We Study Billionaires - The Investor’s Podcast Network - TIP748: The Netflix Playbook: Fewer Rules, Greater Results w/ Kyle Grieve

Episode Date: August 29, 2025

On today’s episode, Kyle Grieve discusses the radical culture that helped Netflix dominate Blockbuster and achieve massive long-term success. He explores lessons on talent density, candor, feedback, freedom, and responsibility that reveal how culture can become a company’s greatest competitive moat. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 02:54 - Why fewer rules can unlock a company’s peak performance. 04:58 - The cultural failures that doomed Blockbuster against Netflix. 08:54 - How talent density drives innovation and rapid productivity gains. 10:40 - Why subtraction sometimes creates stronger, higher-performing teams. 15:14 - How candor accelerates decision-making and organizational efficiency. 25:02 - Netflix’s 4A framework for delivering and receiving feedback. 34:21 - Why “rockstar pay” beats incentive bonuses for top talent. 55:00 - How sunshining mistakes builds trust and stronger organizations. 58:02 - The Keeper Test for retaining only your best performers. 01:04:19 - Why leading with context—not control—fuels lasting innovation. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join Clay and a select group of passionate value investors for a retreat in Big Sky, Montana. Learn more ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Buy a copy of No Rules Rules here. Related episode: TIP744: Hidden Monopolies w/ Kyle Grieve. Follow Kyle on ⁠Twitter⁠ and ⁠LinkedIn⁠. Check out all the books mentioned and discussed in our podcast episodes ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy ad-free episodes when you subscribe to our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses in just a few minutes each week through our newsletter, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠We Study Billionaires Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X (Twitter)⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Browse through all our episodes (complete with transcripts) ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠sponsors⁠: Simple Mining HardBlock Human Rights Foundation Linkedin Talent Solutions Netsuite Shopify Vanta Abundant Mines HELP US OUT! Help us reach new listeners by leaving us a ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠rating and review⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Spotify⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! ⁠⁠⁠⁠⁠https://theinvestorspodcastnetwork.supportingcast.fm⁠⁠ Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Netflix is one of those rare companies that is both an incredible business and an incredible stock. Since its initial public offering, Netflix stock has skyrocketed into an 1,100 banger. I've always found Netflix fascinating, not only as a longtime subscriber, but also because of its legendary battle and ultimate defeat of Blockbuster. Like many listeners, I have fond memories of renting movies at Blockbuster, but capitalism does not care about nostalgia. What I find most impressive and surprising about Netflix is how much culture has been a catalyst for its own success. Netflix does not operate by traditional corporate playbooks. Instead, it takes the concept of freedom and responsibility to an entirely new level.

In this episode, we're going to explore exactly what that means and how investors and business leaders can apply Netflix's cultural principles to drive innovation and long-term value. We'll also discuss why innovative businesses should focus on hiring. and retaining only the most talented individuals, why candor is such a powerful tool to keep teams performing at superstar levels, and why reducing bureaucracy by empowering employees to make their own decisions leads to faster and better outcomes. So, if you're an investor seeking to identify businesses

with just robust culture modes, this episode will provide you with the tools to evaluate them much more effectively. It will also be valuable for business owners seeking practical ways to build stronger, more innovative teams. Now, let's get into this. this week's episode on Netflix's unique culture. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made

billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Greve. Welcome to the Investors podcast. I'm your host Kyle Greve, and today we're going to discuss the book No Rules Rules Rules. By Netflix, founder, Reed Hastings, and author Aaron Meyer. Now, there's a fascinating image that's been circulating on the internet for the past few years depicting the ultimate value drivers of a business's long-term value. It's not sentiment, it's not multiple re-rating, it's not business cycles, or even, you know, high rates of capital efficiency that can create the highest long-term value. It's culture. Netflix is a prime example of how a company's culture can generate immense shareholder value.

Now, I didn't put much thought into business culture before I joined TIP because the culture at TIP is just so much different from anything that I've ever been part of before. But it's not really any coincidence that I think Stig gets all of his new employees to read the book The Culture Code by Aaron Meyer. So when I sought to research more about Netflix and came across the book No Rules Rules by Netflix Sounder, Read Hastings, and Aaron Meyer, I was very excited to read it. And it was a really, really good book offering a ton of valuable lessons that business owners and investors alike can use to help identify the nuances of a company's culture.

And that's what we're going to be diving into very, very deep today. So the book's central question is, what if having fewer rules makes your company better? It's a great question and one that I think that many business owners and investors just never ask. It's not something I necessarily place a lot of importance on when I'm evaluating a business. While I do like businesses that have a high degree of decentralization, I never really thought too hard about how that relates to a company's culture. However, just as decentralizing certain aspects of a business can be value-creative if done

correctly, Netflix has demonstrated that taking that step to a business's underlying fabric can be a truly powerful augmentation. Now, Netflix is interesting here because much of its culture was developed by Reed Hastings' own experiences. So Hastings sold a business called Pure Software, where many of the foundational principles of Netflix were first built. Throughout the book and this episode, we're going to cover some examples of what he learned specifically at Pure Software and why he was so intentional about creating Netflix's culture in the way

that he did. So Netflix's culture is really based on three primary principles and they're very simple. So the first one is talent density. The second one is candor and third is control reduction. All three of these principles are designed to create a culture of freedom and responsibility, which I'll refer to as F&R for the rest of the episode. Hastings and Meyer further break down F&R into three steps for each of these principles. So first, you build up talent density, you increase candor, and you begin removing controls. Second, you begin fortifying talent density, pumping up candor, and removing even more controls. And then third, you're just maximizing talent density, maximizing candor, and eliminating almost

all other controls. So let's use inversion here and examine a company that I think failed to execute on probably two of these ultimately leading to its demise. Most listeners above the age of 30 are going to be very familiar with this company. And even if you aren't, you probably know it as Netflix's chief rival during Netflix's early days, and this is Blockbuster. So Netflix soundly defeated Blockbuster because of Principles 1 and 2. I can't speak to exactly how Blockbuster was attempting to maximize talent density,

but I think that the culture inside of Blockbuster was just not one of innovation. Blockbuster reminds me of one of these legacy businesses you see today, like a utility. These are rent seekers. They're essentially just sitting on their assets and milking every, last dollar out of them while they still can. The problem with this business model is just capitalism. You know, capitalism allows individuals to come and steal your customers away with better products and better services.

