Powerful: Building a Culture of Freedom and Responsibility

by Patty McCord

The fundamental lesson we learned at Netflix about success in business today is this: the elaborate, cumbersome system for managing people that was developed over the course of the twentieth century is just not up to the challenges companies face in the twenty-first. Reed Hastings and I and the rest of the management team decided that, over time, we would explore a radical new way to manage people—a way that would allow them to exercise their full powers.

Yes, engaged employees probably deliver higher-quality performance, but too often engagement is treated as the endgame, rather than serving customers and getting results. And the standard beliefs about how and why people are engaged in their work miss the true drivers of work passion.

As for empowerment, I simply hate that word. The idea is well intentioned, but the truth is that there is so much concern about empowering people only because the prevailing way of managing them takes their power away. We didn’t set out to take it away; we just overprocessed everything. We’ve hamstrung people.

A company’s job isn’t to empower people; it’s to remind people that they walk in the door with power and to create the conditions for them to exercise it.

Creating a culture is an evolutionary process. Think of it as an experimental journey of discovery. That was how we thought about building the culture at Netflix. Which step you start with is no matter; what matters is starting. With the pace of change in business today, there is, as the saying goes, no time like the present.

Ask any very successful person what their fondest memories of their career are, and they will inevitably tell you about an early period of struggle or some remarkably difficult challenge they had to overcome.

I think Reed expressed in that statement exactly what people most want from work: to be able to come in and work with the right team of people— colleagues they trust and admire—and to focus like crazy on doing a great job together.

The typical approach to growth in business is to add more people and structure and to impose more fixed budgetary goals and restraints. But my experiences at fast-growth companies that successfully scaled showed me that the leanest processes possible and a strong culture of discipline were far superior, if for no other reason than their speed.

Later, at Netflix, we had a striking realization about this after we had a big, very painful layoff. In 2001 we had to lay off a third of the company. The dot-com bubble had burst, and the economy had gone bust with it, and we were on the brink of bankruptcy. It was brutal. Then that Christmas the cost of DVD players dropped and they became the big gift, and the business took off. Now we had to do twice the work with two thirds the people. We couldn’t hire anybody except people to put DVDs in envelopes. We had so many new customers that we didn’t have enough inventory, and we had to put every tiny cent of profit we had into buying more product. And yet everyone was much happier. I was carpooling to work with Reed one day, and I said to him, “Why is this so fun? I can’t wait to get to work. I don’t want to go home at night. We’re working so hard, but it’s great. What is it about what we’re doing?” He said, “Let’s figure it out.” Our first big realization was that the remaining people were the highest performers, and it taught us that the best thing you can do for employees is hire only high performers to work alongside them. It’s a perk far better than foosball or free sushi or even a big signing bonus or the holy grail of stock options. Excellent colleagues, a clear purpose, and well-understood deliverables: that’s the powerful combination.

Trusting people to be responsible with their time was one of the early steps in giving them back their power.

We experimented with every way we could think of to liberate teams from unnecessary rules and approvals. As we kept methodically analyzing what was working and how we could keep freeing people to be more creative, productive, and happy, we came to refer to our new way of working as the freedom and responsibility culture. We worked for years to develop it—and the evolution continues today.

IN BRIEF ▶ The greatest team achievements are driven by all team members understanding the ultimate goal and being free to creatively problem-solve in order to get there. ▶ The strongest motivator is having great team members to work with, people who trust one another to do great work and to challenge one another. ▶ The most important job of managers is to ensure that all team members are such high performers who do great work and challenge one another. ▶ You should operate with the leanest possible set of policies, procedures, rules, and approvals, because most of these top-down mandates hamper speed and agility. ▶ Discover how lean you can go by steadily experimenting. If it turns out a policy or procedure was needed, reinstate it. Constantly seek to refine your culture just as you constantly work to improve your products and services.

QUESTIONS TO CONSIDER • As you survey your company-wide policies and procedures, ask: What is the purpose of this policy or procedure? Does it achieve that result? • Are there any approval mechanisms you can eliminate? • What percentage of its time does management spend on problem solving and team building? • Have you done a cost-benefit analysis of the incentives and perks you offer employees? • Could you replace approvals and permissions with analysis of spending patterns and a focus on accuracy and predictability? • Is your decision-making system clear and communicated widely?

