In 1975, Ray Dalio founded Bridgewater Associates out of his two-bedroom apartment in New York City. Today, Bridgewater is the world’s largest hedge fund, managing some $160 billion for more than 350 institutional clients such as pension funds and university endowments. That growth has been driven by performance: Over the past four decades, the firm has made more money for its investors than any other hedge fund in history—nearly $50 billion through last year, according to Bloomberg. Dalio himself has become one of the 100 richest people in the world.
Bridgewater has also developed a reputation in recent years as one of the planet’s most idiosyncratic business organizations, with a unique culture driven by Dalio’s personal beliefs—and built on the tenets of radical truth and radical transparency. Dalio has collected and codified hundreds of “principles” that guide his approach to life, work, and investing.
Until recently, Dalio has preferred to keep his system largely private. But as he nears the end of his career, he has decided to share his distinctive methods, and he’s publishing a new book this month entitled Principles: Life and Work (Simon & Schuster, $30).
In the following edited excerpt from the book, we learn the history behind Dalio’s decision to compile guidelines for managing his organization and get a window into how he dispassionately evaluates employees to ensure that they perform excellently.—Alan Murray
One winter day in 1993, Bob Prince, Giselle Wagner, and Dan Bernstein—three of Bridgewater’s senior leaders—proposed taking me out to dinner with the stated purpose of “giving Ray feedback about how he affects people and company morale.” They sent me a memo first, the gist of which was that my way of operating was having a negative effect on everyone in the company. Here’s how they put it:
What does Ray do well?
He is very bright and innovative. He understands markets and money management. He is intense and energetic. He has very high standards and passes these to others around him. He has good intentions about teamwork, building group ownership, providing flexible work conditions to employees, and compensating people well.
What Ray doesn’t do as well:
Ray sometimes says or does things to employees that make them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad. The odds of this happening rise when Ray is under stress. At these times, his words and actions toward others create animosity toward him and leave a lasting impression. The impact of this is that people are demotivated rather than motivated. This reduces productivity and the quality of the environment. The effect reaches far beyond the single employee. The smallness of the company and the openness of communication means that everyone is affected when one person is demotivated, treated badly, not given due respect. The future success of the company is highly dependent on Ray’s ability to manage people as well as money. If he doesn’t manage people well, growth will be stunted and we will all be affected.
Ugh. That hurt and surprised me. I never imagined that I was having that sort of effect. These people were my extended family. I didn’t want them to feel “incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad.” Why didn’t they tell me directly? What was I doing wrong? Were my standards too high?
This looked to me like another one of those fork-in-the-road cases in which I had to choose between one of two seemingly essential but mutually exclusive options: 1) being radically truthful with each other including probing to bring our problems and weaknesses to the surface so we could deal with them forthrightly, and 2) having happy and satisfied employees. And it reminded me that when faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. There is almost always a good path that you just haven’t figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.
My first step was to make sure I knew exactly what the problems were and how to handle them. So I asked Bob, Giselle, and Dan what they thought was going on. I learned that they personally, and many others who knew me well, weren’t as demoralized by me as some others because they understood my heart was in a good place. If they hadn’t known that they would have quit, because, as they put it, “I wasn’t paying them enough money to put up with my crap.”
They knew that I wanted the best for them and Bridgewater, and to get that I needed to be radically truthful with them and I needed them to be radically truthful with me. This wasn’t only because it produced better results, but also because being truthful with each other was fundamental to how I believed we should be with each other.
What I wanted more than anything else was meaningful work and meaningful relationships. By meaningful work, I mean work that people are excited to get their heads into, and by meaningful relationships I mean those in which there is genuine caring for each other (like an extended family). The more caring we gave each other, the tougher we could be on each other, and the tougher we were on each other, the better we performed and the more rewards there were for us to share. This cycle was self-reinforcing. We all agreed that radical truth and radical transparency were essential to creating this cycle, but since it was making some people feel bad, something had to change.
