The board of directors of a public company has a long list of oversight responsibilities, but it is not always the case that directors receive the information they need to make fully informed decisions on key 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 they 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 radically different approach. It incorporates two unique practices. First, board members periodically attend (in an observing capacity only) monthly and quarterly senior management meetings. What’s more, communication with the board comes in the form of a short, online memo that allows directors to ask questions and comment within the document. Executives can amend the text and answer questions in what is essentially a living document. We believe these two innovations meaningfully contributed to Netflix’s extraordinary performance in recent years.
Governance by Walking About
Unlike the stiff, formalized approach to most director-executive interactions, Netflix encourages its board members to spend time watching the company operate “in the wild.” The company holds three regularly scheduled executive meetings to which board members attend
- Staff meetings (R-Staff) are monthly meetings of the top seven leaders.
- Executive Staff meetings (E-Staff) are quarterly meetings of the top 90 executives.
- Quarterly Business Reviews (QBR) are two-day gatherings of the top 500 employees.
One board member attends R-Staff meetings, one or two attend E-Staff meetings, and between two and four attend Quarterly Business Reviews. Directors who attend these meetings are expected to observe but not influence or participate in the discussion. The purpose of their attendance is primarily educational: By directly observing management, directors gain a greater understanding of the range of issues facing the company, the analytical approach that underpins managerial decisions, and the full scope of the tradeoffs involved. Ultimately, the aspiration is that this will translate to significantly more confidence in management and its choices. While warning that directors must be disciplined and exercise self-restraint about influencing decisions outside the boardroom, Netflix Founder and CEO Reed Hastings told us that providing deep access to management discussion “is an efficient way for the board to understand the company better.”
One director describes the benefit of attending management meetings: “You see a different level of dynamic of the executive team. You really 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 that direct exposure to active strategic discussions gives them substantially deeper knowledge of the company than orchestrated visits to company offices or facilities. They also believe that frequent interaction with the senior executive team positions the board well for an eventual CEO succession. One small hazard: Hastings cautions that directors granted this level of access to management discussion and documentation need to exercise self-restraint about influencing decisions outside the boardroom.
A New Way to Write Board Memos
The next innovation is that Netflix’s board communications are structured as approximately 30-page online memos in narrative form that not only include links to supporting analysis but also allow open access to all data and information on the company’s internal shared systems. This includes the ability for directors to ask clarifying questions of the subject authors. This quarterly memo is written by and shared with the top 90 executives as well as the board.
The memo itself consists written text that highlights business performance, industry trends, competitive developments, and other strategic and organizational issues. High-level data is summarized in charts and graphs, but the memo’s emphasis is primarily the written discussion and analysis of issues. Embedded links within each section of the memo connect the reader to supplemental analysis, data, and details that support and expand the written discussion.
Board members receive the memo a few days prior to board meetings and are self-directed in reviewing the material and clicking through to review supplemental analysis on topics or issues they believe are most important, interesting, or require the most attention from a fiduciary standpoint. Directors estimate they spend four to six hours in preparation. They have the ability to pose questions or ask for clarification directly within the digital memo, to which senior management responds prior to the meeting. Directors take active advantage of this capability.
Because directors are extensively prepared, board meetings themselves are significantly more efficient, with a focus on questions and discussion rather than presentation. Meetings are only three to four hours in length (compared to all day or multiple days at many large corporations). Senior executives attend board meetings and answer questions if needed.
The Netflix approach to board governance is rooted in and reflective of the company’s culture and leadership. The Netflix culture emphasizes individual initiative, the sharing of information, and a focus on results rather than processes. 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 actually make it happen.”
Netflix directors believe that these processes give them confidence in management, particularly when facing challenges. Examples include its fierce competition with Blockbuster for dominance in the DVD-subscription market, costly decisions to invest in content for its website, international expansion, and the significant cost and risk of producing original content. According to one director, “It’s hard to imagine we could have done it without the intimate knowledge of the operations and the people.”
Directors of major companies take their oversight job seriously—but too often they are handicapped by a lack of transparency and usable information. Netflix provides a model for companies looking to overcome this challenge.
from HBR.org https://ift.tt/2I5Mvd4