People Don’t Want to Be Entertained at Work; They Want to Learn

People need to see the view from the C suite in order to feel truly connected to the problem solving that must be done at all levels and on all teams, so that the company is spotting issues and opportunities in every corner of the business and effectively acting on them. The irony is that companies have invested so much in training programs of all sorts and spent so much time and effort to incentivize and measure performance, but they’ve failed to actually explain to all of their employees how their business runs.

I expect you’ve had the experience of talking to someone on your team about a business issue and being asked a question that makes you think, This person is clueless! Well, next time it happens, I want you to say to yourself, Wait, right, this person is clueless. He doesn’t know what I know. So I have to inform him.

When I give this advice about sharing business details, I sometimes get the response that only smart people can understand this information and only smart people want it. I find that there’s a bias among executives that this is “MBA stuff” and that “those people” wouldn’t be interested or couldn’t get it. My answer: then don’t hire people who are that stupid. Better yet, don’t assume that people are stupid. Assume instead that if they are doing stupid things, they are either uninformed or misinformed.

But if I could pick one course to teach everybody in the company, whether they’re in management or not, it would be on the fundamentals of how the business works and serving customers. This is the information people most want, because they know they can take it and run with it. Courses on conflict resolution they generally roll their eyes about, not to mention resenting the time away from their work.

IN BRIEF ▶ Employees at all levels want and need to understand not only the particular work they are assigned and their team’s mission, but also the larger story of the way the business works, the challenges the company faces, and the competitive landscape. ▶ Truly understanding how the business works is the most valuable learning, more productive and appealing than “employee development” trainings. It’s the rocket fuel of high performance and lifelong learning. ▶ Communication between management and employees should genuinely flow both ways. The more leaders encourage questions and suggestions and make themselves accessible for give-and-take, the more employees at all levels will offer ideas and insights that will amaze you. ▶ If someone working for you seems clueless, chances are they have not been told information they need to know. Make sure you haven’t failed to give it to them. ▶ If you don’t tell your people about how the business is doing and the problems being confronted—good, bad, and ugly—then they will get that information somewhere else, and it will often be misinformation. ▶ The job of communicating is never done. It’s not an annual or quarterly or even monthly or weekly function. A steady stream of communication is the lifeblood of competitive advantage.

QUESTIONS TO CONSIDER • How well do you think people throughout the company could describe its business model? Why not ask them to do so? No prompts allowed. • Do you share with employees the same information presented in your company’s earnings calls? How frequently do you show them the company’s P&L? Where are they likely to get data about how your company stacks up against the competition? • Is everyone aware of difficult challenges your company faces? Have you asked them their thoughts about how to tackle these? Do you have a disciplined process for disseminating information and discussing challenges? • What areas of your business do you think your people know little to nothing about? Could you ask a leader in that domain to come and talk to your team? Are there any other ways you could facilitate communication between the groups? • How well do you think your people understand who the customer is and what their needs and desires are? Do you regularly share customer research? Can you facilitate your team spending some time with customers? • If you were going to hold an off-site, what is the most pressing issue you would want your people to learn about and debate? How could you provide the richest possible presentation of information? • What existing meetings or forums could be used to carve out dedicated time for communicating more about the business context? Do you regularly review these meetings to be sure they still are effective? Do you set different agendas for dif...

We want to treat one another well, and we think that means making one another feel good. But this desire to make people feel good is often as much a desire to make ourselves feel good as to do the right thing. It often leads to people actually feeling worse, because they’re not correcting a problem in the way they’re working, and that eventually comes home to roost. Part of being an adult is being able hear the truth. And the corollary is that you owe the adults you hire the truth. That is actually what they want most from you.

Practice is crucial for honing your delivery style. You can do it in front of a mirror or with your spouse or a friend. Actually rehearsing what you’ll say, out loud, allows you to hear the tone of your voice. You might even want to record yourself. It’s also important to think about your body language, which can speak louder than words. We’re often totally unaware of how emphatically it’s sending a negative message.