If you intend to just rest on your laurels and have too big of an ego to see that maybe your industry is rapidly changing in front of you, you're going to lose. I think this is precisely what happened with Blockbuster. Now, in terms of candor, it's hard to see how Blockbuster wouldn't have had other upper level management types that were observing Netflix's giant red boxes. I remember seeing these giant red boxes that Safeway down the road from where I used to live. Then I remember seeing them popping up in more and more locations. If Blockbuster had a culture that encouraged, you know, maybe some more candor, someone might have brought up the issue that Netflix had come up with maybe a crude way to

improve the movie renting experience. For those unfamiliar with Netflix's early strategy, they had a few. So the first one was that they would just mail you a DVD and then you would mail it back after a predetermined period. While doing that, they also had these physical red boxes, almost like a vending machine. You'd go to the vending machine, you'd put some information, put some money in it, and you'd get your movie. It's very simple and low tech, but it was an intriguing business proposition at the time. No retail stores were needed. Minimal storage was required to hold inventory. Much fewer employees were needed, and you had the luxury of putting the movie vending machines in very high traffic areas where you'd be giving your partner a cut of these profits. Additionally, and this is very, very important,

Reid Hastings noticed that Blockbuster was profiting off its customers' mistakes, which he felt was just a horrible business model. Now, the mistakes I'm referring to here are late fees. Any business that's just, you know, exploiting its customers in this manner is going to be very, very right for disruption. And that is precisely what Reed Hastings did. So I recently did an episode on customer loyalty modes. It was TIP 744.

I'll link it in the show notes. In that episode, I discussed how businesses can build and create modes by focusing on building customer loyalty. And I think that's exactly what Netflix did. They saw that the legacy model was simply not built to foster customer loyalty, and they, in turn, targeted that audience to specifically build customer loyalty. Now, since Blockbuster didn't have many competitors, its customers had pretty limited experience with switching to other movie rental companies. And even if they tried another, they were kind of a commodity product. As a result, many of Blockbuster's customers were satisfied with the status quo. However, once Netflix entered the arena, it showed Blockbuster's customers

that there was a superior option that was cheaper, more convenient, and offered just a better experience. Once Netflix achieved a critical mass through its evolution into streaming services, that was it for Blockbuster, which now has just one remaining location. One last part on Candor that I'd like to share is that Blockbuster could theoretically have been around today if they had just made one different decision. So Reed was actually ready to exit Netflix and sell out to Blockbuster for a measly $50 million. But Blockbuster said no. Now, to be fair, given the information at the time, it might have been the best possible

decision. The Netflix business recorded a loss of $57 million. So if Blockbuster had people willing to speak their minds, maybe to Blockbuster CEO, perhaps they might have seen a path to make the two of these businesses work together and maybe make a path towards Netflix achieving profitability. Or if they had bought it, then maybe we'd be watching Blockbuster on our time. TVs instead of Netflix. And those physical stores, maybe we just would have been removed due to their underlying

weaknesses stemming from their higher costs. However, let's start here with the first layer of talent density, candor, and control reduction. So the first step to building talent density is what Hastings refers to as developing a work environment that consists solely of stunning colleagues. So this concept was bred out of the dot-com bubble, specifically in the spring of 2001. Netflix was not a profitable company at this time. And the funding available to internet-related companies was about as scarce as water in the Arabian desert. As a result, Netflix had to lay off a third of its workforce.

And while the experience was not enjoyable at all for Netflix, Hastings actually observed something that was astonishing. Everyone who survived the layoffs was pretty stable and calm, despite the rapid disruption. And after only a few weeks, the atmosphere actually dramatically improved. Hastings writes that we were in cost-cutting mode and let go a third of our workforce, Yet the office was suddenly buzzing with passion, energy, and ideas. By early 2002, Netflix was cruising. DVD players were selling like hotcakes, providing a further headwind for Netflix's DVD-by-mail subscription business. At this point, Netflix was doing more than it had ever done with 30% fewer employees.

Now, on the face of things, it just didn't make much sense. One of Reid's colleagues and carpool partners, Patty McCord, who he had brought with him from his days at peer software, told Reed that it felt like everyone was passionately in love with their work. While on their carpool rides, they began to disseminate what exactly happened to cause Netflix to enjoy this rapid productivity improvement. And the key was in talent density. When they decided who to let go and who to keep, talent was a key factor in their decision. This meant that 80 leftover employees were the cream of the crop. There was a lower number of people, sure, but the average talent level rose substantially as a result of letting go the less talented individuals.

This makes me think of critical mass in a much different way. So most of the time in a critical mass, you're adding things until they can self-reinforce. But in this example, it was really addition through subtraction. By raising the average level of talent, the business achieved a critical mass that it may never have reached if the talent density had remained the same at that lower level. Now, I'd love to touch on this a bit more as part of my job here with TIP. So the hosts and our support staff are very talented, and I interact a lot with both. But since TIP has so many great podcast hosts, it raises the bar for everyone else.

If I want to search for inspiration on an episode, a topic, or a theme, I can go back and research older episodes. Alternatively, I can reach out directly to Stig, Clay, or William for their advice on how they approach their work, which helps me improve my own approach. Because the talent density is high, it just spreads. And Stig is very well aware of this. He wants hosts who will constantly raise the bar as much as they can realistically do. And when you're around other people who are very intentional about improving their abilities in their

job, you get kind of swept away trying to improve as well. At least I know I do. In other jobs I've had, talent wasn't something that management paid too much attention to. If you accomplish the job, that's all that really mattered. Sure, there might be people better at it than others, but even if you were objectively worse than others in the company, it was unlikely that you'd be fired. illustrates the importance of culture. If you lack a culture of productivity and innovation, it's unlikely that your business will survive for very long. And it doesn't matter if your business is a more complex one like Netflix or a small, simple business like a restaurant with five employees. Here is how Reed breaks down what happens if you have a team of, let's say, seven people

with five stunning employees and just two adequate ones. So the adequate ones are going to do things like suck energy for management. So management has less time to spend with top performers. They're going to reduce the quality of group discussions, which therefore reduces the group's IQ. They're going to force outperformers to develop ways of working around their deficiencies, which further decreases efficiency. They're going to drive staff who seek excellence to quit. And then lastly, they're going to show that the business accepts mediocrity, allowing employees to justify a lower level of performance. So Aaron Meyer mentions a particularly useful study in this chapter that really contradicts a lot of of conventional wisdom. So Professor Will Phelps from the University of New South Wales in Australia

conducted this study, which examined the contagious behaviors and work environments. He created a team of four college students, each task with accomplishing a task in 45 minutes. The team that did best received a $100 reward. Now, as in many of these types of studies, researchers often add their little variables to make the findings more interesting. And in this case, certain teams had actors who would play specific roles. So the roles were the slacker or people who would be you know, kind of disengaged from the activity. Then there would be the jerk who would insert sarcastic remarks to his team. And then there was the depressive pessimist who would make depressing remarks about the unlikelyhood of success. Now what Phelps found was that the actions of single

team members actually brought down the overall talent level of the other individuals on the team. And the study wasn't just some one-off affair. Phelps ran the study for a whole month and had dozens and dozens of trials. And the results weren't great. Groups with an underperformer did worse than the other teams by 30 to 40%. Now, I mentioned that this study contradicts conventional wisdom. And that's because with most previous research, the conclusions were that individuals within a group would conform to the group's values and norms.

