--:-- [Theme music fades out]
--:-- Ryan Knudsen: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen.
--:-- Jessica Toonkel: I'm Jessica Toonkel.
--:-- Ryan Knudsen: It's Monday, January 6th. Today, we're talking about the cultural reckoning at Netflix.
--:-- Ryan Knudsen: Ever since it was founded in the late 1990s, Netflix has tried to build a special work culture. Think about it as sort of a corporate anti-bureaucracy utopia.
--:-- Jessica Toonkel: That's right. So there's a lot of transparency. That's our colleague Jessica Tunkel. She says that Netflix trusted employees with a lot of leeway.
--:-- Ryan Knudsen: Everyone could access strategy plans and could weigh in on things. You know, the expense policy was like act in Netflix's best interest. So if that meant flying business class, go do it. If it means taking your team to a five-star restaurant, go do it.
--:-- Jessica Toonkel: Like it was, there was no red tape on anything. Netflix also gave out really generous benefits when it came to things like vacation. And in 2015, the company added a perk that was especially unusual, even among tech companies, a whole year of paid parental leave.
--:-- Ryan Knudsen: So the idea behind this was, look, we're looking at tech companies all the time. We're trying to recruit from them. Google was one that they talk about a lot. Google's policy at the time, I believe, was 18 weeks paid leave, which was pretty significant. And they said, let's do better than that. Let's say people can take up to a year unlimited. And so they did.
--:-- Jessica Toonkel: But as the company has grown, it turns out that what you put on paper isn't always what happens in practice. And Netflix has been pulling back on some of its generous benefits.
--:-- Ryan Knudsen: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Monday, January 6th.
--:-- Ryan Knudsen: Coming up on the show, the cultural reckoning at Netflix. stands for something better. With AI built into one platform, customers aren't mired in endless loops of automated indifference. They get what they need, when they need it. Bad CRM was then. This is ServiceNow. Optimism isn't sunshine and rainbows. It's fixing things, changing the way we fix things. It's running the world on smarter energy. Because if optimism never stops, then change can't either. GE Vernova. The energy of change.
--:-- Ryan Knudsen: When Netflix came out with its year-long paid parental leave policy in 2015, it got a lot of attention. It definitely made a splash. I mean, every publication, including the Wall Street Journal, wrote about it because it was so unheard of.
--:-- Jessica Toonkel: And they, you know, they got on and continue to get on all these, like, best places to work lists. And a lot of these publications mention their very generous parental leave policy.
--:-- Ryan Knudsen: Did they think that people would actually come to the company because of this policy?
--:-- Jessica Toonkel: Yeah, I mean, I think the thinking behind it, and I think this did work, was that Netflix also was having more women, particularly entering the senior ranks of the company. And they wanted to continue to be able to recruit and retain women.
--:-- Ryan Knudsen: Also, at the time when they came out with this policy, Netflix was becoming a global company. And people in other countries look at the parental leave policies in the U.S. and think that we're crazy, how short it is.
--:-- Jessica Toonkel: So the idea was we want to make this great for our employees and we want to help recruit and retain the best talent all over the world.
--:-- Ryan Knudsen: A year of paid parental leave was surprising to many people in America. But at Netflix, the company already had a culture of trusting employees to set their own boundaries, an idea that was enshrined in a memo that outlined the company's culture.
--:-- Jessica Toonkel: So the section that I talk about a lot is the freedom and responsibility section, because the freedom and responsibility was really probably the most unique thing in the memo.
--:-- Ryan Knudsen: That was this idea of, you know, expensive policies being act in Netflix's best interest. You know, their vacation policy was take vacation. Like it was this idea of like we will give you all the freedom and you should have the responsibility to act accordingly
--:-- Jessica Toonkel: Over the years executives at Netflix credited this culture of freedom and responsibility for being able to recruit the best talent. And as the company grew from hundreds of employees to thousands, it set them apart.
--:-- Ryan Knudsen: I mean, tech companies tend to be more secretive in their culture. It's very unheard of that you would see a tech company like a Google or Apple share strategic ideas with all of their employees. That would never happen, right?
--:-- Jessica Toonkel: They were much more like, keep things to themselves, do your work. Netflix wasn't like that. Employees could access strategic plans and some could even see each other's salaries.
--:-- Ryan Knudsen: They very much encouraged candid feedback. So if you don't think someone's doing a good job, you are expected to tell them that.
--:-- Jessica Toonkel: When people were fired, they would send emails out explaining why that person was let go and what they did wrong.
--:-- Ryan Knudsen: But a few years ago, business problems started cropping up. Netflix saw its first decline in subscribers in a decade.
--:-- Jessica Toonkel: In the first half of 2022, Netflix lost more than a million subscribers, and its stock dropped more than 50% that year.
--:-- Ryan Knudsen: So with its subscriber growth and stock price tanking, the company had to do something it had never done before. It had to become cost-conscious.