The most important thing about giving feedback is that it must be about behavior, rather than some essentializing characterization of a person, like “You’re unfocused.” It also must be actionable. The person receiving it has to understand the specific changes in their actions that are being requested. The comment “You’re making a great effort, but you’re not getting enough done” is essentially meaningless. An action version would be “I can see how hard you’re working, and I really appreciate that, but I’ve noticed that there are some things you’re spending too much time on at the expense of others that are more important.” You would then establish a better prioritization with the person. I once received an extraordinarily helpful piece of feedback that is a model for being direct and suggesting the solution. Someone who worked closely with me and was often with me in meetings told me that I should talk less. “You’re always talking so much that others don’t get a chance to get their two cents in.” Done. I started to catch myself and make sure that I shut up and listened more.

In most companies, no one owns the responsibility of communicating this information company-wide, and too often many people—whole departments, even—are left in the dark. Companies sometimes even delay making important strategy and operations changes because of worry about how employees will react.

a study by the Corporate Executive Board found that companies that actively fostered honest feedback and had more open communication produced a return over a ten-year period that was an astonishing 270 percent higher than that of companies that didn’t.

Perhaps the worst problem with anonymous surveys, though, is that they send the message that it’s best to be most honest when people don’t know who you are.

If you want to know what people are thinking, there is no good replacement for simply asking them, best of all face to face.

IN BRIEF ▶ People can handle being told the truth, about both the business and their performance. The truth is not only what they need but also what they intensely want. ▶ Telling the truth about perceived problems, in a timely fashion and face to face, is the single most effective way to solve problems. ▶ Practicing radical honesty diffuses tensions and discourages backstabbing; it builds understanding and respect. ▶ Radical honesty also leads to the sharing of opposing views, which are so often withheld and which can lead to vital insights. ▶ Failing to tell people the truth about problems in their performance leads to an undue burden being shouldered by managers and other team members. ▶ The style of delivery is important; leaders should practice giving critical feedback so that it is specific and constructive and comes across as well intentioned. ▶ Consider setting up a system for colleagues to offer one another critiques. We created a successful one at Netflix and instituted an annual feedback day for the whole company to share comments with anyone they had thoughts for. ▶ Model openly admitting when you are wrong. In addition, talk about what went into your decisions and where you went wrong. That encourages employees to share ideas and opposing views with you, even if they directly contradict your position.

QUESTIONS TO CONSIDER • How open have you been with your team about the current prospects of your business and the most difficult problems the company and your team are dealing with? Do people at all levels know the challenges the company is facing in the next six months? • Are people free to disagree with a point made by someone in authority during a team meeting? Have they seen it done openly, in front of the whole team? • Are there team members who rarely, if ever, speak up with ideas and concerns? Have you called on them or spoken with them about contributing? • When was the last time you talked openly with your team about a mistake you made in addressing a business issue? • Is there someone on your team who is underper-forming but with whom you haven’t seriously discussed the problem? What impact do you think that person’s performance issues have on the rest of the team? • When you do discuss performance issues with people, do you generally feel that they have understood the specific problems with how they’re doing their work? • How valuable do you think it would be for your team to receive feedback from people in other areas of the company? Is there any way you can facilitate such cross-functional sharing?

Note that I say “fact driven,” not “data driven.” There’s been something of a deification of data in recent years, as though data itself is the answer, the ultimate truth. There’s a dangerous fallacy that data constitutes the facts you need to know to run your business. Hard data is absolutely vital, of course, but you also need qualitative insight and well-formulated opinions, and you need your team to debate those insights and opinions openly and with gusto.

Data is great; data is powerful. I love data. But the problem is that people become overly wedded to data and too often consider it much too narrowly, removed from the wider business context. They consider it the answer to rather than the basis of good questions. I love a distinction Ted Sarandos made to me about how data is best used. He said the decision making of his content team was data informed rather than data driven.

Great distinction

Ted also cautions that data can be used as an accountability shield, deflecting responsibility for a judgment call. People are more comfortable making decisions based on hard data in part because they can fall back on that data if the decision turns out to be wrong.

