Great Leaders Have No Rules

by Kevin Kruse

  The results? The company saved money by allowing employees to book their own trips online, eliminating the need to pay a travel agent to do so.

  Of course, there was also a learning curve. According to McCord, managers sometimes needed to speak with employees “who ate at lavish restaurants (meals that would have been fine for sales or recruiting, but not for eating alone or with a Netflix colleague)” (McCord 2014). Similarly, IT members could be prone to buying more gadgets than necessary. But McCord confirmed that the program was an overall success. It’s still in effect today.

  The true enabler of “no rules” at Netflix, the true enabler of their high-trust culture, was the fact that they did better hiring. In an article she penned for the January 2014 issue of Harvard Business Review, McCord sums up why this principle works so well:

  If you’re careful to hire people who will put the company’s interests first, who understand and support the desire for a high-performance workplace, 97 percent of your employees will do the right thing. Most companies spend endless time and money writing and enforcing HR policies to deal with problems the other 3 percent might cause. Instead, we tried really hard to not hire those people, and we let them go if it turned out we’d made a hiring mistake (McCord 2014).

  How can you apply this principle to your work environment? Ask yourself the following questions:

  How much more time and money should you invest into the hiring process?

  How are your managers being evaluated? For building great teams or for compliance with rules and getting all their reports submitted on time?

  What type of culture are you producing? Is it designed so high performers will thrive, or to protect against low performers?

  Are managers reluctant to let go of low performers? Why?

  The higher the quality of your workforce, the less likely it is that you’ll need rules. As McCord says, you should “hire, reward, and tolerate only fully formed adults.”

  RULE REPLACEMENT #2: HOLD PEOPLE ACCOUNTABLE FOR RESULTS

  Could accountability be more powerful than rules?

  When I worked at Kenexa, I can remember my former partners and I trying very hard to increase “cross-selling” among our different divisions. Getting salespeople to share leads and clients across departments is a common problem in large organizations and notoriously hard to accomplish. We did all the usual stuff: held a “summit” to motivate everyone to cross-sell, trained each other on all our solutions, and mandated (i.e., made a rule) that every sales call include a secondary pitch of a cross-sell solution. Of course, nothing changed. Our frontline salespeople said they were pitching the “new” services, but the deal flow didn’t change.

  Then our CEO decided to make us—the business unit heads—truly accountable for cross-selling. He didn’t put in new rules, didn’t ask for more training, he did one simple thing. He told us, “I expect your teams to cross-sell other solutions, and 100 percent of your annual bonus is going to be tied to the amount you sell.” One hundred percent! As an organization we thrived on variable pay formula (i.e., our fixed salary was relatively low and our bonus and commissions were relatively high), so that meant that about half our total annual pay would be tied to results from selling other people’s stuff. I literally could have doubled the sales of my business unit, but if I didn’t sell anybody else’s solutions I would have gotten no bonus for that year. Suddenly everyone was cross-selling everything. Problem solved!

  At the beginning of this chapter I described how my old CFO tried to control expenses by banning the purchase of sticky notes. Wouldn’t it have been better to just set a quarterly office supply budget per person (by role) and hold people accountable for sticking to the budget? Even better of course would be to reward those who came in under their budget.

  How can you pair accountability with coaching? Instead of a hard-and-fast no-beer rule, what if the CFO just flagged someone’s manager when a meal reimbursement seemed out of line? Then a coaching conversation could take place. Maybe the high expense could be justified (e.g., “It was in Manhattan, I had worked all day and into the night skipping lunch and room service was the only option.”). Or maybe not (e.g., “What, four beers at dinner is too many?”), but it would become a conversation that reinforces the expectations around professional behavior and expenses.

  Instead of using rules, look for opportunities to build accountability by assigning ownership and consequences to your team’s decision making.

  RULE REPLACEMENT #3: GIVE GUIDELINES

  Any talk about leading without rules would be incomplete without mentioning the Brazilian business visionary Ricardo Semler. Semler is the former CEO and president of Semco, which under his leadership grew from $4 million in revenue to over $160 million in about twenty years. All this without a mission statement, an org chart, or any written policies at all. And definitely without a rulebook.

  So what was the key to Semco’s success? One could point to various features of the radical industrial democracy that Semler ushered in during his tenure. But Semler himself epitomized it in his 2014 presentation at TED Global:

  We looked at it and we said, let’s devolve to these people, let’s give these people a company where we take away all the boarding school aspects of, this is when you arrive, this is how you dress, this is how you go to meetings, this is what you say, this is what you don’t say, and let’s see what’s left. And so, the question we were asking was, how can we be taking care of people? People are the only thing we have (Semler 2014).

  Power to the people.

