Reed Hastings 'No Rules, Rule' Leadership That Created The Culturally Most Admired Company

​This is the sixth post of the Leadership Series, where we talk about how Reed Hastings went from being poor at the people part of the leadership to an honest-seeking executive and creating one of the Fortune World's Most Admired Top 50 companies.

A blanket policy of "Honesty Always" can crush relationships.

"No Brilliant Jerks" policy can make hiring very difficult in an already candidate-driven market.

"Act in Netflix's best interest" as the only policy for expenses can lead to money spent getting out of control pretty quickly.

But these are precisely the things that Reed Hastings has put down as the centre of how to work and lead at Netflix.  

Wilmot Reed Hastings Jr., who is more popularly known as Reed Hastings, is the person who changed how the world watches movies by co-founding Netflix in 1995. In 2011, he introduced the online streaming service & today, Netflix has a market cap of $73 billion.

The company's success can be attributed to the idea, tech innovation, and the culture of honesty, trust, and responsibility that is practiced at Netflix.

Reed wasn't always like that.

As the founder of his previous company, Pure Software, he would create strict rules whenever there was an issue. Policies and control became a norm which stifled innovation as everyone was told to stick to coloring within the lines. Because people were led with authority rather than context, employees followed processes, not thinking freshly or shifting fast. So when the market moved from C++ to Java, Pure Software failed to innovate and ended up being bought by one of the competitors.

In his book, No Rules, Rule, Reed writes, "With my next company, Netflix, I hoped to promote flexibility, employee freedom, and innovation, instead of error prevention and rule adherence."

That prompted him to create the notoriously famous "Freedom & Responsibility" deck that outlines Netflix's culture and is publicly available and was described by Sheryl Sandberg as "the most important document ever to come out of Silicon Valley."

In this article, we look at the 3 most important lessons that leaders of any company can use to run their teams and organizations in better ways.
3 Leadership Lessons From Reed Hastings

Lesson 1: Give Context Instead of Taking Control

Leaders make not all decisions at Netflix, and not every expense is monitored. It asks leaders to set the context so that everyone feels empowered and informed to make the judgment call themselves.

To set the proper context, Reed holds ongoing one-on-one meetings with executives, directors, and heads of the department regularly. He has one 30-min session with each director at least once a year which amounts to 250 hours of meeting people 2-3 levels below Reed in the org chart.

Then it's the job of those leaders to trickle down the context.

Another radical approach Reed follows is sharing information via Quarterly Business Review (QBR) meetings — two days offsite for people at director and above levels.

"The number one goal for these meetings is to make sure that all the leaders across the company are highly aligned on what I call our North Star: the general direction we are running in," Hastings wrote in his book No Rules, Rule.

When someone does something dumb despite setting the context, Reed recommends asking yourself a bunch of questions instead of lashing out at the other person.

Ask yourself what context you failed to set. Did you articulate well about your goals and vision? Have you explained all the assumptions and risks that will help your team make good decisions? Are you providing enough freedom to fail so that decisions are not too conservative?

When you set the context and ask people to exercise the freedom they have after understanding the context, a small percentage of people will take advantage of it. For example, someone might overspend on business expenses because no one is controlling their billing, or someone might sign a deal that benefits them personally.

To deal with such situations, Reed suggests that you don't overreact and create more rules. Just deal with the individual case and move forward.

Takeaway:

Before setting out to change the workings of your team to 'leading with context' instead of control, you should ask this one question — Is everyone on the team talented enough to take decisions on their own with the clear judgment that aligns with the company's vision?

If your team is struggling with producing high-quality work and or makes poor judgments, you will fall back on the autocratic leadership style. Instead, if you have people who are highly qualified, you can trust their decision, and when something fails, you can learn from it rather than agonizing over how it could have been easily avoided.

Lesson 2: Build a Dream Team

After struggling with a mediocre team at Pure Software and in the initial days of Netflix before the dot-com bubble burst, Reed created a vision of a great workplace where everyone is extraordinary at what they do and are highly effective collaborators.

According to him, your number one goal as a leader is to develop a work environment consisting exclusively of stunning colleagues who would passionately pursue ambitious common goals.

Who are stunning colleagues? — highly talented people of diverse backgrounds and perspectives, who are exceptionally creative, accomplish significant amounts of meaningful work and collaborate effectively.

Netflix encourages managers to consider every member of their team regularly and ensure that they've got the best person in every spot. How do they judge that?

Reed has built what's called a "Keeper's test". Every manager should ask themselves —

If a person on your team were to quit tomorrow, would you try to change their mind? Or would you accept their resignation, perhaps with a bit of relief? If the latter, you should give them a severance package now and look for a star, someone you would fight to keep.

