Whilst most of the American tech giants have had their fair share of hubristic scandals (around predatory tactics vis a vis rivals and/or customers, low pay for employees, sexual harassment, bullying of employees, political lobbying, etc) in recent years, Netflix has been notably absent from the offenders’ list. Why has Netflix been able to keep public opinion on its side and become much loved company the world over? In an insightful piece in the NYT, Jonathan Knee offers us his view: “There are many possible reasons for this, including that Netflix is a fraction of the size of the others and it has eschewed acquisitions that might attract regulatory attention. But the key differentiator may be something less coldly financial and more softly subjective: Culture.
Netflix’s chief executive, Reed Hastings, has always been the adult in the room. He was in his 40s when Netflix went public in 2002 and had previously served as a public company chief executive. All of his counterpart FAANG founders were in their 20s or early 30s when they took their companies public. Most brought in professional management to either serve as chief executive or otherwise provide so-called adult supervision.
Although trained in computer science, Mr. Hastings’s preoccupation at Netflix has been organizational design as much as product and technology. His PowerPoint presentation from 2009 on Netflix’s corporate culture had been viewed by well over 15 million people by the time it was updated and condensed in 2017. Sheryl Sandberg, the adult supervision at Facebook for its founder Mark Zuckerberg, said the initial presentation “may well be the most important document ever to come out of the Valley.”” [In case you have not seen, Reed Hastings’ famous ppt, here it is: https://www.slideshare.net/
With this as background on Mr Hastings’ magical HR skills, we proceeded to find out more about he has to say about creating a winning corporate culture in the Age of Covid for small, fast growing businesses like Marcellus. Help was at hand in the form of much talked about book he published late last year (with B-School prof, Erin Meyer as co-author) titled “No Rules Rules: Netflix and the Culture of Reinvention”. The NYT article summarises the book nicely: “The management approach advanced in “No Rules Rules” is striking in its simplicity: Get the best people, give them honest feedback and empower their decision-making. Although Hastings has been talking about these three key elements for years, it is still jarring to see them synthesized and applied in context.”
Todd Spangler’s review of the book in ‘Variety” goes deeper and gives us five takeaways from the new book:
“1. The Keeper Test started by accident. In 2001, after the dot-com bubble burst and venture capital funding evaporated, Netflix laid off one-third of its 120-person staff. Hastings and his HR chief agonized over who the “keepers” were, prioritizing the most creative and collaborative people. In the months after the layoffs, Hastings expected morale to drop through the floor.
Instead, the “entire office felt like it was filled with people who were madly in love with their work,” he writes, calling it a “road to Damascus moment.” Netflix claims it doesn’t have quotas or hard rules about firing less-than-stellar workers. But the lesson, Hastings says, was that “a team with one or two merely adequate performers brings down the performance of everyone on team.”
2. Netflix’s policy of frank feedback stemmed from Hastings’ marriage counseling. When he was CEO of debugging-tool software company Pure Software in the mid-’90s, Hastings was frequently away from home, and his wife grew frustrated and distant. They went to couples’ therapy, where he learned to express resentments and be honest.
As a result, back in the office, “I began encouraging everyone to say exactly what they really thought, but with positive intent.” Even then, the mandate for complete candor didn’t come to fruition until after Hastings’ disastrous decision in 2011 to split Netflix streaming from the newly named Qwikster DVD-mailing business — a move reversed after less than a month. The CEO found out later that lots of his underlings thought it was a bad idea. Today, withholding honest feedback is against company policy: “We now say that it is disloyal to Netflix when you disagree with an idea and do not express that disagreement,” Hastings writes.
3. Employees don’t need pre-approvals for expenses or certain strategic decisions, but they’re fired if they do something dumb…
4. Netflix asks employees to get salary estimates from recruiters trying to poach them, and relay that to their boss. Managers are encouraged to know the “market value” of their team members and proactively give them raises so they don’t jump ship….
5. The Netflix “Freedom & Responsibility” approach doesn’t work across the entire company. Hastings concedes that eliminating oversight and rules altogether is impossible. He cites the company’s processes for employee safety and sexual harassment, customer data privacy, and financial reporting. Those are instances “where error prevention is clearly more important than innovation,” he writes. Hastings also notes that the “F&R” approach will not work in every industry: For example, old-school controls are still the best way to go for “high-volume, low-error” manufacturing businesses or for managing safety-critical environments.””
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
