Corporate Governance

Another Netflix Disruption: A Transparent Board

How the company that overhauled the entertainment industry created a new model of corporate governance.

May 02, 2018

| by Bill Snyder

Reed Hastings, co-founder and CEO of Netflix. | Reuters/Mike Blake

Netflix CEO Reed Hastings says board members won’t have the confidence to make tough calls unless they fully understand the company. | Reuters/Mike Blake

Netflix is known to tens of millions of consumers as the company that supplies them with a huge library of binge-worthy streaming videos and mail-order DVDs. But there’s a side to Netflix that consumers never see: The $133 billion company has developed a unique corporate governance structure that brings its board of directors much closer to management and arms them with a rich and accessible trove of operational information.

“At Netflix, there is sort of an open book — the managers basically share everything [with the board] that they see and use,” says David Larcker, a professor of accounting at Stanford Graduate School of Business.

As the elected representatives of shareholders, corporate directors are supposed to monitor management’s performance and conduct, weigh in on strategic decisions, and ensure a CEO succession plan is in place. All too often, though, directors lack the critical information and intimate knowledge of the company’s operations needed to make well-informed decisions, which Larcker calls “the information gap.”

Over the last five years, Netflix has done much to narrow that gap, Larcker and Brian Tayan, a researcher at the business school, conclude after a series of interviews with Netflix CEO Reed Hastings, his top executives, and most of the board of directors. Their findings are summarized in a paper published by the Stanford Closer Look Series: “Netflix Approach to Governance: Genuine Transparency with the Board.”

According to the researchers, directors at most companies generally meet only four to eight times a year in board and committee meetings, and the information they receive generally consists of dense PowerPoint presentations amid a thicket of hard-to-digest tables and graphs. What’s more, some CEOs maintain strict control over the content presented to the board, and often there’s little time at board meetings for directors to ask more than a question or two.

At Netflix, though, board members attend monthly and quarterly senior management meetings as observers. Communications to the board take the shape of approximately 30-page memos that are heavy on analysis and contain links to all relevant data on the company’s internal computer systems.

Being armed with the memo before the board meeting makes for “an intelligent and informed conversation,” according to one director.

Giving the board as much data as possible is essential, Hastings says. “The [board members aren’t] going to have the confidence to make hard decisions unless they really understand the market and the company.”

In one sense, having so much usable information makes the Netflix directors work harder. Typically, they spend twice as long preparing for board meetings as do directors at other companies. But because they’re so well informed, board meetings tend to be much shorter, says Tayan.

At Netflix, there is sort of an open book — the managers basically share everything [with the board] that they see and use.
David Larcker

The directors interviewed by Larcker and Tayan said they embrace the openness. Said one about attending management meetings: “It just gives you a far better understanding of the company. You get to know all of the operating players. You get a feel for the move, the cadence, how people think, how people contribute, how people interact with each other. And of course, you get an understanding of the issues of the day.”

The researchers interviewed seven of the company’s nine outside directors. To encourage openness, the directors were assured that their names would not be published. Tayan says that feedback about the governance structure was positive across all of the interviews.

Netflix has been enormously successful over the last five years. Revenues have nearly tripled, increasing to $11.69 billion from $4.4 billion at the end of 2013, while the market cap soared to $133 billion from $4.4 billion.

How much of that success can be attributed to the governance policy is difficult to discern, says Larcker. “The process has been in place for a few years, and the board and management really seem to like it. I suspect that the Netflix culture is the key driver of value, and the open board process supports the value creation process,” he says.

During the interviews with the company, the researchers pushed management to spell out the benefits of the open relationship with the board, says Tayan. While they couldn’t quantify the benefits, they did say that as a result of the open policies, the company is able to make decisions — and reverse mistakes — much faster.

For example, without the closer collaboration between the board and management, “we would have been much slower to invest so much money in content. There would have been more second-guessing if there wasn’t this completely open perspective,” said one director.

Are there downsides? “I suppose there is the possibility of leaking proprietary information that is discussed at management meetings, however this has never happened at Netflix,” Larcker says.

It’s hard to know how easily the policies that are working at Netflix could be replicated at other companies. For one thing, Netflix has an infrastructure that allows corporate data to be shared easily with the board and employees, says Tayan. Many companies do not have company-wide systems that enable data sharing.

“I think it would be hard to put this type of system in place at older and more mature organizations. Innovative organizations that want and need the insights from board members can clearly adapt this type of approach,” says Larker. “You need a CEO who wants a high level of discussion about strategy, etc., and is open to alternative points of view.”

Startups and smaller companies are likely the ideal candidates for a Netflix-style governance makeover. “In the end, the people and the culture have to want this type of information sharing, and this new information takes the governance discussion to a whole new level,” Larcker says.

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