Twenty years ago, when the dot-com bubble burst and venture funding vanished, Netflix was treading water. To keep business afloat, the company had to lay off a third of its workforce.
Morale at Netflix was already low. CEO Reed Hastings anticipated the layoffs would cause it to plummet even further. Say nothing of how much less work would get done.
But to Hastings’ astonishment, the opposite happened. More work was getting done than before. And employees seemed more energized and passionate about what they were doing. That’s when it clicked for Hastings, and he began to understand how talent density — keeping the high performers and booting everyone else — can transform organizations.
“This was my road to Damascus experience,” Hastings writes in his new book. “The lessons we learned became the foundation of much that has led to Netflix’s success.”
Hastings, along with business author Erin Meyer, chronicle this early Netflix lesson — and many more — in No Rules Rules: Netflix and the Culture of Reinvention.
In the book, Hastings and Meyer expand on the notorious presentation deck Netflix shared online in 2009 — a slideshow outlining the company’s unorthodox organizational culture that Facebook COO Sheryl Sandberg called one of the most important documents to ever come out of Silicon Valley.
Hastings argues that the innovative spirit of Netflix is largely due to the company’s commitment to hiring high performers, giving them lots of transparency and freedom, and stripping away any rules that might get in their way.
Here are some of the most surprising and illuminating stories from the book.
Offer Feedback Anytime, Anywhere
Most people are reluctant to give constructive criticism to their colleagues — especially their bosses. Even if their feedback is well-intentioned, people worry about coming across as harsh. Netflix thinks about this differently. Here’s an example from the book:
Rose, a VP on Netflix’s global communications team, met with her colleagues to present her publicity plan for the launch of the second season of 13 Reasons Why. She proposed Netflix fund an independent study with researchers to look at the impact the series has on teenage viewers, which could help better position the show at launch.
During the presentation, colleagues pushed back on Rose’s idea. As more objections were raised, Rose talked faster. Everyone felt the frustration in the room rising. Rose rushed through her slides even more. Finally, Rose’s colleague Bianca waved her arms and said, “Rose, this isn’t working!”
Bianca told Rose she sounded defensive, and that she needed to slow down and address concerns in order to win back the room. Rose suddenly became aware of how ruffled she sounded, so she thanked Bianca for the feedback, recalibrated her tone, and started taking questions. The room’s energy changed completely.
Netflix welcomes this sort of exchange.
“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,” Meyer writes in No Rules Rules.
As long as feedback is given with positive intent (aiming to help the recipient) and provides an alternative solution (focusing on what the recipient can do differently), feedback can — and should — be given anytime, anywhere.
In return, the recipient needs only to show appreciation for the feedback; they aren’t required to apply it.
In the story, Bianca saw how Rose could succeed and gave her actionable feedback. Rose showed appreciation and changed course for the better. If Bianca had simply criticized Rose, this interaction would be seen very differently.
Hastings admits that, to promote an environment with this much candor, “you have to get rid of the jerks.”
Pay People More Than They Expect
In another anecdote from the book, Ted Sarandos, chief content officer at Netflix, was giving a monthly update to his staff. He told them the market was heating up, and that they should expect to receive calls from recruiters from other big tech companies.
But this wasn’t a warning. It was an invitation — Sarandos encouraged his employees to take those calls.
That way, he said In No Rules Rules, the employee could turn around and tell Netflix how much they were being offered, giving Netflix a chance to beat it.
“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.”
Sarandos said it’s not disloyal to take a call from recruiters. On the contrary, “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.”
Netflix believes that, to attract and retain the top talent, it has to pay them more than anyone else. That sometimes means giving people higher salaries than what they might settle for, often before they even ask for more money.
Trusting People Is Worth the Risk
Rob Caruso, the new VP of digital products at Netflix, strolled into his first quarterly business review and was shocked.
To a crowd of 400 managers, several days ahead of Netflix’s earnings call, when the rest of the world would see its books, CEO Hastings dove deep into the company’s financials and strategy. Caruso couldn’t believe it.
Typically, a company doesn’t like to show its employees the financials before the earnings call — because if any of them act quickly on that information, it’s insider trading.
“Secretiveness was so omnipresent that when I left HBO to join Netflix I had a big shock,” Caruso said in No Rules Rules. “Netflix treats employees like adults who can handle difficult information and I love that. This creates enormous feelings of commitment and buy-in from employees.”
Hastings contends that, when you give employees access to information that is typically reserved for senior executives, they feel a higher sense of ownership and responsibility. Keeping secrets is off-limits at Netflix.
Champion the Brilliant Idea Your Boss Hates
Years ago, Netflix users didn’t have the ability to download Netflix content in order to watch it offline. Both CEO Hastings and the company’s chief product officer, Neil Hunt, were against the idea. They thought that building a download functionality would pull valuable resources away from their main focus, which was making Netflix an excellent streaming experience. To them, giving users the ability to download content simply wasn’t worth it.
But Todd Yellin, the VP of product, and his senior UX researcher Zach Schendel, had a hunch their bosses were wrong.