None of the other principles (working independently, honesty, innovation) you put in place will work if you don't have talented people to work in your company.

Takeaway:

"Good enough" should not be an acceptable criterion for you to hire someone. On the other hand, hiring brilliant but awfully-behaved people is also not acceptable, as Netflix's culture documents note that there is no place for brilliant jerks in the company.

Make sure your hiring process clearly sets the context of why to hire brilliant people, and there is no pressure on hiring managers to accept "adequate performers". To keep the already hired competent team, coach yourself or your managers to create values of commitment, cohesion, and camaraderie on the team, while continually making sure that the best person holds each role.

Lesson 3: Empower People to Own Mistakes

At Netflix, employees are encouraged to pursue radically innovative ideas. If an idea fails, they are encouraged to openly share learning from that with everyone else rather than hiding those in embarrassment.

This is called 'Sunshining' — Bringing data, facts, and learning into the light so everyone can be helped.

You can do it in three steps:

• Ask what learning came from the project.
• Don't make a big deal about it.
• Talk about the failure — what happened, what was your thought process, and how you take responsibility for it.

Example of how to 'sunshine' your mistake in a written memo.

Reed beautifully explained the reasoning behind encouraging everyone to show their failures in his book —

"When you sunshine your failed bets, everyone wins. You win because people learn they can trust you to tell the truth and to take responsibility for your actions. The team wins because it learns from the lessons that came out of the project. And the company wins because everyone sees clearly that failed bets are an inherent part of an innovative success wheel."

Takeaway:

Teach your employees that they are not here to "please the boss" but to do what's best for the company, even if it means pursuing a risky, innovative idea. And when that risky idea fails, not gloat over it but learn from it and move on.

Coach yourself and your managers not to override any ideas or decisions even if you feel skeptical about them and your experience says it won't work.

Reed Hastings Leadership Style: Laissez-faire

Reed Hastings takes a laissez-faire approach to leadership at Netflix, contrary to the autocratic style he practiced at Pure Software, the company he ran before Netflix.

You can read more about this style of leadership in our post — Sara Blakely's Human-Centered Leadership That Balances Masculine and Feminine Traits. Blakely also used a hands-off approach to growing her company to become worth $1.2 billion.

What is Laissez-faire leadership?

It is a type of leadership where leaders allow team members to direct their own decision-making & trust them with their judgment. They can still be available for review, feedback, or suggestions. It gives employees the freedom to innovate, make fast decisions and improve their own judgment, which helps in personal & professional development.

What are the pros and cons of the Laissez-faire style of leadership?

Pros of Laissez-faire leadership style:

• Increased retention of employees: When highly motivated employees are given the power to influence decisions, make contributions and create an impact, it brings greater job satisfaction, and hence people tend to stay at that workplace longer.
• Encourages innovation: When the team is given the responsibility to figure out the solutions instead of having one loud voice directing the work, it can bring forward innovative ideas to solve complex problems. Employees no longer fear speaking their minds in brainstorming sessions.
• Improved alignment between teams: In the Laissez-faire style, leaders set the full context for every team on the current status, future goals, vision and culture. This brings everyone on the same page, and there is less conflict on why something should or should not be done.

Cons of Laissez-faire leadership style:

• It's not for everyone: The laissez-faire style is not for a company where the proper context is yet to be set, or the team is not all experts but beginners in their profession. It is not necessarily suitable for a project that is time-sensitive and has high stakes.
• Need self-driven employees: If the team consists of people who are working just for the sake of it and don't have any incentives to act in the best interest of the company whenever required, this approach would be a disaster. Blue-collar jobs would be one example where laissez-faire would not work.
• It can be abused by both the leader & the employees: If leaders are not conscious of their own responsibilities, they might get in the habit of not checking in on crucial projects or setting enough context since they might feel that they've already delegated duties to employees. Employees can take advantage of this style to inflate the amount of work they are doing, bills they are submitting, or favors they might be handing out to friends in other companies since there is little oversight.

When should one practice Laissez-faire leadership?

• Laissez-faire leadership is helpful when the leaders can give clear and full context to their team so that they don't have to review each decision.
• When leaders can give their employees the required resources, and create a team of A-players, then Laissez-Faire can be a successful approach.
• If a leader is good with delegating tasks — articulating what needs to be done, playing to the employees' strengths, allowing for failure and being patient — then a laissez-faire leadership style can be effective in scaling the team and focusing on strategic tasks rather than daily operations.

Stick Them in Your Journal

Here's a quick summary of notes from Reed Hastings' leadership style that you can copy into your personal notes for reference whenever you need to get inspired to become a better leader or discover your leadership style:

• Give context instead of exercising control.
• Don't accept 'good enough' candidates. Build a dream team.
• Allow failures and encourage people to share them openly.

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