Theoretically, one of these actors in the presence of a talented individual should actually elevate their performance rather than dragging down everyone else. It's also important to note that these results occurred over a short 45-minute period. If you had years or decades of underperformers, I'd assume that they might drag down the outperformers even more. The main takeaway from this chapter is to focus on an increasing talent density within your workplace. As we'll discuss later in this episode, this approach has many other benefits, such as paying

your top performers more, rather than bringing in outside help and keeping their salaries at or below market rates. To accomplish this, you must monitor the performance of your organization. This is why having a workplace that prioritizes meritocracy is so essential. When you do this, you can identify outperformers more easily compared to just the adequate ones. And it means it becomes easier to see who really deserves promotions and who doesn't, or who you might need to let go of if layoffs become necessary. Additionally, meritocracy helps you bring out the best ideas regardless of an employee's tenure.

Ray Dalio said, a system that doesn't differentiate between more and less credible thinkers will not produce consistently good decisions. This transitions well into the next chapter, which is about increasing candor. Hastings learned the power of candor as the CEO of Pure Software. He admits to being miserable at the people part of leadership. One example was when he had a product that he thought was just taking a little bit too long to develop. Reed then actually went behind this product developer at Pure Software and hired an outside company to help get the project going. Once his developer found out, he was furious, telling Reed,

that he should have just told him how he felt so that they could come to a solution together, rather than going behind his back. At Netflix, Reed realized that reducing backstabbing in office politics was a key to increasing efficiency. And if his group of incredibly talented people had ways of doing things faster and better, they shouldn't be afraid to share their techniques with anyone inside of the company. As a result of this thinking, Netflix came up with the term, Only Say About Someone, What You Will Say to Their Face.

So when someone would come to read with a problem, he would directly ask them, what did that person say when you spoke to him about this directly? The interesting thing about candor is that most people just don't really enjoy receiving it. It can cut pretty deeply when someone tells you that, you know, you're doing something wrong or you're doing something less optimally. Criticism triggers feelings like self-doubt, frustration, and vulnerability. Examining this in an evolutionary context, these feelings tend to prompt response that activates our fight-or-flight mechanism, the same reaction towards a physical threat.

Another interesting perspective on candor is how it's delivered. So there's a significant difference between receiving criticism in a one-on-one setting and receiving it in a public setting. Warren Buffett has said, praise in public, criticize in private. And I think that's excellent advice. The praise means a lot because it's being said in a public domain where all your colleagues can share in the appreciation for your hard work and value creation. But things obviously are all rainbows and butterflies.

If things aren't going in the direction that, let's say, Warren wants, he'll address it, but not in a manner that he feels would maybe humiliate someone in front of their peers or the general public. Warren is an absolute master at this. If you read his annual reports or listened to him talk at any of his annual meetings, he's constantly peppering praise to the superstars who are part of Berkshire Hathaway. He'll criticize certain, you know, broad behaviors, but he's very rarely singling out any individual. And in the rare case, he does single out an individual. It's not someone who's inside of the Berkshire Hathaway organization. The book mentioned some incredible data about corrective feedback.

So the interesting thing about corrective feedback is that it tends to have a much greater impact on success compared to positive feedback. A 2014 study concluded that by a three to one margin, people believe that corrective feedback is more effective in improving their performance than positive feedback. Here's some of the staffs in that survey. 57% of respondents claim they would prefer to receive corrective feedback over positive feedback. 72% felt the performance would improve if they received more corrective feedback. And then finally, 92% agreed with a comment that negative feedback, if delivered appropriately, improves performance. I couldn't agree more with these results.

And I think it really reminds me of something that Monich Pabry said, and I'm paraphrasing here, but he said something along the lines that, you know, you just learn most from your losses. When you have a win, you know, you just pat yourself on the back and you move on. However, the best feedback that you'll receive from investing comes specifically from making mistakes. In that case, you can look at things you overlooked or other errors and then examine ways how you can prevent yourself from ever making them again. If you do this long enough, you'll make fewer and fewer mistakes and your results will

improve. Feedback in a corporate setting is going to be a lot different from what you might experience if you were operating solo. Netflix makes sure that feedback isn't a one-way street. It's not meant for managers to just give feedback without hearing any. return. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are

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All right, back to the show. One way that Netflix attempts to gather feedback from management is buying including it in their agenda for their one-on-one meetings. As a manager, this helps your employees provide valuable feedback to management that can then be used to elevate the entire organization. But this culture, you know, it's not normal. There's a great example in the book when Netflix's chief content officer, Ted Sarandos, who is now co-CEO of Netflix, brought on someone named Brian Wright, a senior vice president at Nickelodeon to help improve Netflix's young adult content. Brian here is talking about a previous experience with feedback.

So he says, in all my past jobs, it was all about who's in and who's out of favor. If you gave the boss feedback or disagreed with her in a meeting in front of others, that would be political death. You would find yourself in Siberia. So in a group meeting that Brian had with Ted on his first day at Netflix, Ted was actually receiving criticism about an idea from a lower level worker. Brian was astounded that someone would speak to their superior in the way that he did. But when the meeting was over,

Brian noticed that Ted put his hand on the guy's shoulder who provided that criticism and said, great meeting, thanks for the input today. When Brian was asked later about how his first day was going, he explained that he was surprised at how the guy seemed to be attacking Ted's idea. Ted replied by saying, Brian, the day you find yourself sitting on your feedback because you're worried you'll be unpopular is the day you'll leave Netflix. We hire you for your opinions. Every person in that room is responsible for telling me frankly what they think.

The key here is truly in the culture. Suppose you have management that just can't accept criticism with open arms. In that case, it's very unlikely that you'll foster a culture of candor. In the example above, Ted made it explicitly clear that he expected Brian's honest opinion, whether that was good or bad. When you create this as an explicit part of your business, you're helping to build a culture that prioritizes improvement over ego. If you're looking to give and receive feedback optimally, the book provides a pretty straightforward framework for doing so. It's called the 4A guideline. So there's two parts to it. There's giving feedback and there's receiving feedback.