  Semler distributed that power in some unorthodox ways. For example, he let employees set their own salaries. Over twenty-five years ago, Semler put a computer in the company cafeteria that revealed how much revenue the company was taking in, the profit margins from that revenue, how much employees inside the company made, and how much employees in similar positions made. Armed with that information, the employee was then allowed to set his or her own salary. Did people pay themselves ridiculous amounts? No, it turned out that information and peer pressure kept pay at industry norms.

  This is just one example of many—like Semco’s refusal to track the amount of hours employees worked. And their freedom to take time off during the “workweek” to go see soccer matches. Or the fact that most meetings are voluntary, and that two seats at board meetings are open to the first employees to arrive. (Semler admitted that cleaning ladies sometimes voted on his board meetings. The result? They “kept us honest.”)

  Remember my example from Kenexa when the partners of the firm weren’t allowed to expense a beer they had with dinner? Instead of a “no alcohol” rule, what if there was a guideline like, “When traveling for business and eating alone we try to keep the daily meal reimbursement to $35—and of course we are happy to split any savings with you if you should spend less than that.”

  What if instead of travel reimbursement rules there was a public spreadsheet that “racked and stacked” everyone’s spending for the month? Imagine the power of peer pressure when you see most people are spending $25 per day on travel meals and you’ve been averaging $50 per day. What if the top 25 percent lowest spenders were celebrated or given gift cards as a thank you? Wouldn’t expenses organically drop as everyone’s sense of ownership also went up?

  Rules by their nature send the message that you cannot be trusted to do the right thing, the smart thing. Rules are, well, rules—not to be broken. Guidelines are perceived as, and truly are, something very different. Guidelines are educational. They say, “Here’s what we think is right in most circumstances, but do what’s in the best interest of the company.”

  While you might be unwilling or unable to eliminate rules to the extent of Semco, how much more would your employees give you if you defaulted to trust? (Yes, an occasional bad apple [i.e., bad hire] will cause a problem that needs to be solv
ed.) You need to ask questions like:

  What decisions am I willing to delegate to team members?

  What decisions do they wish I would delegate to them?

  What information do they need to have in order to make the right decision?

  How can we change our “policies” into “guidelines”?

  As Semler wrote in a 1994 article for Harvard Business Review, “participation gives people control of their work, profit sharing gives them a reason to do it better, information tells them what’s working and what isn’t” (Semler 1994).

  RULE REPLACEMENT #4: STANDARDS AND VALUES INSTEAD OF RULES

  When it comes to rules, remember, they take away the opportunity for employees to make a decision. It just so happens that my friend Jack Kloeber is one of the world’s leading experts in decision analysis. A former army officer and pharmaceutical executive, Kloeber now leads the company Kromite, consulting with big companies about how to make strategic decisions objectively. So I asked him to explain “decision analysis” to a regular guy like me.

  To my surprise, Kloeber said making decisions comes down to getting clear on your values. You need to analyze how the different choices you can make tie back to what matters most to you. Should you take the job offer that comes with both higher pay and a longer commute? You value both money and your time, of course. But how much would you value that specific increase in income? What is its value after taxes? What is the value of that raise compounded with interest over time? How would your life change from the additional income? What would you stop doing to add time to your commute? Stop watching Netflix, or stop tucking your daughter into bed at night? How can you meet both values better? Would your potential employer allow you to work from home one day a week? Would your spouse be able to work less since you have added income?

  Earlier in the chapter I shared Coach K’s disdain for rules. What does he do instead? As he wrote in his book The Gold Standard:

  In developing teams, I don’t believe in rules. I believe in standards. Rules don’t promote teamwork, standards do. Rules are issued by a leader to a group…When something is presented as a rule, you can’t own it. You can’t live it. Standards, on the other hand, are lived. This is what we do all the time. These are the things for which we hold one another accountable (Krzyzewski 2010).

  More important, the standards come from the players, not the coach. Whether he’s leading a team of NBA all-stars who are united as the USA Olympic team or young college athletes, Coach K sits down with the players and asks them to establish standards that everyone will abide by. In this way, they become the team’s standards not the coach’s rules, and they’ll work far harder to hold one another accountable.

  Dina Dwyer-Owens is cochairwoman of the Dwyer Group, a company with eleven franchise brands doing over a billion dollars in annual revenue. She credits strong values as a key to the success of the company. When I interviewed her on The LEADx Leadership Show she said that most companies pick some values and then ignore them, but at Dwyer they’re used as tools.

  Make it become a way of life for you and your organization. We came up with these, what we call operationalized values, because they’re not just respect, integrity, customer focus, and having fun. They’re specific standards for how we expect ourselves to operate and how we expect each other to operate (Dwyer-Owens 2017).

  She shared an example of an employee who in anger flipped off a coworker with her middle finger. Dwyer has a specific policy around communicating respectfully without profanity or sarcasm. The offending employee was counseled about her behavior, and a few months later she resigned on her own. Strong cultures tend to be self-reinforcing.

