No Rules Rules

by Reed Hastings

  Dear all,

  With mixed emotions, I’ve decided to exit Jake.

  Jake was an internal candidate for a promotion to a senior level executive position. While conducting due diligence for this promotion, some more information has been shared with me that Jake has not consistently displayed the qualities of a leader in all cases that we demand or expect.

  Specifically, it is now clear that Jake was not forthright with us around a major employee issue that impacted the business even when directly asked.

  Jake made a meaningful impact over his many years at Netflix and for some, this will come as a shock. He did a lot of great work. But I’m confident that the feedback I’ve collected is clear and led to us needing to make this change.

  Of course it is possible to be too candid when revealing why someone has been let go. It’s important to respect the dignity of the person leaving as well as to take into consideration cultural differences in different world markets when figuring out how much to disclose. 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?”

  In this case, Jake’s actions happened in the office. When it comes to speaking openly about an employee’s personal struggles, things get even more complicated. And in these cases I recommend a different approach.

  The fall of 2017, one of our leaders, who unbeknownst to us, struggled with alcohol addiction and fell off the wagon on a business trip. He immediately entered rehab. What should we tell his staff? His boss believed that we should follow the Netflix culture and tell everyone the truth. Human Resources insisted that he should have the right to choose what he shared about his personal challenges. In this case, I agreed with HR. When it comes to personal struggles, an individual’s right to privacy trumps an organization’s desire for transparency. Here we didn’t take the most transparent route. But we didn’t spin either. We told everyone that the guy had taken two weeks off for personal reasons. It was up to him to share more details if he chose.

  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.

  QUIZ SCENARIO 4: WHEN YOU SCREW UP

  You are still the founder of a start-up with one hundred employees. This is a tough job, and despite your best efforts, you make a series of serious mistakes. Most notably you hire and fire five sales directors within five years. You keep thinking you’ve found a good candidate. But each time, as you begin to work together, you realize the new recruit doesn’t have what it takes to do the job. You realize that these mis-hirings are entirely due to your poor judgment. Do you admit this to your workforce?

  No! You don’t want the group to lose confidence in your ability to lead. Some of your best people might even leave in search of a better boss. On the other hand, everyone can see that a fifth sales manager has just been let go. You have to say something—but only a few words about how difficult it is to find good sales directors. Focus your efforts on finding a great one next time.

  Yes! You want to encourage your staff to take risks and to see mistakes as an inevitable part of that process. Besides, when you speak openly about your errors it makes others trust you more. At the next company meeting, you tell the group how embarrassed you are to have flubbed the hiring and managing of the sales director for the fifth time in a row.

  Answer from Reed: whisper wins and shout mistakes

  My response to Quiz Scenario 4 is (b): Yes! Admit that you screwed up.

  Earlier in my career, in the early days of Pure Software, I was too insecure to talk openly about mistakes with my staff, and I learned an important lesson. I was making a lot of leadership mistakes and it weighed on me heavily. Beyond my general incompetence at people management, I had indeed hired and fired five sales directors in five years. The first two times, I could blame the person I’d hired, but by the fourth and fifth failures, it was clear the problem was me.

  One thing I have always done is put the company before myself. Certain my own incompetence was bad for the organization, I went to the board and, as if in the confessional, detailed my inadequacies and offered my resignation.

  But the Pure board didn’t accept it. Financially, the company was doing well. They agreed that I’d made mistakes with people management but claimed that, if they hired someone new, that person would make mistakes also. Two fascinating things happened during that meeting. One was that, as expected, I felt immense relief because I had told the truth and come clean about my errors. The other was more interesting: the board seemed to believe in my leadership more after I had opened up and made myself vulnerable to them.

  I went back to the office and, at our next all-employee meeting, did the same thing I’d done in the boardroom. I outlined my mistakes in detail and expressed my regret for having hurt the company. This time, not only did I feel more relief and build trust with my staff, but also people began telling me about all sorts of mistakes they made, mistakes they’d been previously sweeping under the rug. That offered them relief, improved our relationships, and gave me more information so I could do a better job managing the business.

