Netflix has clearly gone from the conventional HR assumptions, that people need rules of the road and guardrails and double yellow lines and ubiquitous police cruisers, to the opposite extreme, of (more or less) “use your best judgment.” This has tremendous intuitive appeal, particularly when we all know that we ourselves are fully-formed adults who would never take advantage or cut corners.

Risk #1 is that as organizations grow larger and larger, “trust” as a management technique has to morph into “trust, but verify.” There’s a newish theory circulating among the thoughtful critics of our recent Big Bank missteps that “too big to fail” also necessarily entails “too big to manage.” I think there’s a lot to that.

Floyd Norris recently wrote a thoughtful column in the NY Times that JP Morgan Chase didn’t fail to catch Bernie Madoff’s shenanigans (Chase was his bank during all the years of the Ponzi scheme) because people were tempted into looking the other way when questions arose about an enormously profitable client, but because reality was obscured in the blizzard of paperwork. Here’s the “you can’t make this stuff up” story revealing just how true that probably is:

My favorite disclosure in the documents is that JP Morgan had a requirement that a “client relationship manager” certify every year that each client complied with all “legal and regulatory-based policies.” This was no doubt viewed as a tiresome and routine requirement, both by the bankers who did the certifying and by the people in the compliance department who collected the certifications.

“In March 2009,” we are told in a “statement of facts” agreed to by the bank and prosecutors, the Madoff relationship manager “received a form letter from JPMC’s compliance function asking him to certify the client relationship again.”

Evidently, whoever sent out that letter did not read it after a computer generated it. Or perhaps that person had somehow missed the report that Mr. Madoff had been arrested on Dec. 11, 2008. That would not have been easy. In the month after the arrest, The New York Times printed 15 front-page articles on the Madoff fraud, and it received exhaustive coverage everywhere else as well.

Similarly, last week the Times ran a feature on Dominic Barton, the global managing director of McKinsey, who is out to “change the culture of the firm that shaped him” in the wake of the Rajat Gupta and Anil Kumar insider-trading scandals. McKinsey had always relied on its trust-based, values-driven partnership culture for rectitude, but Barton has decided a bit more is needed, so in 2010 he introduced a new personal investment policy forbidding employees and their family members from trading in securities of any of McKinsey’s clients, and requiring consultants to complete a few online tutorials.

We shouldn’t be surprised there was pushback:

“How childish it is that we have to pass a test,” Mr. Barton recalls one colleague saying to him. “Is that what adults do?” Mr. Barton held firm, but says that the partner didn’t back down, either, saying: “You are reminding me of what it was like in Eastern Germany when the Stasi was checking.”

But Barton has held firm, so that “when values fail, at least there are now rules.”

Risk #2 is that Netflix’s “take whatever vacation you need” is actually interpreted by employees as something quite different. Among the many many online comments to the HBR article a clear thread emerges that Netflix is not actually the greatest place to work. Here’s a typical remark: “Netflix has a reputation for being a sweatshop where people work long hours for decent compensation. The joke I have heard there is “take as long a vacation as you like, just don’t come back” when it comes to their vacation policy.”

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