So, in giving feedback, the first part is aim to assist. Feedback should be given with positive intent. It's not meant to, you know, tear someone down, but actually build them up. Feedback isn't a tool to hurt someone, express your frustration, or further any specific agenda. The second one is to make it actionable. Great feedback will prompt the receiver to instantly improve by adjusting their inputs. Vag feedback, like, you know, it wasn't your best work, doesn't offer much help for someone. Instead, explain what it was that they could specifically improve on that is actionable. Then when it comes to receiving feedback, the third one is appreciate the feedback for what it is. Remember the whole fight or flight thing that I discussed earlier? When receiving feedback,

we want to try to avoid the desire to flee. If you feel your blood pressure rising while receiving feedback, remember that the criticism is intended to help you improve at your job. You can even show appreciation for feedback and express gratitude to the person providing it for trying to help you improve. And the fourth one is to accept feedback or discard it. Not all feedback is helpful. You must decide whether to accept the feedback and make adjustments or toss it and continue as you were. This is a very simple and practical framework. I resonate a lot with a third A on appreciating feedback. I get feedback from Stig on every single episode that I produce for TIP. And he has a great job of giving me both positive and negative feedback, even though I tend to remember the negative

feedback much more vividly than the positive. However, this is very beneficial because if I can continue to improve, it enhances your listening experience, making what I say more powerful and efficient. While I know I sometimes feel defensive when receiving negative feedback from Stig or the audience, I understand that they're doing so in the best interest of making the show better. After taking a moment to think about it, I genuinely appreciate the feedback because I believe it helps me elevate my own podcasting skills.

As I read the book, the connections between Netflix and Berkshire Hathaway, became increasingly apparent. The concept that really cemented this for me has to do with Netflix's culture of F&R. So at Berkshire, Buffett trusts many of his businesses to just simply do the right thing. And it's not too different at Netflix. So the next part of the book I'd like to discuss is how to cultivate this culture towards what Hastings calls a culture of freedom and responsibility. The first point that he makes on building F&R is to remove the vacation policy.

One of the reasons that Hastings thought this was beneficial was because he didn't believe that a person's value should be measured specifically by time. Let's say you had two people who can accomplish the same amount of work, but someone else can do it in half the time. Why should they be punished if they want to take more time off than the person who is slower? Hastings writes, when it comes to how we judge performance at Netflix, hard work is irrelevant. Another hidden benefit of vacations that Netflix noted was the increased clarity and innovation that some people experience after taking time away. For instance, Neil Hunt, one of their chief product officers, loved vacationing in extreme outdoor places.

When Neil took off on a vacation, it was often to some remote location that nobody had ever heard of. And upon his return from one such vacation, Neil conceived a new algorithm that could be used to enhance Netflix's movie selection for its customers. So one problem with having a no vacation policy was that employees might not take advantage of it if they didn't observe their boss taking advantage of it as well. So in some workplaces, you may arrive before the boss and leave after they depart. And that demonstrates that you're putting in a lot of hours and working hard. And while this is not the culture that Netflix promotes,

this is the culture that probably most people are used to rather than Netflix's more radical approach. So to combat this issue, it had to start from the top. Reed would ensure that he vacationed for more extended periods just to set the tone for everybody under underneath him. Additionally, he would actively discuss these adventures with his colleagues. This was done intentionally to ensure that all levels of employees at Netflix knew that everyone else was taking vacations and that not taking a vacation would make them into an outlier. This type of leadership modeling was the first step that Hastings suggests. However, there are additional roadblocks to consider. So let's say you're running a large organization. You can't

necessarily have employees just taking vacations around huge debt. headlines, especially if they're key personnel in that initiative. So this led Netflix to focus on reinforcing context to guide employee behavior. This meant that a business or a management team must provide context to their employees, helping them better understand when and how long they can take a vacation. So that could mean things such as giving advance notice of vacations that are longer than two weeks, but maybe not giving any notice for just taking an extended weekend. The interesting thing about having the no vacation policy is that it can work really,

wonders as a benefit to certain companies. Aaron Mayer mentioned a business called Mammoth that decided to clone Netflix's policy and tested out for themselves. So the No Vacation policy was then ranked number three in terms of the benefits behind only health insurance and the business's retirement plan. So for companies that are looking to retain talent, a policy such as this could actually be a significant draw for both attracting and retaining top talent. So here's another example of just how disruptive travel and expense approvals can be for a

company, such as Pure Software, Reed's first company. So he tells the story of one of his sales directors, this gentleman named Grant. While on a work trip, he rented a car. As part of his job, he went to a party, and he knew that others and himself would probably consume alcohol. So he took a taxi to and from the event. Now, when he provided Pure Software with the invoice for his taxi, he was actually denied. So according to Pure Software's employee handbook, employees are permitted to either rent a car or take a cab, but they must choose one or the other. His point was that according to the handbook that pure software gave him, he should have just drunken drive, which is obviously nonsense.

Months later, Grant resigned because he felt that management was just wasting too much time on non-productive tasks, such as editing the employee handbook, which was not well written. When Netflix was started, this lesson was top of mind for a read. So he decided that his first expense guideline would be to spend companies money as if it were your own. Now, while this sounded good on paper, the problem was that not everyone spends their own money frugally, which was what Reed was kind of hoping for when he wrote that guideline. The book shares the story of David Wells, who served as the VP of Finance and later became Netflix's CFO. So Wells was a frugal guy.

And on a work trip to Mexico, he was very surprised to find a bunch of his colleagues in first class seats while on his way to his seat in economy. And these colleagues were embarrassed for David, not because he was an economy and they were in first class, but because an executive like David would ever be an economy. So this indicates that individuals have varying perspectives on how they would allocate their own money. Some people are naturally more frugal than others, but assuming everyone will treat the company's money responsibly is very unrealistic. Because of this event, Netflix changed its spending and travel guidelines to act in Netflix's best interest. To help clear up any confusion, once Wells became the CFO of Netflix, he helped set the context of this guideline for new employees. And it was pretty simple.

