Freedom from rules, freedom for excellence

In the span of two decades, Netflix went from being a little-known start up struggling to break even to one of the biggest forces in the entertainment industry, and indeed one of the most powerful mass media corporations in the world. In the 2020 book, No Rules Rules, Netflix CEO Reed Hastings reveals the free and responsible corporate culture that has allowed his company to succeed where others fail.

The book starts by telling the tale of when Netflix co-founders Reed Hastings and Marc Randolph met with the CEO of Blockbuster in 2000. At the time, Blockbuster was a behemoth, over 1,000 times the size of Netflix. They offered to sell their company, which at the time was a DVD rental subscription service, to Blockbuster for $50 million. As part of the deal, they also proposed managing Blockbuster’s website. Blockbuster flatly refused. The rest is history.

Netflix was able to adapt and change rapidly, while Blockbuster declared bankruptcy after technological development rendered its business model irrelevant. What made Netflix so successful and adabtable?

Hastings lays out a few key principles that have helped Netflix pivot and grow with such success. The first is high talent-density. Netflix hires only the best of the best. They pay salaries way above the industry standard, because they know that talented, creative people boost each other’s success, something which is born out by psychology. It is more than worth the expense to get a tight team of highly motivated and extraordinarily competent people. Do your job merely adequately and you lose that job, albeit with a generous severance package.

To help maintain this high talent density, Netflix also encourages a culture of candor. Employees and management are encouraged to speak their minds and correct each other constantly, if they believe that adding their perspective will help the company innovate.

Netflix does not value brutal honesty for no reason. Constant feedback and review is a critical component of maintaining their high talent density. It’s a two-way street. The comments employees make about management are, if anything, more important than management’s review of employees. There are some guidelines in place as well to prevent the system from decaying into backbiting or office politics, such as any criticism has to be actionable and specific.

One of the most surprising dimensions of Netflix’s corporate culture is the lack of certain rules and restrictions that are almost universally applied. For instance, having realized the ways in which vacation time and travel expenses can require a lot of wasteful micromanagement, Hastings decided to try trusting his employees instead. He got rid of limits and regulations on vacation time, as well as on business travel. He trusted his people to be responsible and use their best judgement.

It worked. Hastings says that after implementing these changes, people took more ownership of the workplace. The office was tidier and more efficient, not less so. By giving his employees freedom, they responded by taking more responsibility. Part of this process also involved senior management taking the lead. For instance, not wanting people to avoid taking vacation days at all and burning out, Hastings would take fairly lavish ones and share photos around the office.

This attitude of freedom and responsibility, combined with a merciless and intense focus on talent density allows Netflix to focus on innovation instead of efficiency. Senior management gives employees a lot of freedom to make big decisions because they trust them to make the right ones.

No Rules Rules is engaging, well-written, and entertaining. Netflix is a genuinely interesting business success story. Moreover, Hasting’s insights about freedom and responsibility are truly game changers. A key takeaway is that by focusing on talent acquisition and retention, you can create an environment with a spiral of success. Creating a lean, competent, and motivated team and then giving them the freedom to make big decisions is the key to innovation and flexibility.

No Rules Rules by Reed Hastings and Erin Meyer is available for purchase here.

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