Culture Moats


I recently read the book “No Rules Rules: Netflix and the Culture of Reinvention”. It’s a great book for any business person to read as it describes the Netflix culture and how they have a lot of policies, or rather lack of policies, that really feed into a very unique and productive workplace at Netflix. Netflix has been so successful that I would think most businesses could learn a few things from how Netflix runs its business. That got me to thinking… is Netflix’s unique culture a competitive advantage? And if it is, is it an enduring competitive advantage that we should invest in?


In order to think about this you probably need to understand a little bit about Netflix’s culture. Netflix has a high performance workplace where they target and hire the absolute best and smartest employees from all over the world. One of the key principles about Netflix is that they are looking for “talent density” in their workforce. That’s no surprise as everyone wants to hire great employees. What’s different about Netflix though is that they take extreme measures to ensure they attract and retain the top quality employees and let go of employees who are only average. Netflix likes to operate like a professional sports team, hopefully operating at a high level but quick to replace players who are no longer excelling.

To counter this lack of job security, Netflix offers a number of benefits and freedoms which appeal to high performers. Netflix proudly pays top of market for all of their employees, and they pay them as straight salary instead of providing a bonus structure. This means the employee knows they are going to receive all of their salary, which is better than having to wait to see if you get your bonus.


In addition to this, Netflix has a culture of freedom which is pretty rare. One example would be their vacation policy, or rather their lack of a vacation policy. Netflix employees can take as much vacation as they want… whenever they want… provided they can still perform their job at a high level and provided their vacation does not hurt Netflix or their teammates. This is pretty unique (though I’m proud to say we have the same vacation policy at Endeavour Wealth Management) and it provides tremendous appeal to many top performing employees. As an example, one Netflix employee works really hard, putting in 12 hour days for a period of time, but then goes on extended vacations for six weeks in the Amazon Rainforest or in the Himalayas. Not too many employers allow that kind of freedom.


Netflix also has a tremendous culture of transparency. They provide a lot of feedback to their employees and in turn receive a lot of feedback from employees, even up to the CEO Reed Hastings. This culture of transparency can seem harsh at times but in practice fosters more trust and cooperation among employees and in turn leads to better performance.


So, Netflix is doing some interesting things, and it seems to have led to some extraordinary results. Netflix’s business has grown from a tiny DVD mail service to a streaming juggernaut that has left previous rival Blockbuster bankrupt in its wake (there is literally a documentary entitled “The Last Blockbuster” which is actually an interesting portrayal of the rise and fall of the former movie rental behemoth. You can watch it on, where else…. Netflix). Even established content producers and movie studios like Disney and HBO are now playing catchup. Something Netflix is doing is working, and it has definitely resulted in a big benefit to their shareholders. Since Netflix started with no content and no platform, we have to conclude that their culture and their employees have been a big advantage in getting them to where they are now.


So the Netflix culture definitely seems to be an advantage. As an investor when I see these things, I start to wonder, is this an advantage that will persist? And will it result in better performance of the stock so an investor can make money off of it? This got me thinking about other businesses that have unique cultures. The one that came top of mind was none other than Berkshire Hathaway.


Berkshire Hathaway has been successful predominantly because it’s been run for over 50 yeas by the best investor probably ever. That of course is Warren Buffett. But one thing that often gets overlooked is the role that the culture of Berkshire Hathaway has played in its success. Because of Buffett’s unique position as a controlling shareholder, Berkshire didn’t evolve the way most public companies do.


When you are a public company, there is all kinds of pressure on management to deliver performance consistently, quarter after quarter. This pressure comes from your shareholders but it also comes from Wall Street who wants you to conduct yourself in a certain way, which suits their interests and not necessarily your own. This includes doing quarterly conference calls with analysts, or doing share splits when your stock becomes too valuable. A great example came just this week. Two proposals have been put forth for the upcoming annual meeting of Berkshire Hathaway which will take place in May. The two proposals would require Berkshire to produce reports annually on its efforts related to climate change, as well as a report which would assess Berkshire’s diversity and inclusion efforts in its workforce. Both of these proposals are expected to be soundly rejected at the annual meeting, not because those topics don’t warrant discussion and action, but because Berkshire leaves such matters to the discretion of its subsidiaries and adding these reports at the parent level would be contrary to their culture.


There are very few companies in the world who would have the ability to just say no to proposals like this, given the politically charged atmosphere in 2021. Still I think it’s the right decision. I agree with spirit of the proposals entirely, but I don’t think Berkshire Hathaway needs to start producing reports at the parent company level just to show all of the good work on these fronts that they are already doing at the subsidiary level. And I certainly don’t think Berkshire Hathaway should start meddling with their subsidiaries when 50+ years of success indicates that not meddling is working just fine. Ultimately Berkshire’s ability to do so is safeguarded by Buffett, but given the culture that has been created, I think it will survive beyond him, and that is a tremendous advantage for Berkshire Hathaway over other companies who are more vulnerable to such public pressure.


Getting back to Netflix, the question is, will their culture be as enduring as Berkshire Hathaway’s and can it be replicated in other companies? I think that by virtue of the fact people are writing books about it Netflix’s culture is here to stay. Whether or not it can be replicated by other companies, like say Disney, is harder to figure out. There are obviously incentives for companies to try and copy Netflix’s success, so incentives are definitely in favour of replication. On the other hand, most of their competitors are established companies with their own cultures. These are like big ocean liners that have a momentum all to themselves and can be tough to turn around. I think if Disney wanted to start acting like Netflix, it would take time and a lot of effort to start incorporating these policies into their workforce, and there is no guarantee they would be successful.


Far more likely in my opinion that some upstart new company will decide to implement Netflix’s ideas right from the start. But of course any upstart competitor to Netflix is going to have to contend with all of the advantages that Netflix’s scale and experience afford it. That means that the upstart is not only going to have to replicate Netflix’s culture, but they are likely going to have to improve on it somehow. Netflix is now the Blockbuster of streaming. While it’s certainly not impossible they could be toppled, it won’t be easy at all to do so.


I think that much of the money to be made investing in Netflix has already been made, though I still think it’s a great company. But learning the lessons of Netflix’s cultural advantage can provide insights into other companies who might have unique and advantageous cultures. In a world where traditional moats of businesses are becoming less durable and harder to find, a cultural moat of a business can be stronger and more important than ever, and investors should be on the lookout for them.


- Craig White, BA, LL.B., CIM®


Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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