book.chapter Initiating a liberating culture

In 1997, Netflix made its debut, but four years later, the dot-com bubble burst, causing widespread failure among internet companies. To endure this challenging period, Netflix was compelled to reduce its workforce by a third, cutting down from 120 to 80 employees. The day the layoffs were announced was a day filled with sorrow, but in the weeks that followed, a surprising transformation occurred. Despite being in a mode of financial austerity and having just released a significant portion of its staff, the office atmosphere shifted, becoming charged with an infectious energy, passion, and a flurry of innovative ideas. When the holiday season arrived, DVD players became a popular gift, leading to a surge in Netflix's DVD-by-mail subscription service. By early 2002, the company was experiencing rapid growth once again. Remarkably, the remaining eighty employees were able to handle the increased workload with an even greater level of passion than before, often working extended hours, yet morale was at an all-time high. Not only were the employees more content, but Reed Hastings, the CEO, also found himself eager to start each day at the office. It was only later that Hastings realized the layoffs had inadvertently increased the "talent density" within the company. The average talent per employee had risen significantly, and the underperforming employees who had previously drained the time and energy of their managers were no longer present. The remaining workforce at Netflix was now composed entirely of individuals who excelled at their jobs, and this high standard of performance became contagious. Hastings learned a valuable lesson from the layoffs in 2001: performance, whether good or bad, can spread within a team. Mediocre performers can cause potential high performers to also settle for mediocrity. Conversely, when a team is made up entirely of high performers, each member drives the others to achieve even more. The first step in initiating the Netflix Cycle is to cultivate an exceptional workplace brimming with top-tier talent. By surrounding your star employees with colleagues who are both skilled and cooperative, performance will naturally begin to escalate. This environment fosters a culture where individuals learn from and inspire one another, rather than relying solely on the leadership team for motivation and drive. The primary objective for any leader should be to establish a workplace that is devoid of underachievers and naysayers, as this can lead to remarkable achievements. Hastings emphasizes that eliminating restrictions fosters a culture of "Freedom and Responsibility," a concept so ingrained in Netflix's ethos that it is often abbreviated as "F&R." This culture attracts the best talent and enables the reduction of even more controls, propelling the company to levels of speed and innovation that are difficult for others to match. However, reaching this pinnacle of performance is not an overnight process. At Netflix, employees are not only allowed but encouraged to express their opinions openly. This ethos of transparency and constructive feedback is not merely lip service; Hastings himself has gone to great lengths to foster an environment where employees feel comfortable voicing their concerns. He has cultivated a culture where backstabbing and office politics are minimized, allowing the company to operate more efficiently. The more employees receive constructive feedback, the better they become at their jobs, which in turn enhances the company's overall performance. This led to the adoption of the principle "Only say about someone what you will say to their face." Hastings exemplified this behavior and encouraged it among his staff. Whenever an employee approached him with a complaint about a colleague, he would inquire whether they had addressed the issue directly with the person involved. This approach was revolutionary, as typically, individuals who are forthright with their opinions are often marginalized or excluded. However, at Netflix, such individuals are valued, and the company strives to ensure that constructive feedback is exchanged regularly throughout the organization. The essence of this dynamic is that when everyone communicates candidly, high performers are empowered to reach new heights. Regular feedback amplifies the speed and effectiveness of the entire team, which is precisely the desired outcome. Netflix has established the "4A guidelines" for feedback, which have become the standard for how feedback is delivered and received within the company. In a somewhat unconventional move, employees were encouraged to provide honest feedback to their superiors. This practice was institutionalized by including feedback as a topic in all one-on-one meetings. Leaders were also tasked with giving employees reassurances that they would not face repercussions for their candor. These reassurances are referred to as "belonging clues" within Netflix, signaling to employees that their voices can be heard without fear of punishment. As leaders at Netflix became adept at giving and receiving feedback in line with the 4A's, the rest of the staff also grew more comfortable with the feedback process. Over time, this fostered a culture of transparency and forthrightness. Employees began to speak out whenever they identified issues, rather than remaining silent and tolerating them. Hastings points out that a feedback loop is an incredibly effective tool for enhancing performance. When giving and receiving feedback becomes an integral part of collaboration, it accelerates learning, reduces misunderstandings, fosters a sense of shared accountability, and diminishes the need for a rigid hierarchy and strict rules. One of the benefits of properly administered and well-received feedback is that it necessitates the removal of disruptive individuals from the workplace, regardless of their brilliance. It doesn't matter how talented they are; if someone exhibits dismissive or insulting behavior towards others, it can undermine the culture of candor. Such individuals must be removed to maintain a healthy and open environment. A culture of candor does not imply that one can speak without considering the impact on others. Instead, it requires everyone to thoughtfully apply the 4A guidelines, which often means reflecting and preparing before giving feedback, as well as ongoing monitoring and coaching from those in leadership positions. With high talent density and a culture of candor in place, the next step is to begin lifting certain restrictions, thereby granting more freedom in the workplace. A good starting point is to relax controls on vacations and expenses. This approach gives employees more autonomy over their lives and conveys a message of trust. It also fosters a stronger sense of ownership among the staff, which is beneficial for the company. At many organizations, vacation time is strictly regulated, with employees required to apply for time off and adhere to a set limit each year. In contrast, Netflix has adopted an unlimited vacation policy. Employees are free to take as much time off as they wish without needing approval, and their vacation time is not monitored. Hastings emphasizes that offering unlimited vacation is a powerful tool for attracting and retaining top talent, particularly among younger generations who value flexibility. Eliminating strict vacation policies also reduces bureaucracy and the administrative costs associated with tracking employee absences. Most importantly, it signals to employees that the company trusts them to make responsible decisions, which encourages them to act accordingly. To ensure the success of this policy, leaders at Netflix demonstrate their commitment by taking substantial vacations themselves. Hastings, for example, takes six weeks off each year and openly discusses his vacations to reinforce the policy's authenticity. Netflix also employs the strategy of "Lead with context, not control." Managers are expected to discuss with their teams the optimal times for taking vacations, ensuring that critical periods, such as the end-of-year accounting rush, are not disrupted by staff absences. Hastings recounts that when Netflix stopped monitoring vacations, there was no significant change in employee behavior, except for an increase in job satisfaction. The policy was particularly well-received by the company's more independent-minded employees. With a workforce comprised of high-performing, conscientious individuals and a culture that encourages open communication, any abuse of the system is quickly addressed by colleagues. This level of freedom and trust is made possible by the company's commitment to maintaining a high talent density and fostering a culture of candor. Another area where controls can be relaxed is in the management of travel and expense approvals. It is surprising how much time is consumed by establishing and enforcing policies regarding business travel and expense reimbursements. Netflix initially introduced a guideline for expenses that encouraged employees to treat company money as if it were their own. However, this proved to be too subjective, leading to the adoption of a more straightforward policy: "Act in Netflix's best interests." To prevent frivolous spending, the finance team provides managers with a monthly summary of expenses per employee. Managers are responsible for reviewing these expenses and addressing any instances of overspending with their team members. They provide guidance on what is considered appropriate and what is not. If any instances of abuse are discovered, either by the managers or the finance team, the offending employees are terminated in a manner that is both conspicuous and instructive, ensuring that the consequences of such actions are clear to all. Hastings concludes that once you have a workforce composed almost entirely of high performers and a culture that values honesty, you can begin to dismantle unnecessary controls and grant your staff greater freedom. This approach relies on the responsible behavior of employees and the vigilance of their peers to maintain alignment with the company's best interests. By removing these controls, you empower your employees, which in turn contributes to the company's success.