Over the past decade, Netflix (NFLX 1.74%) has been a clear winner for investors. The streaming giant's stock price has skyrocketed more than 20-fold as it pioneered a new entertainment category.
While Netflix's prescient founders deserve credit for seeing an opportunity and being the first movers in the industry, I believe the continued success of the company traces back to one thing: culture. Just like a sports team, a business that wants to thrive must foster a winning culture that attracts top-tier talent and creates a high-performance environment.
Culture can't be quantified, but it is of the utmost importance because it sets the tone for an organization. At Netflix, this means a few things -- independent decision-making, transparency, being candid, keeping only the top performers, and avoiding rules. After reading this article, you may just want to apply for a job at Netflix.
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People over process
The core philosophy for Netflix is to put people over process. This has numerous implications, but it primarily means that Netflix allows its employees to make decisions in the best interest of the company, without always seeking approval from superiors. This is how most start-ups operate, with employees wearing many different hats. Once companies become larger, though, policies, processes, and structure all get in the way of the innovation and speed that led to success in the first place.
Netflix demonstrates this with its approach toward employee retention, which eschews traditional bell curves, quotas, and formal reviews found at other companies. At any time of the year, managers can deploy something called a "keeper test." It is a hypothetical situation in which managers ask themselves whether they would fight to keep an employee if that employee were thinking about leaving for another company. If the manager would not work to keep the employee, that employee fails the keeper test, and is given four months of severance pay and asked to leave.
This is required to keep high performers in the organization and mediocre performers out. Netflix's version of a great workplace does not mean sushi lunches or nice offices that you may associate with other tech companies. Instead, it is one that strives to create a "dream team" of top performers by emphasizing flexibility, speed, and continuous improvement of its workforce.
For example, a Netflix engineer who lost three of his direct reports to layoffs in 2001 was actually happier working longer hours as a one-man team. "I've learned that I'd rather work by myself than with subpar performers," he said. Surrounding existing employees with other all stars is better than any other perk because it minimizes the need to correct mistakes, which saves valuable time.
Show me the money
In his new book, No Rules Rules: Netflix and the Culture of Reinvention, co-CEO Reed Hastings compares working for Netflix to being part of a sports team. He has no issue paying top dollar in order to attract the best talent in the industry. Furthermore, employees are encouraged to interview at other companies in order to assess their own market value.
All employees can choose how they want their annual compensation: all cash, all stock options, or any combination of the two. And in case you were wondering, there is no vesting period. This system makes sense now, as the company is still growing considerably, but might not make sense once Netflix reaches a mature stage. The business may lean toward more traditional pay structures in the future, where only senior leadership is awarded stock as compensation.
Job seekers that want stability and safety in a position need not apply to Netflix. It is very difficult for other companies to mimic this because they are not growing like Netflix has and continues to. A rising stock price and fast expansion attract top talent, and this top talent wants to push their own limits every day in order to reach their potential, something most people in the corporate world don't want. This allows Netflix to benefit from a virtuous cycle, one that hasn't slowed down yet. As touched on above, it will be fascinating to see how the culture evolves when the business' growth inevitably slows in the future.
Stakeholder value
It is obvious that the media company puts its employees first, but this does not mean that the company doesn't care about profits or returns. Happy employees mean that content producers are taken care of as well. Just look back to the first quarter of this year, when Netflix committed $150 million to support production crews that were out of work across the TV and film industry. Happy employees also lead to satisfied consumers, as Netflix's 26 million subscriber additions in the first half of this year show.
Much of corporate America would benefit significantly if it spent more time fostering a positive ecosystem that takes care of all stakeholders that are involved with a company. At the end of the day, this creates sustainable and beneficial relationships that ultimately reward shareholders.
Although there are many companies with less well-defined cultures that are successful, for a disruptor and innovator like Netflix, a high-performance culture matters. It benefits the company's results, which in turn leads to more people wanting to join the organization. In a world where market participants are obsessed with numbers, it pays for investors to focus on culture as a legitimate source of value creation.
