, also find it more terrifying than comfortable. If so, they learn to adjust or move on.

Ask what learning came from the project. Don’t make a big deal about it. Ask her to “sunshine” the failure.

Often a failed project is a critical step in getting to success.

If you make a big deal about a bet that didn’t work out, you’ll shut down all future risk-taking.

It’s critical that your employees are continually hearing about the failed bets of others, so that they are encouraged to take bets (that of course might fail) themselves. You can’t have a culture of innovation if you don’t have this.

We shouldn’t be afraid of our failures. We should embrace them.

▶ TAKEAWAYS FROM CHAPTER 6 In a fast and innovative company, ownership of critical, big-ticket decisions should be dispersed across the workforce at all different levels, not allocated according to hierarchical status. In order for this to work the leader must teach her staff the Netflix principle, “Don’t seek to please your boss.” When new employees join the company, tell them they have a handful of metaphorical chips that they can make bets with. Some gambles will succeed, and some will fail. A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance. To help your workforce make good bets, encourage them to farm for dissent, socialize the idea, and for big bets, test it out. Teach your employees that when a bet fails, they should sunshine it openly. Toward a Culture of Freedom and Responsibility Your company is now benefiting heavily from a culture of Freedom and Responsibility. You’re moving faster, innovating more, and your employees are happier. But as the organization grows, you may find that it’s difficult to maintain these cultural elements in which you have so carefully invested. This is what happened to us at Netflix. Between 2002 and 2008 we laid the foundation for most of the aspects outlined in the first six chapters of this book. But when we had dozens of new employees joining us from other companies every week, it became more challenging to shift people’s mind-sets to working in the Netflix way. For this reason, we have introduced a set of techniques for all managers in the company to use in order to assure that the critical elements of talent density, candor, and freedom persist despite change and growth. These techniques are the topic of section 3.

With our dispersed decision-making model, if you pick the very best people and they pick the very best people (and so on down the line) great things will happen.

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.

He was a lovely person, but the deliverables weren’t there.

We wanted employees to feel committed, interconnected, and part of a greater whole. But we didn’t want people to see their jobs as a lifetime arrangement. A job should be something you do for that magical period of time when you are the best person for that job and that job is the best position for you. Once you stop learning or stop excelling, that’s the moment for you to pass that spot onto someone who is better fitted for it and to move on to a better role for you.

After a lot of discussion Patty suggested that we think of Netflix as a professional sports team.

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…

At Netflix, I want each manager to run her department like the best professional teams, working to create strong feelings of commitment, cohesion, and camaraderie, while continually making tough…

A professional sports team is a good metaphor for high talent density because athletes on professional teams: Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time. Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another. Know effort isn’t enough, recognizing that, if they put in a B…

On a high-performing team, collaboration and trust work well because all the members are exceptionally skilled both at what they do and at working well with others. For an individual to be deemed excellent she can’t just be amazing at the game; she has to be selfless and put the team before her own ego. She has to know when to pass the ball, how to help her teammates thrive, and recognize that the only way to win is for the team to win together. This is exactly the…

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…

Would the company be better off if you let go of Samuel and looked for someone more effective? If they say “yes,” that’s a clear sign that…

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,…

They should replace me once they have a potential CEO who is likely to be more effective. I find it motivating that I have to play for my position every quarter, and I try to keep improving myself to stay ahead.

We pay our employees top of their personal market, so they are all paid very well. Part of that agreement is that they will play on the team as long as they are the best player for the spot. They understand that the needs of our company change quickly and that we expect outstanding performance. So, each employee who chooses to join the Netflix team opts in to our high-talent-density approach. We are transparent about our tactics and many employees are delighted to be surrounded by such high-quality colleagues and happy to put up with some job risk in return. Other people may prefer long-term job security and they choose not to join Netflix. So yes, I believe our approach is ethical. It is also highly popular with most of our employees.

The second is to protect the company from a lawsuit. We ask exiting employees, in order to receive the generous severance we are offering, to sign an agreement that they won’t sue us. Almost all accept the offer. They get a big chunk of money and can focus on the next step of their careers.