So Yellin had Schendel run interviews in India and Germany to test their theory. (Netflix was gearing up for an international expansion at the time.) He uncovered that 70 percent of YouTube consumers in India used the download function, and many consumers in Germany, too, relied on downloading video content to watch later. So if Netflix wanted to compete overseas, it might want to revisit the download idea.
Schendel and Yellin showed their findings to their boss, who showed it to their boss’ boss, and so on, until it made its way to Hastings, who gave it the green light. You can now download content from Netflix.
“I was able to push back against a strong and publicly stated opinion from the top leadership to rally excitement for this feature. This is what Netflix is all about.”
At many companies, what Yellin and Schendel did might be seen as insubordinate. But they trusted that, at Netflix, it was the right thing to do.
“I am a nobody in the company,” Schendel said in No Rules Rules. “I’m just some researcher. Yet I was able to push back against a strong and publicly stated opinion from the top leadership to rally excitement for this feature. This is what Netflix is all about.”
Hastings said “it’s fine to disagree with your manager and 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.”
‘Sunshine’ Your Failures
Yasemin Dormen was heading up a Turkish social media campaign for Netflix’s hit sci-fi show Black Mirror. Dormen thought it would catch people’s attention to create creepy, cryptic messages and post them on Turkey’s equivalent to Reddit, to generate buzz for the mysterious show’s upcoming fourth season.
But the idea backfired. People found the messages off-putting. British media called it a “creepy marketing stunt,” and Netflix leaders scrambled to do damage control.
Dormen was on vacation when she saw the backlash. She spent the next several days writing memos and making dozens of calls — she was “sunshining” her mistakes.
Throughout No Rules Rules, Hastings is emphatic that employees — no matter their rank in the Netflix company hierarchy — are empowered to make big bets without sign-off.
If they fail, though, they have to “sunshine” it.
That means, if you’re a Netflix employee, and your project or idea crashes and burns, you have to share with the company your comprehensive assessment of what went wrong and what you learned.
So that’s what Dormen did. She took responsibility for her failure, explained her thought process, and what she would do differently.
Was she fired? Nope. Five months later, she was promoted to senior marketing manager, and 18 months later, she was named director of marketing.
As Hastings said in the book, “When you sunshine your failed bets, everyone wins. You win because people learn they can trust you to tell the truth and to take responsibility for your actions. The team wins because it learns from the lessons that came out of the project. And the company wins because everyone sees clearly that failed bets are an inherent part of an innovative success wheel.”
Practice the ‘Keeper Test’
Hastings and McCord learned something valuable in the early days, when they saw Netflix’s culture turn around after the company laid off a third of its staff. They realized that the most effective way for them to innovate was to keep only “the keepers.”
Since then, Netflix leaders have encouraged managers to regularly practice something called the “Keeper Test.”
When assessing their team, a manager should ask, “If this person were to quit tomorrow, would I work hard to try to change their mind?” If not, they’re not a keeper, and the manager should get rid of them and find someone they would fight to keep.
The Keeper Test is perhaps the most controversial of Netflix’s quirks. But Hastings asserts that it’s the only way to keep the talent density high enough to allow all the other cultural elements to work. Plus, he says, employees know what they’re getting into when they come to work for Netflix — the CEO is fond of reminding employees, “We are a team, not a family.”
In order to prevent employees from competing with each other in an unhealthy way, Hastings said that Netflix has no firing quota or rating system. So managers don’t feel any pressure to reduce their teams by a certain percentage. They are only asked to get rid of the adequate performers.
Context Is More Important Than Direction
Adam Del Deo, Netflix’s director of original documentary programming, fell in love with the movie Icarus. It was a gripping documentary about how competitive cycling became embroiled in an international doping scandal, and it had just premiered — to rousing applause — at the Sundance Film Festival.
Del Deo wanted Netflix to acquire Icarus. But he knew it would be expensive. So he asked his boss, Chief Content Officer Ted Sarandos, what he should do.
Sarandos refused to tell Del Deo what he should do. He said it was his call to make.
Sarandos told Del Deo that, if he believed Icarus was “the one,” he should feel free to bid whatever he wanted for it. But if he had any doubts that the documentary would be a game changer, he shouldn’t bother overpaying for it.
Del Deo felt good about Icarus. He believed it was “the one.” So he bought it for Netflix (for what was thought to be an exorbitant price).
But Icarus turned out to be a hit — it won the Best Documentary prize at that year’s Oscars. Del Deo’s bet paid off.
This episode summarizes an important Netflix principle: Lead with context, not control.
“Ted wasn’t about to make that decision for me,” Del Deo explained in No Rules Rules, “but he set broad context to help align my thinking with the company’s strategy. That context he set laid the foundation for my decision.”
Netflix doesn’t want its leaders to make all the big decisions and control every high-stakes situation for their direct reports. It wants them to lay out the context, so that employees feel empowered and informed to make the judgment call themselves — even when there’s millions of dollars on the line.
“The benefit,” Meyer writes, “is that the person builds the decision-making muscle to make better independent decisions in the future.”