He told him to imagine that he or she was standing in front of her boss and the CFO and explain why they chose to purchase that specific flight, hotel, or phone. If they could comfortably explain why it was in the company's best interest to make that purchase, then they proceed. If, on the other hand, you feel any discomfort explaining yourself, then you should probably consider skipping the purchase, checking in with your boss or just buying something cheaper. Hastings makes the point that this F&R probably increases Netflix's expenses compared to having a more set of rigid rules. However, he believes the cost of giving them that freedom is less than having a workplace where they must ask about every little thing, wasting times on these tasks,

rather than creating new and innovative products and features. We've now covered the first steps to how Netflix has created their culture. So here's what Hastings said. Once you have a workplace made up nearly exclusively of high performers, you can count on people to behave responsibly. Once you have developed a culture of candor, employees will watch out for one another and ensure their teammates' actions are in line with the good of the company. Then you can begin to remove controls and give your staff more freedom.

Great places to start are the lifting of your vacation, travel, and expense policies. These elements give people more control over their own lives and convey a loud message that you trust your employees to do what's right. The trust you offer will in turn instill feelings of responsibility in your workforce, leading everyone in the company to have a greater sense of ownership. So the next section of the book outlines the three principles and further refines them. So the first section is once again regarding talent entity. However, this time it involves compensation.

The title of the chapter tells you much of what he thinks about how to compensate employees, pay top of personal market. Netflix has reached its current position primarily due to its high talent density. But hiring talent is different than keeping talent, and Hastings is very well aware of this. So he came up with offering his employees just rock star pay. So he came to this conclusion through trial and error. Reed was an engineer and was very familiar with this concept called the Rockstar Principle. So the Rockstar Principle originated from a famous study that was conducted in Santa Monica in 1968.

At the bright and early hour of 6.30 a.m., nine trainee programmers were led into a room, filled with computers. Each of them was tasked with accomplishing a series of coding and debugging tasks that they would have to complete to the best of their abilities in the next two hours. The researchers hypothesized that the best performers would outperform the average by a factor of maybe two or three. However, within that group of nine, the best performers outperform the worst by a significantly larger margin. The best guy was actually 20 times faster at coding, 25 times faster at debugging, and 10 times faster at program execution than the programmer with the lowest rank. So Reed's conclusion here was simple. He had a fixed amount of money to spend on talent. So with his funds, he could either one, hire 10 to 25 average engineers or two, hire

one rock star and pay them significantly more. This is a fascinating subject because it genuinely relies on culture that prioritizes productivity. If you have that type of culture, you should be able to then have a smaller and more efficient workforce that can produce at a much higher level than a larger and less efficient one. It's kind of the dream scenario, isn't it? Reed admits that the performance gap might actually be even greater than what was quoted in that study. So Reed Hastings was on the Microsoft board, and Bill Gates once said,

A great lathe operator commands several times the wages of an average lathe operator. But a great writer of software code is worth 10,000 times the price of an average software writer. If you manage businesses where the majority of your talent is in kind of operational roles, this framework may not be the best fit. If you operate something like an ice cream parlor, your best ice cream scooper can probably scoop maybe at double the pace of your worst one. But there's no chance they're going to scoop 10,000 times faster. So this framework really depends on what type of employees you have.

If you only require operational people, then you can get away with paying market rates for average employees as you won't get the same torque from your rock stars. But if you own a business that requires your workforce to innovate and execute creatively, then having a few rock stars is a better decision than having a diluted group of people. And for any startup founders out there listening, there's good news. If you want to pay top of the market to bring in exceptionally talented people, a study concluded that 44% of people would be willing to leave their job if they got paid more elsewhere. And this figure won by a landslide, as a second category was only 12%.

Now comes an area of Netflix's compensation that I was kind of shocked to see, to be honest. If you've listened to any of my episodes over the years, You know how much emphasis I place on the power of incentives. One of, if not the greatest thinkers of our generation, Charlie Munger, said that he always underestimated the power of incentives, despite the fact that he thought that he understood it better than 95% of other people. So I was stunned to see that Netflix does entirely away with incentive-based bonuses. Hastings developed this framework early in Netflix's existence around the year 2003.

So Reed was having a meeting with his chief marketing officer, Leslie Kilgore. While trying to find what KPI's worked best for her, he came up with an incentive based on new customers. Seeing as Kilgore's job was in marketing, this made sense, theoretically. But she told Reid, the number of customers we sign is no longer what we should be measuring. In fact, it's irrelevant. She went on to show us numerically that while new customers had been the most important goal last quarter, it was now the customer retention rate that really mattered.

Reed's takeaway was that as Netflix scaled up, its KPIs would change. For his CMO, should her KPI be touched? to new customers or some sort of customer retention metric. With how fast Netflix was really just disrupting its industry, Reed felt that it was nearly impossible to know the answer to that question. Many of Netflix employees had jumped ship from companies such as Warner Media or NBC. And in those places, it was customary to get incentives based off of KPIs. But Netflix was a different type of company just doing other things.

At Warner or NBC, employees might be compensated to increase operating profits by, let's say, 5% in a year. And that's fine, given what those companies were doing. But at Netflix, what if employees needed to take maybe a loss on something in order to make the business better a few more years down the road? In that sense, a KPI like this would actually serve to block innovation and creativity, which is what Netflix is all about. Reed also had a hunch that high performers don't require a bonus to incentivize them. If they're paid well, they will do whatever it takes to continue performing well. Aaron Mayer added that Reed's hunch was actually true, and that research by renowned

behavioral economist Daniel Aarley actually confirmed it. So he had a study which involved tasks that required things like attention, memory, and creativity. And he found that offering a higher bonus actually led to worse performance when the tasks involved cognitive skills. So initially tested in India, where the highest bonuses was equivalent to about five months pay, participants who were promised the most significant rewards perform the worst. A follow-up study at MIT showed the exact same.

Higher bonuses improved results for purely technical tasks, but harm performance when even basic thinking was involved. The takeaway? For cognitive work, large financial incentives can actually reduce effectiveness. Now, I find this fascinating because it potentially shows that incentive-based compensation works best for jobs that have very specific tasks, and that's mainly mechanical-based jobs. But jobs which require creativity can actually be harmed. by these incentives. I'm still not completely sold on this premise, though. There's just too many

examples of executives performing at a very high level, and it's hard not to believe that they are performing at that level specifically because they're being incentivized correctly. When I'm analyzing a business, I'll always look at executive compensation, and I want to know a few things. Number one, what is their base pay? Number two, what is their bonus pay? And three, how do they maximize their bonus? Perhaps the difference comes here in the fact that someone making $300,000 dollars per year isn't going to try too much harder if they can earn additional, say, $50,000. But this isn't necessarily the case with executives. Some executives can earn multiples of their base salary if they achieve their KPIs.

