Introduction
Corporate governance is at the forefront for determining the organizational standards of corporate ethics directed at reducing immoral practices whilst preserving a healthy business environment. In today’s global environment, corporate governance has become more dynamic & complex and cannot be dispensed with. Market regulators and academicians have time and again emphasized upon the significance of transparency within an organization.[i] Furthermore, prospective investors and shareholders always have a keen eye in the corporate governance structure as it instils faith in the credentials of a Company. Consequently, numerous policies and regulations have been introduced to warrant true and complete disclosure of financial information.[ii]
Conscious and independent-minded directors that administer management and represent shareholders’ interests lay the foundation of a good corporate governance mechanism.[iii] However, in stereotypical corporations’ directors receive the vital information only through board meetings and specialized board committees. This builds an information gap between the Board and the Management as the Board has limited exposure to routine day-to-day decisions. The Directors fail to gain a comprehensive understanding of the firm’s affairs and the prevalent market requirements because of their limited involvement, and unlimited independence from the business.
To overcome this communication void, in May 2018, Netflix Inc. devised a profoundly unique mechanism of information sharing with the sole objective of substantially increasing transparency and openness among the Management and the Board.
CORPORATE GOVERNANCE STRUCTURE OF NETFLIX
The Netflix method incorporates two highly distinct elements of corporate governance:
- Attendance of Board members at all Executive Meetings.
At Netflix attendance of its Board members is essential in all periodically organized executive meetings namely:
- Reed’s Staff meetings: These are conducted once a month wherein the top seven executives deliberate upon the chief strategic, structural and administrative challenges before the company.
- Executive Staff meetings: These meetings are trimestral i.e. conducted once in every quarter for the top ninety executives. They discuss organizational arrangements and conduct breakout sessions to look into corporate disputes, competitive market threats, workplace issues, and company regulations.
- Quarterly Business Reviews: In QBR’s the top five hundred employees of the company come together for 2-day gatherings. In the course of the gathering, business quarterly performance is assessed, business presentations are conducted, and crowd-sourced topics are deliberated upon.[iv]
The Board is divided such that a proportionate number of board members attend the Reed Staff meetings, a few attend Executive Staff meetings, and the rest attend the QBR’s. However, the prime objective of the attendance in these meetings is educational. Therefore, the directors are expected to witness and not contribute to the meetings.
Direct and intimate observation of the managerial practices ensures that Directors have a deeper understanding of firstly, the array of challenges faced by the corporation, secondly, the analytical approach that strengthens all management choices, and thirdly, the extent of the tradeoffs involved. Eventually, this translates into a noteworthy reliance on the management and its choices. The Directors believe that honest involvement in strategic negotiations would give them a significantly deeper understanding of the firm than mere orchestrated visits to the company. Beyond this, board attendance tends to build a robust relationship and mutual trust between the Board and the Managers.
- Structure of Board Communications
The second facet is a comprehensive and exhaustive Board Memo with supplementary analysis as well as open access to all the company files. The written section in the Memo emphasizes on the corporations’ performance, market trends, and competitive advances, among other executive issues. All the complex data concerning the company is recapitulated through charts, tables, and graphs. The memo consists of supplementary links within each unit of the memorandum to link the reader to the additional analysis, statistics, and particulars that sustain and elaborate upon the written discussion.
Board members obtain the memo a few days before they proceed for meetings and assess and analyze the subject matter or challenges they deem as vital from a fiduciary perspective. Directors are expected to employ 6-8 earnest hours in preparation. They are entrusted with the power to enquire or demand clarifications within the digital Memo, to which the management is expected to revert before the meeting. Since the Directors are well primed, board meetings are considerably more effective, with special emphasis on issues and discussions instead of a presentation of mere facts and figures. The Directors are also extremely constructive about the information they obtain through the Memo and accompanying analysis, including the bearing it has on board discussions.
Netflix strongly believes that only a well informed and well aware Board can take strategic decisions on behalf of the company. These measures upturn the capability of the Board to afford an extreme duty of care towards the company. An experienced and sincere executive crew knows vividly more about what’s going on in the company than a Board, and thus, the Board’s participation should be at every strategic level.
CONCLUSION
The question still remains if this approach is suitable for all companies. We believe that this approach might be apt in small or medium-sized corporations but would not be feasible in larger corporations. Also, this approach sounds very utopian or impractical to exercise amidst the hustle of innumerable organizational responsibilities. Directors who are permitted to have this level of access to regular discussions and official records must exercise self- restraint in respect of manipulating decisions outside the boardroom. Furthermore, access to complete organizational information would also open avenues for the exploitation of this authority. Hence, though the uniqueness of this model was appreciated by the masses it comes with its own set of drawbacks.
Nevertheless, for Netflix, this method of ensuring Good Corporate Governance is embedded in its policies and reflective of its healthy work culture and effective leadership. The Netflix culture is based on individual resourcefulness, absolute transparency of information, and focuses on Result Based Management (RBM). Thus, their culture deck and board operation strategy are interwoven. The approach consolidates various key aspects of a successful organization viz. candor and sincerity, freedom and responsibility, transparency and accountability.[v] After its implementation in 2018, this innovative structure has been one of the major reasons for investor/shareholder confidence in Netflix. Netflix shares saw a remarkable 39% increase by the end of 2018. Subsequently, their share prices have only increased in every trading session of 2019, thereby making it the ‘best performing stock of the decade’ delivering more than a 4000% return. This is the impact of an efficaciously created corporate governance structure
[i] Benjamin Fung, The Demand and Need for Transparency and Disclosure in Corporate Governance, Vol. 2 Universal Journal of Management P. 73 (2014).
[ii] Bushman, R. and Smith, A. Transparency, Financial Accounting Information, and Corporate Governance, Vol. 9 FRBNY Economic Policy Review, P. 65 – 87 (2003).
[iii] David Larcker, Brian Tayan, Brian and Christina Zhu, A Meeting of the Minds: How Do Companies Distribute Knowledge and Workload Across Board Committees? Rock Center for Corporate Governance at Stanford University Closer Look Series No. CGRP-46 (2014).
[iv] David F. Larcker and Brian Tayan, Netflix Approach to Governance: Genuine Transparency with the Board, Rock Center for Corporate Governance at Stanford University Closer Look Series: No. CGRP-71, P. 2 (2018).
[v] Mark Fenwick, Joseph A. McCahery and Erik P. M. Vermeulen, The End of ‘Corporate’ Governance: Hello ‘Platform’ Governance, Vol 20 European Business Organization Law Review, P. 171-199 (2019).
This article is written by Sanjana Karnavat & Ishita Soni of Symbiosis Law School, Pune.
Disclaimer: This article is an original submission of the Author. Lex Insight does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns. You may also refer to our Copyright regulations