--:-- Jessica Toonkel: First, the company made some external changes, like cracking down on password sharing and launching a lower-cost version of Netflix that has ads.
--:-- Ryan Knudsen: And it also started changing how things work inside the company for its employees.
--:-- Jessica Toonkel: Prior to this, you know, I would talk to people who were going on off-sites to Iceland. Like, they just would spend the max on things. And no one, it didn't seem like anyone was keeping track of how much was being spent on some of these things.
--:-- Ryan Knudsen: But I think that they've reined it in. You know, I've spoken to sources who say that managers are keeping a tighter lid on expenses.
--:-- Jessica Toonkel: The company has also been pulling back on salaries. And so all of a sudden you started seeing pay tiers. They introduced pay tiers.
--:-- Ryan Knudsen: They used to tell managers, you know, just pay top dollar, pay whatever you need to get the people you want.
--:-- Jessica Toonkel: The idea was if you were an employee and you went to your manager and could show them how much more peers at other companies were making, you should be able to get a raise. Like that shouldn't even be an issue.
--:-- Ryan Knudsen: And so that has started to shift. We were the first to report that they've now told people to keep salaries within a certain range that's more along with industry peers.
--:-- Jessica Toonkel: But the most controversial change that employees have noticed at Netflix is what's happening to the company's unusual parental leave policy. That's next.
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--:-- Ryan Knudsen: A whole year of paid parental leave was basically unheard of in the U.S. before Netflix, and it was popular among employees from the get So in the beginning literally within 24 hours of the policy being announced a number of people asked for a year off for parental leave
--:-- Jessica Toonkel: And HR and managers were really surprised because they were not anticipating that. And then people also asked to go back on leave. People who had taken a few months off and had returned were like, oh, well, if it's up to a year now, can I go back on leave?
--:-- Ryan Knudsen: I mean, I have to pause for a moment where there's this whole concept of like unlimited print to leave. Why would any company not expect its employees to take as much as they're allotted, take more?
--:-- Jessica Toonkel: I mean, like. Ryan, this is a really good question. And, you know, I think what they would say is, and what they did say when this came up was, we never meant for a year to be the starting point.
--:-- Ryan Knudsen: We meant it to be a conversation between managers and employees about what the right amount of time would be.
--:-- Jessica Toonkel: And the head of HR at the time did tell people, I don't think people are going to actually take a year parental leave. Because Netflix is the kind of place where people throw themselves into the work and are so type A and high achievers that they thought no one would actually take a full year off.
--:-- Ryan Knudsen: It turned out that so many people were taking the full parental leave that company leaders started to reassess it.
--:-- Jessica Toonkel: And so by 2018, they sent a memo out, First, just to executives, managers, saying, hey, we're looking at clarifying this policy. You know, not saying that it's unlimited for the first year, but saying, you know, talk to your managers and figure out what's best.
--:-- Ryan Knudsen: Netflix did not come out and officially say it was making a change to its policy. But it has revised its guidance on parental leave several times.
--:-- Jessica Toonkel: Jessica says employees started to notice the difference. I've reviewed all these employee communications about it. And, you know, one manager said, it feels like we're taking a benefit away without saying that's what we're doing.
--:-- Ryan Knudsen: And that doesn't feel that feels incongruous with what our culture of transparency is. Right. Like, why not just say, like, the policy is six months or whatever?
--:-- Jessica Toonkel: Exactly. And they were and still are adamant that the policy is not six months, that there is no set time limit. You just need to talk to your manager.
--:-- Ryan Knudsen: Employees Jessica spoke to felt they had been promised a culture full of transparency and freedom. But what they were getting was anything but transparent.
--:-- Jessica Toonkel: But that's not what the company says. They say that they have not walked back their parental leave policy, and the parental leave policy is still do what's best.
--:-- Ryan Knudsen: And they also, the other thing that they deny is that there is any set limit, but I have spoken to people who talk to HR or their managers, and I have a recording of HR telling one employee that the policy is actually six months.
--:-- Jessica Toonkel: A Netflix spokesman said the leave policy, quote, has always been to take care of your child and yourself, and that the average parental leave that a Netflix employee takes is less than a full year.
--:-- Ryan Knudsen: In recent years, Netflix has also had to lay off thousands of employees as part of its cost-cutting measures.
--:-- Jessica Toonkel: And Jessica found that some of those employees were people who'd taken a long parental leave. Some former employees have spoken up about this.
--:-- Ryan Knudsen: One of them is a former marketing manager based in Australia named Vanessa Hughes. She's suing Netflix.
--:-- Jessica Toonkel: In the court documents, she alleges that she was, you know, trying to put in for parental leave and they kept pushing back.
--:-- Ryan Knudsen: Hughes took the year-long parental leave anyway and was ultimately laid off while on leave.