And in those cases, I think that's a really huge incentive. And whether that incentive is achieved through mechanistic or creative ways, my guess is they'll use whatever is possible to achieve their incentive. I will say that I do like one part of this incentive system. So in many corporations, if an executive is underperforming, they still get their incentive. But Netflix has a culture, as I've discussed, that just removes underperformers from the company. If you want to cruise along at your job and take it easy, Netflix is not the place to do that. But I think there are some corporations where the CEO is doing just that.

And often that comes at the expense of shareholders. I try to avoid these situations at all costs. Now back to that study. So Aaron writes, if part of what you focus on is whether or not your performance will get you that big check, You are not in that open cognitive space where the best ideas and most innovative possibilities reside. You do worse. An interesting part of how Netflix does things is to allow its employees to take calls from its competitors. For instance, Reid learned that one of his top engineers, this guy named George, was offered a higher pay to work at Google.

At first, he was just incensed at the lack of loyalty that this employee displayed by taking that call with Google. But as he thought more and more from a rational standpoint, he understood that George took the interview to better understand what he was work. And since George was irreplaceable, Netflix ended up paying him top of market value. Additionally, this would dissuade other tech companies from thinking they could come in poach talent from Netflix's talent pool. As a result, they ended up paying George even more than he would have gotten at Google. Then they made a list of employees who Google might contact within Netflix and just paid them all more as well.

I think what Reed was doing here was just trying to get ahead of his competitors. And if these top engineers were really worth, you know, 100 times, a thousand times, or 10,000 sometimes more than a potential replacement, then bumping their salary a little bit would have a massive ROI. The following section I want to discuss is based on pumping up candor. So the chapter is based on secrets and how keeping them often does more harm than good. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together

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And these are composed of things like whether to tell employees you're considering a reorganization that could cost in their jobs, whether you should discuss with other employees why someone was fired, as the real reason may harm their reputation, how much insider information you should share with others that risks being leaked to potential competitors if someone were to leave, divulging personal mistakes that could hurt your reputation or ruin your career, the rocky relationship between two leaders that, if made public, would cause unrest inside of a company, and expressing vital financial information to employees who could theoretically be sent to prison for sharing that information. So, Reid has many ways to handle all of these problems,

and he has an interesting term that he used when it comes to secrets. He calls it sunshining. Here's what he says about it. Big things, small things, whether good or bad, if your first instinct is to put more information out there, others will do the same. At Netflix, we call this sunshining, and we make an effort to do a lot of it. I think this is smart, and if you want to build a culture of trust, sunshining is the way to do it.

People shouldn't be afraid to highlight mistakes and vulnerabilities, as dealing with those things by talking about them with others can be a great way to improve. You may notice in my episodes that I often highlight a number of my, own investing-related mistakes. I love sunshineing these because it shows that I'm just very far from perfect and it lets me express my mistakes in my own way so that I can do my best to avoid making them again. I could easily hide my mistakes and deal with them internally, but for me, this isn't an optimal way to help myself improve and to be transparent, which is one of TIP's primary principles. Now, the book poses four questions related to transparency from what I was just discussing here and

gives Reed's response to each one of them. So the first one, he has. here is in regard to releasing information to your employees that would be illegal to leak to the public. In Netflix's example, this would be specific financial information. The question here is, do you continue sharing numbers with your team after Wall Street knows, or do you give numbers to Wall Street before sharing them with your team? Reed would choose to continue sharing this information with his employees before Wall Street and put trust in his employees to just do the right thing. The reason he takes this approach is that he wants transparency in the business, from top to

bottom. And if all your employees are correctly trained to read a profit and loss statement, it can be a massive advantage. Here's the passage from the book I highlighted. My goal was to make employees feel like owners, and in turn to increase the amount of responsibility they took for the company's success. However, opening company secrets to employees had another outcome. It made our workforce smarter. When you give low-level employees access to information that is generally reserved for high-level executives, they get more done on their own. They work faster without stopping to ask for information and approval, and they make better decisions without needing input from the top. It's worth noting that if you take this route, you will encounter some bad actors,

but you can just deal with them on an individual basis. So the second question here relates to possible organizational restructuring. So the example here is when a restructuring relates to how you might handle employees who may potentially lose their job as a result of the reorganization. There's a couple questions here. The first one, do you let time take its course and wait to tell your employees that they may be let go while nothing is for sure? Do you hint at what could maybe happen without revealing the full potential of what could happen? Or do you just tell them the truth that they may lose their

job in six months and if they need to make necessary arrangements in the future to do so? You probably won't be surprised at this point to see that Hastings chooses the final option. If you want a culture of transparency, then keeping secrets such as potential firings makes you a hypocrite. It also will erode trust in the company's culture. Another point that I appreciate is that if the company culture is transparent and the business genuinely cares about its employees, it should treat them fairly. And that means allowing your employees to seek alternative employment before it's too late. The third one here is how do you handle post-firing communication? Do you tell your train the truth, describe some of the truth, or cover for them?

This is more of a question related to employees who are maybe highly likable and decent in terms of effectiveness, but certainly not rock stars. When you fire them, they will likely be upset. And after it's done, you're probably going to have employees who want to understand better why he or she was let go. Reed would choose the first option and tell the truth, but with a caveat. So in the spirit of transparency, Netflix decides not to try to spin things to its employees to make itself or even a former employee look better than reality.

It's better to tell other employees why the fit wasn't right, but to respect the dignity of the person leaving. So this leads to the caveat. Netflix had an employee who checked himself into rehab for alcohol addiction and had to take two weeks off of work. In this case, Reed believes that personal matters such as these can be left for the person to reveal if they wish to do so. Reed has a he he uses when describing why someone was fired. He asks managers to be able to respond yes to the question, would I feel comfortable

showing the person I let go of, the email I sent? The fourth one here is in handling personal mistakes. Let's say you're managing a startup with 100 employees. Let's say over five years, you hire and fire five sales directors. Do you hide the mistake you've made in your judgment of these hires, or do you share these mistakes with your employees? You can probably guess Reed's answer this one is to tell the truth. Read provides a superb example from real life as the question is actually based on Reed's history at Pure Software. Reed had actually hired and fired five sales directors over five years and believed it to be just an egregious mistake. He took the issue to the board and offered his resignation as a result of these mistakes. But they didn't accept it. The board appreciated

his honesty and showed an even stronger belief in his leadership as a result of this honesty. Reed felt better about being honest and about showing some of these vulnerabilities that he had. So this part of about displaying vulnerabilities leads to a phenomenon known as a Pratfall effect. The Pratfall effect is a psychological tendency in which people tend to like someone more after they make small, relatable mistakes provided that person is otherwise competent. And being transparent is just a great way to take advantage of the Pratfall effect, because you will inherently be more honest about your past mistakes. And chances are the people with whom you're discussing the error can actually resonate very well with that error, which helps you improve your connection with them.