I want our high-performing employees to compete against Netflix’s competitors, not one another. With rank-and-yank what you gain in talent density you lose in reduced collaboration.

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?”

The best response after something difficult happens is to shine a bright light on the situation so everyone can work through it in the open. When you choose to sunshine exactly what happened, your clarity and openness will wash away the fears of the group.

Most companies do what they can to minimize employee turnover. It costs money to find and train new people, so the traditional wisdom goes that it’s cheaper to hold on to your current team members than to find new ones. But Reed doesn’t pay much attention to turnover rate, believing that replacement costs are not as important as ensuring the right person is in every position.

If each manager considers carefully, on a regular basis, whether every employee on the team is indeed the best choice for that position and replaces anyone who isn’t, performance across the organization soars to new heights.

▶ TAKEAWAYS FROM CHAPTER 7 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?” Avoid stack-ranking systems, as they create internal competition and discourage collaboration. For a high-performance culture, a professional sports team is a better metaphor than a family. Coach your managers to create strong feelings of commitment, cohesion, and camaraderie on the team, while continually making tough decisions to ensure the best player is manning each post. When you realize you need to let someone go, instead of putting him on some type of PIP, which is humiliating and organizationally costly, take all that money and give it to the employee in the form of a generous severance payment. The downside to a high-performance culture is the fear employees may feel that their jobs are on the line. To reduce fear, encourage employees to use the Keeper Test Prompt with their managers: “How hard would you work to change my mind if I were thinking of leaving?” When an employee is let go, speak openly about what happened with your staff and answer their questions candidly. This will diminish their fear of being next and increase their trust in the company and its managers.

Candor is like going to the dentist: a lot of people will avoid it if they can.

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

at Netflix we base salaries on the market, not performance.

The live 360s are so useful because individuals become accountable for their behavior and actions to the team. Given how much freedom we grant employees, along with the general “don’t seek to please your boss” climate, this co-responsibility provides a safety net. The boss doesn’t tell the employee what to do. But if the employee acts irresponsibly, he will get feedback from the group.

If you’d like to try the live 360 for yourself, here are a few tips: Length and location: A live 360 will take several hours. Do it over dinner (or at least include a meal) and keep the group small. We sometimes have sessions with ten or twelve people, but eight or fewer is more manageable. For a group of eight you’ll need about three hours. A group of twelve could run to five hours. Method: All feedback should be provided and received as an actionable gift following the 4A feedback guidelines outlined in chapter 2. The leader will need to explain this in advance and monitor it during the session. Positive actionable feedback (continue to …) is fine, but keep it in check. A good mix is 25 percent positive and 75 percent developmental (start doing … and stop doing …). Any nonactionable fluff (“I think you’re a great colleague” or “I love working with you”) should be discouraged and stamped out. Getting started: The first few feedback interactions will set the tone for the evening. Choose a feedback receiver who will receive tough feedback with openness and appreciation. Choose a feedback provider who will give the tough feedback, while following the 4A guidelines. Often the boss chooses to be the first to receive.

If you’re serious about candor at some point, you do need to implement mechanisms to assure candor happens. With just two institutional processes you can ensure that everyone gets candid developmental feedback at regular intervals. ▶ TAKEAWAYS FROM CHAPTER 8 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. Performance reviews are not the best mechanism for a candid work environment, primarily because the feedback usually goes only one way (down) and comes from only one person (the boss). A 360 written report is a good mechanism for annual feedback. But avoid anonymity and numeric ratings, don’t link results to raises or promotions, and open up comments to anyone who is ready to give them. Live 360 dinners are another effective process. Set aside several hours away from the office. Give clear instructions, follow the 4A feedback guidelines, and use the Start, Stop, Continue method with roughly 25 percent positive, 75 percent developmental—all actionable and no fluff.