--:-- Jessica Toonkel: Another former employee who's spoken up is Becca Leckie. Becca Leckie was an employee and she had written on LinkedIn. The post has since been taken down.
--:-- Ryan Knudsen: But she describes in her LinkedIn post how, you know, one of the reasons she joined Netflix was for this generous parental leave policy. And she, you know, moved from New York to L.A. to work for Netflix and loved it.
--:-- Jessica Toonkel: Leckie was laid off a day before she was set to return from parental leave.
--:-- Ryan Knudsen: As one employee said to me, if you take more than six months, it feels like all eyes are on you.
--:-- Jessica Toonkel: That was just a quote, but many people said that to me. And everyone felt like you can't really take more than six months, and otherwise you're in trouble.
--:-- Ryan Knudsen: Netflix said employees weren't targeted for layoffs because they were on parental leave.
--:-- Jessica Toonkel: And Jessica reported that in many cases people who were laid off were paid out their remaining leave plus severance.
--:-- Ryan Knudsen: The company also did an analysis and said that only a very small percentage of those laid off were on parental leave.
--:-- Jessica Toonkel: Jessica says that Netflix's pullback on parental leave is just one example of how the company's culture is changing.
--:-- Ryan Knudsen: As part of that, it has had to reevaluate its culture memo and specifically around freedom and responsibility.
--:-- Jessica Toonkel: So we were the first to report last spring that Netflix actually took out the freedom and responsibility section out of the memo.
--:-- Ryan Knudsen: It took it out entirely? The entire section has been taken out.
--:-- Jessica Toonkel: Now, they would argue that the ideas behind it are still found in pieces of the memo, but that section has been removed.
--:-- Ryan Knudsen: Last year, Wall Street Journal editor-in-chief Emma Tucker interviewed CEO Ted Sarandos and asked him about the change to the memo.
--:-- Jessica Toonkel: So I want to talk a bit about Netflix culture, because obviously, famously, Netflix has got this very distinct culture that's been credited with being able to attract talent and create this real kind of environment of excellence.
--:-- Ryan Knudsen: Now, but this year, you've updated your culture memo. And I think I'm right in thinking that you've ditched the freedom and responsibility section of the memo and talking more now about employing unusually responsible people.
--:-- Jessica Toonkel: I do think it was one of those things where we didn't take lightly the evolution of the document, but it actually reflects much more today, our 14,000 employee business culture.
--:-- Ryan Knudsen: And the freedom and responsibility evolution, we didn't throw it out. It was probably a little more emphasis on freedom than responsibility.
--:-- Jessica Toonkel: And we think you have to have both. So it's ways of recrafting some of those things. But the core values in the new document are all in the old document. Right.
--:-- Ryan Knudsen: Did you get any pushback from the update?
--:-- Jessica Toonkel: Well, what's interesting, because it's such an iconic thing, you get a little bit.
--:-- Ryan Knudsen: And I do think one thing that we have to really help employees understand all the time is that we put no energy in preserving the culture.
--:-- Jessica Toonkel: We are constantly working on improving the culture. And so when anyone says, hey, the culture is changing, yes, of course, it needs to.
--:-- Ryan Knudsen: We definitely changed the culture. We wanted to reflect how we work, not dictate how we work.
--:-- Jessica Toonkel: Over the years, executives at Netflix credited its, quote, no-rules culture for fueling the company's success.
--:-- Ryan Knudsen: And some employees now worry that all these changes mean the entertainment giant is losing its identity.
--:-- Jessica Toonkel: So what does this say about Netflix and its culture right now and what it's going through as in its evolution as a company?
--:-- Ryan Knudsen: You know, I think this whole situation kind of raises this question of, can any company really maintain its identity as it grows and becomes a global company?
--:-- Jessica Toonkel: Like, do you have to give up who you are to be successful? and I do think that is what Netflix is going through now because, you know, a lot of people will hear these stories and say, those people make so much money. So it is what it is.
--:-- Ryan Knudsen: But there is a question like, at some point Netflix will have another business challenge, right? There will be something else.
--:-- Jessica Toonkel: And will they continue to be able to recruit and retain the best people if their culture's just like everyone else's?
--:-- Ryan Knudsen: I don't know. But Netflix's benefits policy is still more competitive than most companies, right?
--:-- Jessica Toonkel: Even though they won't say it's six months, but let's just call it six months, that's still very competitive and better than most companies that we know.
--:-- Ryan Knudsen: But the problem is they're not just saying that. Which I imagine must carry an additional weight given the fact that Netflix has historically been such a company focused so much on transparency to have this ambiguity.
--:-- Jessica Toonkel: Exactly. I mean, a lot of people that I talked to complained about that, like we're supposed to be so transparent and that's a key value here.
--:-- Ryan Knudsen: But these changes that they're now making, I think are going to have consequences ultimately.
--:-- Jessica Toonkel: That's all for today. Monday, January 6th. The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Ryan Knudsen: If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.