Let's transition here and discuss some additional details on how we can release more control to a business's employees by removing unnecessary approvals. So one quote from this chapter that I found powerful was, don't seek to please your boss, seek to do what is best for the company. This is an interesting quote because it doesn't apply to a large percentage of businesses simply because most companies are run where making your boss happy is a primary lever for furthering yourself inside of a company. For instance, at Netflix, they aim for a culture where decision making can be made throughout

the entire company rather than just being concentrated at the very top. This allows everyone to just flex their creative muscles and innovate at high levels without the bureaucratic red tape that suppresses this at many companies. When Aaron was working on this book with Reed, she asked him when he'd have time to work on it and was very surprised that his schedule was pretty much wide open. She writes, Reed believes so deeply in dispersed decision making that by his model, only a CEO who is not busy is really doing his job. This is fascinating to me because I see some parallels between this specific framework and how Stig runs TIP.

Stig is pretty hands off when it comes to me running the two communities that I'm involved in. While I run things by Stig, and he will definitely give his opinion, he's very fond of finishing it with all that said, I rely on your better judgment. Hastings says that if an employee comes to with an idea that you might not necessarily agree with, ask yourself four questions. Number one, is the employee stunning? Number two, do you believe they have good judgment?

Number three, can they make a positive impact? And number four, are they good enough to be on the team? If the answer is no to any of these, then you should fire them. And we'll be covering that in some more depth shortly. But if the answer is yes to all of them, then that means you can put more responsibility on them to make the right decision. And even if you don't think it's the best idea, you should give them a leash to try it out. You'll probably be shocked by how successful their ideas are if they are truly

exceptional employees. This framework is ideal for companies that require innovation to continue thriving or to even survive. If you're running a business that doesn't require much innovation, then I can see how this framework wouldn't necessarily be the best fit. However, you know, with the increasing pace of innovation just everywhere, it's becoming increasingly rare to find companies that can just stay in business without requiring any innovation. Let's have a look at the innovation cycle that Netflix have created. So you start by analyzing an idea by doing the following. You first, Farm for dissent or you socialize the idea. If you have a big idea, you test it out.

And as the informed captain, you make your bet. And lastly, if it succeeds, celebrate. And if it fails, sunshine it. So farming for dissent means you actively seek contrary opinions to your idea. This is so important for Netflix that Reid made a fundamental rule. It is disloyal to Netflix when you disagree with an idea and do not express that disagreement. By withholding your opinion, you are implicitly choosing not to help the company. This is an interesting rule because while I agree with it, it could also cloud the person's

judgment with the idea. I was just reading a quote that I had from Jim Rogers, who's one of the best international investors of all time. And this is from the book Money Masters of Bar Time. The important thing in his view is to develop a way to think independently, as he and George Soros did so profitably. He says, I have always found it much better just to sit and do your own reading. When I talk to people, it would muddy up my thinking.

I was much more successful just sitting back and reading and figuring. things out. Now, the idea here really depends on your personality. I think if you're a solo employee running, you know, a fund, then discussing your strategy with others who might have misaligned incentives is probably a mistake. However, if you're a business like Netflix with just a ton of very well-aligned employees trying to move the company forward, it makes a ton of sense. Now, socializing an idea refers to sharing with others internally just to kind of gauge the temperature of that idea. It may reveal that you have overlooked things and maybe open up new opportunities or illuminate just a dead end that you thought might have had potential.

Next up is testing ideas out. And this is vital to a good business. If you have a good idea that you can test out for, let's say, $100,000, why try rolling out the entire thing for a million dollars? You're basically just increasing the risk on that idea if it hasn't net been validated by the market. A great example of this was Starbucks's order and pay service. So they created this mobile order and pay service specifically in Portland, Oregon to test out and gauge the reception. And it was a massive success. And today I see mobile orders at pretty

much every single Starbucks that I've ever visited. The third part of this framework is about being the captain of your idea and making your bet. So this refers to the fact that Netflix does not foster a culture where a consensus is required to move forward with a decision. Sure, it's great to get the opinions of others, but ultimately, the decision maker must either proceed with the decision or move on from it. And lastly, there's kind of this post-morum of a decision. If it's a win, celebrate it. And if it's a loss, sunshine it. The sunshining part is probably most crucial, as that's where you're going to learn the most and will be able to pass on those learnings to your colleagues so they don't make the same mistakes that you did. It also builds trust and fosters innovation. When employees

know they won't be punished for thinking of innovative ideas, it encourages them to continue innovating rather than doing what is safe but may not actually move the company forward. Now we move to the final section of the book, which aims to maximize talent density, candor, and then eliminate nearly all controls. To maximize talent density, Netflix does something called the Keeper test. It's a very simple heuristic that Netflix asks their managers, which of my people, if they told me were leaving for a similar job at another company, would I fight hard to keep? The point here is to keep the ones that you would fight tooth and nail to stay around

and let everyone else go. Another concept I enjoyed from this chapter is how Netflix doesn't think of themselves as a big family. This thing can be rife with errors for specific businesses. The problem with thinking of a company like a family is that, you know, inside of a familial unit, mistakes and shortcomings are often accepted because they're just seen as being part of a family. Nobody's perfect. However, in the cutthrow world of business, especially a hyper-competitive one like Netflix, they can't accept this. Otherwise, a company would never have grown to where it is today. Instead, Hastings has used the term team instead

of family. On a team, underperformance is just unacceptable. A sports team can sign trade or release players as it sees fit to construct the best possible roster to help it win. And this is what Netflix tries to do. Athletes on a professional sports team demand excellence, train to win, and know that effort isn't enough and understand that performance, it really is everything. There's no place for just adequate performance at Netflix. However, if you do perform adequately, you will be offered a very generous severance package to facilitate your job search elsewhere. The severance package provides about four to nine months of salary, so it's very overly generous. Now, why is it so generous? Reed believes that performance improvement plans, PIPs, are costly and time-consuming. Instead of taking

months to complete these pips to save time and protect the company from lawsuits, Netflix eliminates them, pays its former employees a substantial severance package, and requires that they sign a document stating they won't sue Netflix. Now, we've spoken a lot about feedback today because it's vital to Netflix's culture, but Hastings was very aware of how feedback is often just a one-way street. Managers provide feedback, but very little is returned. In a culture of transparency, this just is not a good fit. So Reed Hastings came up with two workarounds.