Toward a Culture of Freedom and Responsibility After implementing the Keeper Test system, you will have achieved a high level of talent density in your office. Now, with the implementation of the written and live 360 feedback processes, you don’t just have a climate of candor around the office; you have institutionalized tools to ensure employees are talking openly and honestly to each other. With this much talent and candor, you can now focus your time on teaching your leaders to let go of whatever controls they are holding on to. We spoke about decision-making freedom in chapter 6, so conceptually your workforce is ready. But to develop a true environment of Freedom and Responsibility you’ll need to teach all managers in your company to lead with context, not control.

Leading with context, on the other hand, is more difficult, but gives considerably more freedom to employees. You provide all of the information you can so that your team members make great decisions and accomplish their work without oversight or process controlling their actions. The benefit is that the person builds the decision-making muscle to make better independent decisions in the future.

Therefore, the first question you need to answer when choosing whether to lead with context or control is, “What is the level of talent density of my staff?” If your employees are struggling, you’ll need to monitor and check their work to ensure they are making the right decisions. If you’ve got a group of high performers, they’ll most likely crave freedom and thrive if you lead with context.

If your focus is on eliminating mistakes, then control is best.

But if, like Target, your goal is innovation, making a mistake is not the primary risk. The big risk is becoming irrelevant because your employees aren’t coming up with great ideas to reinvent the business.

Or as Antoine de Saint-Exupéry, the author of The Little Prince, put it rather more poetically: If you want to build a ship, don’t drum up the people to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea.

If you’re starting up your own company and your goal is innovation and flexibility, try to keep decision-making decentralized, with few interdependencies between functions, in order to nurture loose coupling from the outset. It will be a whole lot trickier to introduce once your organization has settled into a tightly coupled structure.

In a tightly coupled system, strategic change is easily aligned throughout the organization.

If loose coupling is to work effectively, with big decisions made at the individual level, then the boss and the employees must be in lockstep agreement on their destination. Loose coupling works only if there is a clear, shared context between the boss and the team. That alignment of context drives employees to make decisions that support the mission and strategy of the overall organization.

The number one goal for these meetings is to make sure that all leaders across the company are highly aligned on what I call our North Star: the general direction we are running in. We don’t need to be aligned on how each department is going to get where they are going—that we leave to the individual areas—but we do need to make sure we are all moving in the same direction.

Between QBRs, I hold ongoing one-on-one meetings to get a feel for how aligned we actually are and where context is lacking. I have one thirty-minute meeting with each director once a year. That makes about 250 hours of meetings with people who are three to five levels below me in the org chart. In addition, I meet with each vice president (two to three levels below me) for one hour every quarter. This results in another 500 hours of meetings annually.

These one-on-one meetings help me to better understand the context in which our employees are working, and alert me to areas where our leadership is not aligned so that I can revisit key points at the next round of QBR meetings.

WHEN ONE OF YOUR PEOPLE DOES SOMETHING DUMB DON’T BLAME THEM. INSTEAD ASK YOURSELF WHAT CONTEXT YOU FAILED TO SET. ARE YOU ARTICULATE AND INSPIRING ENOUGH IN EXPRESSING YOUR GOALS AND STRATEGY? HAVE YOU CLEARLY EXPLAINED ALL THE ASSUMPTIONS AND RISKS THAT WILL HELP YOUR TEAM TO MAKE GOOD DECISIONS? ARE YOU AND YOUR EMPLOYEES HIGHLY ALIGNED ON VISION AND OBJECTIVES?

If one person is misaligned with our strategy, there must be fifty others who are in the same boat.

Either the boss makes the decision and pushes it down the pyramid for implementation, or those at lower levels make the smaller decisions but refer the bigger issues to the higher-ups.

But at Netflix, as we’ve discussed, the informed captain is the decision maker, not the boss.

In a loosely coupled organization, where talent density is high and innovation is the primary goal, a traditional, control-oriented approach is not the most effective choice. Instead of seeking to minimize error through oversight or process, focus on setting clear context, building alignment of the North Star between boss and team, and giving the informed captain the freedom to decide.

