Directors given access to see Netflix as it operates ‘in the wild’

‘You see how the topics that have been discussed, resolved and reported on in a board meeting actually got processed.’

The board of directors of a public company has a long list of oversight responsibilities, but directors don’t always receive the information they need to make fully informed decisions on matters such as strategy, succession and performance monitoring. We recently studied a novel approach to information sharing at Netflix that provides a model for overcoming this governance shortfall.

At most companies, directors have a less complete understanding of the company than executives because of their limited exposure to day-to-day activities. The format of the information that board members receive does little to overcome this information deficit. The typical board book of a large corporation is a dense PowerPoint presentation spanning hundreds of pages in length. Some directors find these presentations heavy on data but light on analysis.

Furthermore, boardroom dynamics impede information flow, particularly in settings where the CEO maintains strict control over the content presented, when presentations are carefully scripted and when presentations are made by only a limited number of executives.

Netflix takes a different approach that incorporates two unique practices. First, board members periodically attend monthly and quarterly senior management meetings to observe them. Communication with the board takes the form of a short online memo that allows directors to make comments within the document. These two innovations have contributed to Netflix’s extraordinary performance in recent years.

Netflix encourages its board members to spend time watching the company operate “in the wild”. The company holds three regular executive meetings to which board members attend:

● Staff meetings: monthly meetings of the top seven leaders.

● Executive staff meetings: quarterly meetings of the top 90 executives.

● Quarterly business reviews: two-day gatherings of the top 500 employees.

One board member attends staff meetings, one or two attend executive staff meetings and between two and four attend quarterly business reviews. Directors who attend these meetings are expected to observe but not participate in the discussions. The purpose of their attendance is primarily educational: by directly observing management, directors gain a greater understanding of the issues facing the company, the analytical approach that underpins managerial decisions and the full scope of the trade-offs involved. The aspiration is that this will improve the board’s management skills. Netflix founder and CEO Reed Hastings says providing deep access to management discussion “is an efficient way for the board to understand the company better”, while also warning directors must exercise self-restraint when influencing decisions outside the boardroom.

One director describes the benefit of attending management meetings: “You see a different level of dynamic of the executive team. You see how different individuals contribute, you see their expertise, you see the voice that they have around the table and you ... see the dynamic with the CEO. You see how the topics that have been discussed, resolved and reported on in a board meeting actually got processed.”

Netflix directors believe direct exposure to active strategic discussions gives them deeper knowledge of the company than visits to company offices or facilities. Directors also believe frequent interaction with the senior executive team better positions the board to handle the CEO’s eventual succession.

Netflix’s innovative board communications are structured as about 30-page online memos in narrative form. The memos not only include links to supporting analysis but also allow access to all data and information on the company’s internal shared systems.

The quarterly memos highlight business performance, industry trends, competitive developments and other strategic issues. High-level data is summarised in charts and graphs, but the memo’s emphasis is the written discussion and analysis of issues.

Board members receive the memo a few days before meetings, when they review the material and click through analysis on issues they believe are interesting or require attention from a fiduciary standpoint. Directors spend four to six hours in preparation, including posing questions within the digital memo, to which senior management responds before a meeting.

Because directors extensively prepare for board meetings, the meetings are significantly more efficient, with a focus on discussion rather than presentation. Also, the meetings are only three to four hours long (compared with all-day or multiple days at many large corporations). And senior executives attend meetings and answer questions when needed.

The Netflix approach to board governance is rooted in and reflective of the company’s culture and leadership. The Netflix culture emphasises individual initiative, the sharing of information and a focus on results. In the words of one director, “A lot of CEOs like the notion of transparency. The difference is that Reed has decided to put mechanisms in place ... that make it happen.”

Netflix directors believe these processes give them confidence in management, particularly when facing challenges. Examples include Netflix’s competition with Blockbuster for dominance in the DVD-subscription market, costly decisions to invest in content for its website, international expansion and production of original content. One director says: “It’s hard to imagine we could have done it without the intimate knowledge of the operations and the people.”

Copyright 2018 Harvard Business Review. Distributed by the New York Times Syndicate.