So the first one was something called a 360 written report, and the second one is called a live 360 dinner. So the written report might seem standard, but it's not. The written report requires the names of people providing the feedback and removes any numerical ratings. Netflix also doesn't link these reviews to raises or promotions. These reports are open to anyone who wishes to help provide constructive feedback. Netflix utilizes the start, stop, continue method to provide feedback. So the start, stop, continue method helps make sure that the feeder, is genuine and honest.

It can be easy to simply give your coworkers a high score and avoid any constructive feedback. So this method allows feedback to be constructive for the person who's receiving it. After all, since Netflix requires only rock stars, all employees need to know what they can do to maintain that rock star designation. So while these 360 written reports were good, there was one issue. So Aaron Meyer writes, although the 360 written exercise established regular candid feedback and many chose to discuss the feedback after the reports came out, it didn't ensure that those open discussions were actually

happening. If Chris Ann gives written 360 feedback to John Paul that his whispering and client meetings is hurting his sales, but John Paul never talks to Chris Ann or anyone else about the comment, it turns into the stuff of secrets. Reed's next process was put in place in order to help address that problem. So the solution was a live 360. This would be a live discussion where Netflix workers would openly discuss feedback and level up together. So the framework for this, was to keep the length to several hours and do it outside of the workplace. So you wanted to keep the group size small. For let's say a group of eight, it might take three hours.

For a group of 12, it might take five hours. And all feedback given during these Live 360s should follow that for a feedback guideline, which I've already gone over. It should all be very actionable. You can use the start, stop, continue method, but 75% of the feedback should focus on the start and stop to make sure that time is spent efficiently. And then to just, you know, set the tone of some of these types of meetings, you might want to get the person who can provide the harshest feedback to go first. One Netflix employee when speaking

about her first live 360 said, I hated that evening at the Waldorf. But without it, eventually, I would have failed to keep her test. I don't think I'd be at Netflix. While these live 360s are probably an experience that would take some time to get used to, it's probably worth it as long as you're open to improving and accepting feedback that will make you better at your job. The final chapter really resonates with me because it's all about taking responsibility as a way to achieve freedom. The way to accomplish this is through context, not control. So let me explain that.

Aaron Mayer makes a great point that there's nothing wrong with leadership from control or from context. Some businesses that must focus on error prevention are best led through control. She gives the example of Exxon Mobile, which has the safety protocols that it must follow closely to ensure the safety of everyone who works there. In Exxon's case, control makes a lot of sense because they don't want people dying under their watch. Therefore, they have hundreds of safety protocols.

that must be followed very closely. But the problem with control is that it can stifle innovation. If you put clamps on what people can and cannot do in a creative setting, you're basically just handicapping their abilities to innovate. So culture of control is not something that would have worked well at Netflix. Reed Hasing says that leading through context requires four key elements. High talent density, a focus on innovation rather than error prevention, work that is loosely coupled, and alignment.

We've already spent so much time on the first two here. So let's look closer at this concept of work that is loosely coupled. So coupling can be either tight or loose. For tight coupling, two things are directly connected and depend heavily on each other. If you change one, you almost always have to change the other. An example might be when, you know, two gears are locked together. If one turns differently, the other one must also adjust. But for loose coupling, two things work together but have minimal dependency.

You can change one without breaking the other. An example of loose coupling is, you know, a TV and a remote. You can replace the remote without having to rewire the TV. Tight coupling is closely tied to control. A culture that requires a high degree of control will be tightly coupled. Any significant changes to the company's culture might be at odds with a tight coupling of that business. NetFix follows a loose coupling model where changes can occur throughout the system and do not require significant and disruptive changes to other parts of the company. Now let's talk about alignment because it's vital to making context work.

In Netflix, they have a North Star that they seek to achieve. How you get to this North Star is completely up to you. Now, I just love this concept of having a North Star. On a personal note, a North Star is something that helps me guide me to where I want to go. In the Rich or Wiser, Happier Master Class, we have discussed extensively what we would like written in our obituary. If you have a North Star that's aligned with what you want in your obituary, it can then help you take the steps to actually get there.

But two people can have a similar North Star and get to that North Star in, completely different ways. This is where context comes in at Netflix. So the book presents an excellent analogy for thinking about control and context through the lens of hierarchies. This is to think of context as a pyramid or as a tree. So in a pyramid, the bottom level has to ask the next level up for permission to do something creative.

In the movie industry, the bottom might be someone like a creative executive and that might go all the way up to the CEO. However, you might have multiple levels on this pyramid between those two positions. And that means that significant decisions have to go through various layers to determine whether they can ever actually be implemented. This is pretty normal in many businesses. But Netflix uses the tree analogy. So in this analogy, you can imagine just a tree growing out of the ground. The CEO is actually at the bottom of the tree.

And as a tree's branch out, decisions are made by what's called informed captains. And the informed captain does not need to look anywhere other than inside themselves to make the decision. I'll once again use myself as an example here. So Stig is very good at setting context for the host at TIP. He seeks excellent podcast episodes that empower investors and to foster genuine connections and help build TIP's brand. So I'm really able to make episodes about anything that I think is pertinent to helping our audience become better investors.

And I have free reign to really take this in whatever direction I want. I can discuss the pros and cons of discounted cash flow analysis or I can take a different approach and explore the concepts of financial independence. Alternatively, I can discuss Netflix's unique culture as I'm doing with you today. One area that is crucial when it comes to leading through context is dealing with people who make mistakes that the CEO or management believes should not have been made. In this case, it's up to the manager to take responsibility for not sending the proper context. Reed suggests asking the following questions in this case.

Are you articulate and inspiring enough in expressing your goals and strategy? Have you clearly explained all the assumptions and risks that will help your team to make good decisions? And are you sure your employees are highly aligned on vision and objectives? He points out that managers must continuously ask themselves these questions when meeting their managers to ensure everyone is aligned correctly and on the same page. If you skip this crucial step, you risk having poor context, which can negatively impact efficiency and performance. As long as you set the context, your informed captains can make the right decisions to help your business move towards its North Star. That's all I have for you today on Netflix's novel culture that was created by Reed Hastings.

Want to keep the conversation going? Follow me on Twitter at Irrational MR. KTS or connect with me on LinkedIn. Just search for Kyle Grieve. I'm always open to feedback, so feel free to share how I can make the podcast even better for you. Thanks for listening and see you next time. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

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