One of the biggest mistakes is fixating on metrics that don’t matter. Take HR and its obsession with retention. HR is the department that is supposed to take care of people’s well-being, and supposedly the key metric to measure that is retention, yet 50 percent of what HR does is say good-bye to people.

Another big mistake made with metrics is thinking that they’re fixed. They must be fluid; they must be continuously revisited and questioned. This is where vigorous debate comes in.

At one point a big disagreement arose between Netflix’s head of marketing and head of content concerning how we thought about our customers. It was developing into a real tussle, because both executives were very strong-minded, and both had good reasons for their views. Reed did a beautiful thing. He arranged a debate between the two, onstage, in chairs facing each other, in front of the rest of the executive team. And the really brilliant twist was that each one argued the other’s side. To prep for that, they really had to get into the other person’s skin. Reed made this style of formal debate a regular practice for the product development team.

IN BRIEF ▶ Intense, open debate over business decisions is thrilling for teams, and they will respond to the opportunity to engage in it by offering the very best of their analytical powers. ▶ Set terms of debate explicitly. People should formulate strong views and be prepared to back them up, and their arguments should be based primarily on facts, not conjecture. ▶ Instruct people to ask one another for explanations of their views and of the problems being debated, rather than making assumptions about these things. ▶ Be selfless in debating. That means being genuinely prepared to lose your case and openly admitting when you have. ▶ Actually orchestrate debates. You can have people formally present cases, maybe even have them get up onstage. Try having people argue the opposing side, poking holes in their own position. Formal debates, for which people prepare, often lead to breakthrough realizations. ▶ Beware of data masquerading as fact; data is only as good as the conclusions it allows you to draw from it. People will be drawn to data that supports their biases. Hold your data up to rigorous scientific standards. ▶ Debates among smaller groups are often best because everyone feels freer to contribute—and it’s more noticeable if they don’t. Smaller groups also aren’t as prone to groupthink as large groups are.

QUESTIONS TO CONSIDER • What problem is your team working on, or what decision do you have coming up, that you could stage a formal debate over? • Having set the rule that people must state their case by marshaling facts, will you be prepared to concede that someone on your team makes a stronger case than yours? • Are there members of your team who have become too fixed in their views about an issue and whom you could ask to take the perspective of the other side in a debate in front of your team? • How well is your team set up to conduct formal testing of ideas and to obtain the data they need to draw strong conclusions? Are there any ways in which you could provide them with access to tools they may lack? • How can you help your people to consider data beyond the information that is familiar to them and that they know how to interpret? What biases might members of your team—and you— have about which data you should be considering and your interpretations of it? • Can you invite younger members of your team, and perhaps of other teams, to listen in on some of your debates? Could you or their direct manager coach them about how to participate themselves? • Can you establish a regular forum for the presentation of arguments about key decisions and the best ways to solve problems your team is working on?

Don’t Let Hiring Become a Numbers Game If you’re not constantly engaging in this exercise of looking ahead and envisioning the team you’ll need, your team leaders are inevitably going to end up in a zero-sum competition for people.

Companies don’t exist to make happy employees!” I looked around the room and people were clearly shocked. I then explained that it’s absolutely great for employees to be happy, but that it’s best for both them and their companies if the reason they’re happy is that they’re doing great work with great people.

True and abiding happiness in work comes from being deeply engaged in solving a problem with talented people you know are also deeply engaged in solving it, and from knowing that the customer loves the product or service you all have worked so hard to make.

I really dislike the term “A player.” It implies that there is some grading system that can determine who will be best for a position. HR people always ask me how Netflix manages to hire only A players. I say, “You know, there’s this island that’s populated exclusively by A players, and only some of us know where it is.” Making great hires is about making great matches. One company’s A player may be a B player for another firm, and vice versa. There is no generic formula for what makes people successful, despite a great deal of effort and all sorts of assessments to try to come up with one. Many of the people we let go from Netflix because they were not excelling at what we were doing at the time went on to excel at other jobs.