TAKEAWAYS FROM CHAPTER 9 In order to lead with context, you need to have high talent density, your goal needs to be innovation (not error prevention), and you need to be operating in a loosely coupled system. Once these elements are in place, instead of telling people what to do, get in lockstep alignment by providing and debating all the context that will allow them to make good decisions. When one of your people does something dumb, don’t blame that person. Instead, ask yourself what context you failed to set. Are you articulate and inspiring enough in expressing your goals and strategy? Have you clearly explained all the assumptions and risks that will help your team to make good decisions? Are you and your employees highly aligned on vision and objectives? A loosely coupled organization should resemble a tree rather than a pyramid. The boss is at the roots, holding up the trunk of senior managers who support the outer branches where decisions are made. You know you’re successfully leading with context when your people are moving the team in the desired direction by using the information they’ve received from you and those around you to make great decisions themselves.

If your goal is to build a more inventive, fast, and flexible organization, develop a culture of freedom and responsibility by establishing the necessary conditions so you can remove these rules and processes too.

I learned that I couldn’t directly transfer my own way of life to the culture of another place. In order to be effective, I had to think about what adaptations I would need to make in order to get the results I was hoping for.

“We are a team, not a family” is about insisting on high performance; it’s not about investing every minute in the work, avoiding getting to know one another deeply, or not caring about the people you work with.

What we learned from this experience, and later found to be true not just in Japan but in most cultures where direct negative feedback is less comfortable and less common, was that asking employees to give ad hoc feedback to peers and superiors at informal moments doesn’t usually work well. But if you run more formal events, putting feedback on the agenda, providing preparation instructions, and giving a clear structure to follow, you can get all the useful feedback out there just as effectively.

Creating copious formal feedback moments is the first lesson Netflix managers learned for implementing a culture of candor around the world.

Chris’s advice was simple and anyone who needs to give feedback to a colleague in a less direct culture should take heed. Be friendlier. Work harder to remove the blame. Be careful to frame the feedback as a suggestion, not an order. Add a relationship-based touch like a smiling emoji.

One of the best ways to get better at providing feedback to an international counterpart is to ask questions and show curiosity about the other person’s culture.

When giving feedback with those from your own culture, use the 4A approach outlined in chapter 2. But when giving feedback around the world, add a 5th A: The 4As are as follows: Aim to assist Actionable Appreciate Accept or decline Plus one makes 5: Adapt—your delivery and your reaction to the culture you’re working with to get the results that you need.

▶ TAKEAWAYS FROM CHAPTER 10 Map out your corporate culture and compare it to the cultures of the countries you are expanding into. For a culture of F&R, candor will need extra attention. In less direct countries, implement more formal feedback mechanisms and put feedback on the agenda more frequently, because informal exchanges will happen less often. With more direct cultures, talk about the cultural differences openly so the feedback is understood as intended. Make ADAPTABILITY the fifth A of your candor model. Discuss openly what candor means in different parts of the world. Work together to discover how both sides can adapt to bring this value to life.

“Rules and process” is so familiar a paradigm for coordinating group behavior, it hardly needs any explanation at all.

In select instances like these, where error prevention is clearly more important than innovation, we have loads of checks, processes, and procedures to ensure we don’t screw anything up. In these moments, we want Netflix to be like a hospital where there are five people verifying the surgeon is operating on the correct knee. When a mistake would lead to a disaster, rules and process isn’t just nice to have, it’s a necessity.

Here are a set of questions you can ask in order to select the right approach: Are you working in an industry where your employees’ or customers’ health or safety depends on everything going just right? If so, choose rules and process. If you make a mistake, will it end in disaster? Choose rules and process. Are you running a manufacturing environment where you need to produce a consistently identical product? Choose rules and process.

But for those of you who are operating in the creative economy, where innovation, speed, and flexibility are the keys to success, consider throwing out the orchestra and focusing instead on making a different kind of music.

Of course, you can’t just remove the rules and processes, tell your team to be a jazz band, and expect it to be so. Without the right conditions, chaos will ensue.