  In 2007, almost a decade later, I joined the Microsoft board. Steve Ballmer, the Microsoft CEO at the time, is this big, boisterous, friendly guy. He would talk very transparently about his mistakes, saying stuff like: “Look here, see how I really screwed this thing up.” This led me to feel connected to him. What an honest thoughtful guy! And I realized: oh, it’s just normal human behavior to feel more trusting of someone who is open about mistakes.

  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.

  That’s why, when it comes to Quiz Scenario 4, I have absolutely no reservations. 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.”

  * * *

  • • •

  Reed speaks so frequently and openly about his mistakes as CEO of Pure Software that the experience sounds like one giant catastrophe, in spite of the fact that annual revenues doubled four years in a row before Morgan Stanley took it public in 1995, and it was sold two years later for $750 million, some of which went to Reed and became the seed money for Netflix.

  Research backs up Reed’s claims about the positive ramifications of the leader speaking openly about mistakes. In her book, Daring Greatly: How the Courage to Be Vulnerable Transforms the Way We Live, Love, Parent, and Lead, Brené Brown explains, based on her own qualitative studies, that “we love seeing raw truth and openness in other people, but we are afraid to let them see it in us. . . . Vulnerability is courage in you and inadequacy in me.”

  Anna Bruk and her team at the University of Mannheim in Germany wondered if they could replicate Brown’s findings quantitatively. They asked subjects to imagine themselves in a variety of vulnerable situations—such as being the first to apologize after a big fight and admitting that you made a serious mistake to your team at work. When people imagined themselves in those situations, they tended to believe that showing vulnerability would make them appear “weak” and “inadequate.” But when people imagined someone else in the same situations, they were more likel
y to describe showing vulnerability as “desirable” and “good.” Bruk concluded that honesty about mistakes is good for relationships, health, and job performance.

  On the other hand, there is also research showing that if someone is already viewed as ineffective, they only deepen that opinion by highlighting their own mistakes. In 1966, psychologist Elliot Aronson ran an experiment. He asked students to listen to recordings of candidates interviewing to be part of a quiz-bowl team. Two of the candidates showed how smart they were by answering most of the questions correctly, while the other two answered only 30 percent right. Then, one group of students heard an explosion of clanging dishes, followed by one of the smart candidates saying, “Oh my goodness—I’ve spilled coffee all over my new suit.” Another group of students heard the same clamor, but then heard one of the mediocre candidates saying he spilled the coffee. Afterward, the students said they liked the smart candidate even more after he embarrassed himself. But the opposite was true of the mediocre candidate. The students said they liked him even less after seeing him in a vulnerable situation.

  This tendency has a name: the pratfall effect. The pratfall effect is the tendency for someone’s appeal to increase or decrease after making a mistake, depending on his or her perceived ability to perform well in general. In one study conducted by Professor Lisa Rosh from Lehman College, a woman introduced herself, not by mentioning her credentials and education, but by talking about how she’d been awake the previous night caring for her sick baby. It took her months to reestablish her credibility. If this same woman was first presented as a Nobel Prize winner, the exact same words about being up all night with the baby would provoke reactions of warmth and connection from the audience.

  When you combine the data with Reed’s advice, this is the takeaway: 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.

  THE FIFTH DOT

  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.

  Toward a Culture of Freedom and Responsibility

  Now that you have high talent density, candor, and organizational transparency in place, and you’ve experimented a little with symbolic freedoms (like removing vacation limits and lifting travel and expense policies), you’re ready to ramp up the freedom to a serious level. The topic of the next chapter—“No Decision-making Approvals Needed”—cannot be implemented unless you have already addressed the topics in the previous chapters. Assuming you’ve done the groundwork, this coming chapter is the one most likely to increase innovation, speed, and employee satisfaction throughout the organization.