Finding the right people is also not primarily about “culture fit.” What most people really mean when they think someone is a good culture fit is that the candidate is someone they’d like to have a beer with. That approach is often totally wrong-headed. People can have all sorts of different personalities and be great fits for the job you need done. One of our great hires was Anthony Park, who was working as a programmer for a bank in Arizona when we reached out to him. On paper he certainly didn’t look like a slam-dunk fit. He was a “programmer,” not a “software developer.” He was also a pretty buttoned-up, quiet guy, so I worried a little about how he’d cope with our debate-like-crazy culture. We called him because someone told me he had created a Netflix-enhancing app, which he had posted on his website. We brought him in for a day of interviews, and everyone loved him as well as the app he’d created. When he got to me, shortly after we started talking he turned bright red. I asked him if he was okay, and he said, “You’re going to make me an offer, aren’t you?” And I said, “Yes, we are.” He said, “And you’re going to pay me a lot of money, right?” And I said, “Well, you’re not programming for a bank anymore. You know, you’d be here in Silicon Valley and it’s expensive to live out here. We’re going to pay you commensurate with what it will take for you to have a great life with your family here.” He seemed overwhelmed, and I asked again if he was all right. He said with ...

One of the reasons that I’m no fan of the annual performance review process is that not only does it take up a lot of your HR department’s time, but it is so often removed from any true connection to business results and serving customers.

IN BRIEF ▶ Hiring great performers is a hiring manager’s most important job. Hiring managers should actively develop their own pipelines of talent and take the lead in all aspects of the hiring process. They are the lead recruiters. ▶ The teams and companies most successful in staying ahead of the curve manage to do so because they proactively replenish their talent pool. ▶ Retention is not a good measure of team-building success; having a great person in every single position on the team is the best measure. ▶ Sometimes it’s important to let even people who have done a great job go in order to make space for high performers in new functions or with different skills. ▶ Bonuses, stock options, high salaries, and even a clear path to promotion are not the strongest draw for high performers. The opportunity to work with teams of other high performers whom they’ll learn from and find it exhilarating to work with is by far the most powerful lure. ▶ Making a great hire is not about bringing in an “A player”; it’s about finding a great match for your needs. Someone who is a high performer for one team may not be for another team. ▶ Get beyond the résumé. Be really creative about where you look for talent. Dig further than a list of experiences. Consider wide-ranging experiences and focus on people’s fundamental problem-solving abilities. ▶ Make the interviewing experience extremely impressive all the way through. You want every single person you interview to want to join the comp...

QUESTIONS TO CONSIDER • Can you name the two people you would call right away to talk to about taking the place of your top performers should they leave? • What change is under way in your business? How prepared are you to begin interviewing for the new talent you need in the event the change happens faster than you’ve expected? • How creative are you in looking for candidates? • How thoughtful and rigorous is the interview process your candidates go through? • How well do you think the recruiters working with you understand the details of the jobs to be filled and the qualities you are looking for in hires?

An interesting study done by Bain and described in a Harvard Business Review article provides strong support for the value of this strategy. The study analyzed the distribution of talent in twenty-five global companies and found that on average, only 15 percent of employees were performance “stars.” But a big difference between the most successful companies and the rest was the nature of the roles their stars were in. The authors wrote, “The best companies used intentional non-egalitarianism,” meaning that “they focus their stars on areas where these individuals can have the biggest impact on company performance. As a result, the vast majority of business-critical roles—upward of 95%—are filled by A-quality talent.” At the other companies, stars were distributed broadly across the departments.

I recently had a conversation with a brilliant new head of HR that’s a cautionary tale about focusing so much on engagement. She’d been at her new company for eight weeks, and she had already conducted a seriously eye-opening analysis of how employee engagement tracked with performance. She had taken a close look at the company’s heat-mapping survey, which measured how happy and engaged employees were, and compared those results with the performance of teams. The good news, she told me, was that most of the company was green, meaning highly engaged and happy. But the bad news was that the teams with subpar performance were just as green as those that were performing really well. That’s a striking demonstration that there is not such a simple link between engagement and performance. By superimposing business metrics over happiness metrics, she enabled the company to begin to differentiate much more effectively what was going on in the teams that were performing so well versus those that weren’t.

One company’s failure might be another company’s treasure.