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Reed Hastings’ Book on Netflix’s ‘No Rules Rules’: Five Key Takeaways

Todd Spangler

Do you want your company to be like Netflix? Co-founder and co-CEO Reed Hastings has written a step-by-step recipe detailing how Netflix created and evolved its unconventional corporate culture — although, as he freely admits, not every company can or should follow the same playbook.

Hastings’ “No Rules Rules: Netflix and the Culture of Reinvention” spells out how his company fosters an environment of employee “freedom and responsibility” (referred to internally as “F&R”). Hastings claims Netflix’s unique ways of doing business have formed the basis for its astronomical growth and category-dominating position today, with 193 million paying customers globally as of the end of June.

See Also: Reed Hastings on New Book, Netflix’s Future — and Why He Fired His Last CFO

Much of the book, set to be released Sept. 8 by Penguin Press, is a retelling of well-documented Netflix practices. Those include its unusually radical transparency and feedback loops, lack of official time-off or vacation policies, and the famous Keeper Test — in which managers are encouraged to fire employees who aren’t “stars.” Indeed, the book almost reads like a 300-page-plus elaboration on the Netflix Culture document outlining the company’s corporate culture, which Hastings first put out for public consumption in 2009.

In the introduction to “No Rules Rules,” Hastings boils down Netflix’s competitive advantage over Blockbuster — which 20 years ago rejected his $50 million asking price for the then-fledgling DVD-by-mail startup — to three things: “a culture that valued people over process, emphasized innovation over efficiency, and had very few controls.” Those principles, he says, are the taproot from which its “no-rules rules” have sprung.

Here are five takeaways from the new book, co-written with business professor and author Erin Meyer.

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.
The book reveals that one Netflix employee in Taiwan had been reimbursed for more than $100,000 on lavish personal vacations over three years without his manager catching it. He was canned after Netflix’s finance department ran an audit of his receipts.

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. “It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place,” Hastings observes.

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.

In the end, it’s debatable how different Netflix really is from other Silicon Valley tech startups that espouse move-fast-and-break-things principles or pay top dollar for talent. But Hastings makes a persuasive case that Netflix has successfully codified its processes — and yes, it still has many of those — that buck age-old conventional wisdom. More important, the company has done so in a way that (mostly) seems to have scaled across the company’s 8,600-plus workforce and let it operate at a high level.

That said, there’s always room for improvement. Hastings devotes the book’s final chapter to Netflix’s efforts to export its culture overseas, which haven’t always gone as he expected. “What we’ve learned is that in order to integrate your corporate culture around the world, above all, you have to be humble, you have to be curious,” he writes, “and you have to remember to listen before you speak and learn before you teach.”