  THE TAKEAWAY

  Rules, policies, and procedures are implemented with the best of intentions to minimize risk (primarily financial loss). Because we as leaders can’t be everywhere, we can’t watch everyone, we implement rules to protect against wasteful spending, wasting time, and poor quality.

  By protecting against the bad choices of the minority (about 3 percent according to Netflix experience) we are taking away the opportunity for 97 percent of our team members to reflect on company values, to develop decision-making skills, and to deepen their feelings of ownership and accountability. Instead of rules, leaders need to hire talent who can be trusted, make company values actionable, set guidelines, and be willing to coach those who make honest mistakes.

  HOW MIGHT YOU APPLY THIS IF YOU’RE A:

  MANAGER: Gather your team around a pizza and ask them variations on, “Hey, what rules and policies around here bother you the most? Which rules get in the way of you doing your job better?” Hear them out. Look for opportunities to replace rules with guidelines. When that’s not possible, make sure they understand the intent behind the rule, why it’s in place. Proactively manage up and ask your manager to explain the intent behind the rules and policies that you think are hurtful rather than helpful.

  SALES PROFESSIONAL: A “no rules” philosophy in sales doesn’t give license to break ethical boundaries; integrity with clients and your manager alike is paramount. Rather, you should strive to understand the why behind the rules that seem to get in your way. Yes, logging every prospective contact into your customer relationship management (CRM) system does take up your valuable time and brings you no value. But does tracking all that data across the entire sales function help sales management to understand seasonality, trends, and effectiveness of different sales tactics? And for the rules without a good “why,” commit to being a change agent. Make sure your manager—your manager’s manager or even the CEO—knows how much time every policy and procedure is taking you. Let them know how many hours you are spending each week on winning deals and how many you are spending on administration.

  SPORTS COACH: From dress codes to curfews, it is true that athletic teams have a long culture of rules. But is there a better way? Instead of rules, ask your team to come up with a list of standards, or a code of conduct, that will help them to be their best. Explain that the failing of one player is a failing that impacts the entire team; the players must hold one another accountable. Have the players nominate several team leaders who can help reprimand or punish players when needed. Realize that rules by definition are inflexible but standards are conditional. An appropriate response to a first-time minor infraction might be a warning from team leaders; a minor infraction from a player who has had ongoing behavior problems might require you—the coach—to mete out severe punishment. Be the disciplinarian when you must, but only as a last resort.

  MILITARY OFFICER: From dress code and salutes to reflective belts and operational risk management the military has numerous rules to maintain discipline, effectiveness, safety, and tradition. They aren’t going away anytime soon. But when it comes to training requirements that are impossible to meet, or meeting them would interfere with war readiness, commanders should delegate the authority to not complete the task to the lowest level possible.

  PARENT: At the risk of sounding like one of those annoying parents, I have great kids. Three teenagers who have strong grades, excel in activities, are very polite, and have never missed a curfew. Of course, they’ve never actually had a curfew. I’m sure I just hit some kind of parent lottery but I will add that they were raised with very few rules. Even as toddlers it wasn’t, “You can’t pull Natalie’s hair!” but more about values, “We don’t hurt other people because…” Even now in a time of high school parties, rather than telling them they have to be home by a certain time it’s a conversation. They tell me how important or not this party is to them, I remind them that I can’t go to sleep until I know they’re home safe, and I ask what time they’d like to come home. Usually the time they suggest is earlier than the time I would have set as a rule. And if they get home five or ten minutes late it’s no big deal, there is no punishment because it wasn’t a rule. It was a guideline.

 
Let me add that if my kids were making bad decisions repeatedly that were putting themselves or others at physical risk, or if they were wasting large sums of money, you betcha I’d have rules. But again, I’d do it carefully and selectively only after the conversations around values and decisions and impact were worked through. The more rules you set down, the more it becomes your home, not their home; your family, not their family. And that’s a dangerous place to be.

  Think about the rules you have for your children. Could you replace the “go to bed at nine o’clock” rule with a conversation about getting enough sleep, when it would be OK to stay up late and when it is not? Could you replace a “no drinking” rule with a conversation about the dangers of alcohol and how disappointed you would be if you found out they were drinking, but also talking about how they should call you with no fear of punishment rather than drink and drive?

  INDIVIDUAL: Do you have personal rules and don’t even realize it? To uncover them, think about what you never do, or always do. Maybe you never date anybody who supports a different political party than you. Maybe you always say yes when your boss asks you to stay late, even with no notice on a Friday night when you have plans. Maybe you always give money to charitable causes when you’re asked.

  Reflect on these types of patterns and ask, Is it because of a rule that has been explicitly or implicitly put out by your parents, or religion, or societal norms…or is it from your values? Have you reflected on your values and made a conscious decision? If so, good for you. If not, think about your recurring behaviors and beliefs. What are your automatic decisions? Are they holding you back? Unmask hidden rules that might be controlling you without you even knowing it.