  NOW RELEASE MORE CONTROLS . . .

  6

  NO DECISION-MAKING APPROVALS NEEDED

  In 2004, we were still exclusively a DVD-by-mail company, and Ted Sarandos was responsible for buying all the DVDs. He decided whether we should order sixty copies of a new movie title or six hundred. These DVDs would be sent to our customers.

  One day, some new movie about aliens had come out and Ted thought it would be hot. He and I were having a cup of coffee while he worked on his ordering form, so he asked me, “How many of these do you think we should order?”

  I responded, “Oh, I don’t think that’s going to be popular. Just get a few.” Within a month, the title was in crazy demand and we were out of stock. “Why didn’t you buy more of that alien movie, Ted?!” I exclaimed.

  “Because you told me not to!” he protested.

  That was when I began to understand the dangers of the standard decision-making pyramid. I’m the boss and I have strong opinions, which I share freely, but I am not the best person to decide how many movies to order or to make a slew of other critical daily decisions at Netflix. I told him:

  “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 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. 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.

  There’s a whole mythology about CEOs and other senior leaders who are so involved in the details of the business that their product or service becomes amazing. The legend of Steve Jobs was that his micromanagement made the iPhone a great product. The heads of major networks and movie studios sometimes make many decisions about the creative content of their projects. Some executives even go so far as to boast about being “nanomanagers.”

  Of course, 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. The popular notion is that the boss knows more because she made it to that higher rung in the ladder. If you value your career and don’t want to be accused of insubordination, listen carefully to what she thinks is the best and follow that course of action.

  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.

  Awhile back, Sheryl Sandberg of Facebook spent a day shadowing me at work. She attended all of my meetings and one-on-ones. It’s something I do occasionally with other Silicon Valley executives, so we can learn from watching one another in action. Afterward, when Sheryl and I debriefed, she said, “The amazing thing was to sit with you all day long and see that you didn’t make one decision!”

  I felt great—because that’s exactly what we are going for. Our dispersed decision-making model has become a foundation of our culture and one of the main reasons we have grown and innovated so quickly.

  * * *

  • • •

  When we first began working on this book, I asked how Reed would find the time to co
llaborate. He replied, “Oh, I can give this pretty much whatever time you think it will need.”

  I was surprised. Given the growth rate of Netflix, how could he be anything but overwhelmed? Yet Reed believes so deeply in dispersed decision-making that, by his model, only a CEO who is not busy is really doing his job.

  Dispersed decision-making can only work with high talent density and unusual amounts of organizational transparency. Without these elements, the entire premise backfires. Once those elements are in place, you are ready to remove controls that are not just symbolic (such as vacation tracking) but also have the power to dramatically increase the speed of innovation across your business. Paolo Lorenzoni, a marketing expert who worked for Sky Italy before joining Netflix in Amsterdam, demonstrates the principle by comparing his old and new workplaces:

  Sky is the sole Italian provider for Game of Thrones. At Sky, my boss asked me to come up with promotional ideas for the show. I came up with a great one.

  If you’ve watched Game of Thrones, you know about the big ice wall protecting the country. A lot of the show is filmed up on the wall, and it is very, very cold up there. That gave me the idea for the ad.

  Four friends are having a drink outside on a warm evening in Milan. The sun is setting, and they are sipping pink Bellini cocktails from champagne glasses. They are dressed in T-shirts and they are outside in the courtyard. You can see the reflection of the TV screen from the house windows behind them. One of the friends checks his watch. Seeing that Game of Thrones is about to start, he laughs, “We’d better go inside. Winter is coming” (wink-wink). Two of the friends grab their stuff. They don’t want to miss the show either. But the fourth friend doesn’t understand. “What do you mean? It’s warm out!” The other three laugh at his ignorance. He apparently doesn’t have Sky TV and doesn’t know about that wall of ice. “You have to get it to get it!” they tell him.