While those people I had contact with understood me, liked me, and in some cases even loved me, those who had less contact with me were offended by my directness. It was clear that I needed to be better understood and to understand others better. I realized then how essential it is that people in relationships must be crystal clear about their principles for dealing with each other.
That began our decades-long process of putting our principles into writing, which evolved into the Work Principles. Those principles were both agreements for how we would be with each other and my reflections on how we should handle every situation that came up. Since most types of situations arose repeatedly with slight variations, these principles were continually refined.
The number of principles started small and grew over time. By the mid-2000s, Bridgewater was beginning to grow rapidly, and we had a number of new managers trying to learn and adapt to our unique culture—and who were increasingly asking me for advice. I was also beginning to have people from outside Bridgewater ask me how they could create idea meritocracies of their own. So in 2006, I prepared a rough list of about 60 Work Principles and distributed them to Bridgewater’s managers so they could begin to evaluate them, debate them, and make sense of them for themselves. “It’s a rough draft,” I wrote in the covering memo, “but it is being put out now for comments.”
Over time, I encountered most everything there is to encounter in running a company, so I had a few hundred principles that covered most everything. That collection of principles, like our collection of investment principles, became a kind of decision-making library.
Constantly Train, Test, Evaluate, and Sort People
Both your people and your design must evolve for your machine to improve. When you get personal evolution right, the returns are exponential. As people get better and better, they are more able to think independently, probe, and help you refine your machine. The faster they evolve, the faster your outcomes will improve.
Your part in an employee’s personal evolution begins with a frank assessment of their strengths and weaknesses, followed by a plan for how their weaknesses can be mitigated either through training or by switching to a different job that taps into their strengths and preferences.
At Bridgewater, new employees are often taken aback by how frank and direct such conversations can be, but it’s not personal or hierarchical—no one is exempt from this kind of criticism. While this process is generally difficult for both managers and their subordinates, in the long run it has made people happier and Bridgewater more successful. Remember that most people are happiest when they are improving and doing the things that suit them naturally and help them advance. So learning about your people’s weaknesses is just as valuable (for them and for you) as is learning their strengths.
Even as you help people develop, you must constantly assess whether they are able to fulfill their responsibilities excellently. This is not easy to do objectively since you will often have meaningful relationships with your reports and may be reluctant to evaluate them accurately if their performance isn’t at the bar. By the same token, you may be tempted to give an employee who rubs you the wrong way a worse evaluation than he or she deserves. An idea meritocracy requires objectivity. Many of the management tools we have developed were built to do just that, providing us with an unbiased picture of people and their performance independent of the biases of any one manager. This data is essential in cases where a manager and a report are out of sync on an assessment and others are called in to resolve the dispute.
Every leader must decide between 1) getting rid of liked but incapable people to achieve their goals and 2) keeping the nice but incapable people and not achieving their goals. Whether or not you can make these hard decisions is the strongest determinant of your own success or failure. In a culture like Bridgewater’s, you have no choice. You must choose excellence, even though it might be difficult at the moment, because it’s best for everyone.
Evaluate accurately, not kindly
Nobody ever said radical honesty was easy. Sometimes, especially with new employees who have not yet gotten used to it, an honest assessment feels like an attack. Rise to a higher level and keep your eye on the bigger picture and counsel the person you are evaluating to do the same.
a. In the end, accuracy and kindness are the same thing.
What might seem kind but isn’t accurate is harmful to the person and often to others in the organization as well.
b. Put your compliments and criticisms in perspective. It helps to clarify whether the weakness or mistake under discussion is indicative of a trainee’s total evaluation. One day I told one of our new research people what a good job I thought he was doing and how strong his thinking was. It was a very positive initial evaluation. A few days later I heard him chatting away at length about stuff that wasn’t related to work, so I warned him about the cost to his and our development if he regularly wasted time. Afterward I learned that he thought he was on the brink of being fired. My comment about his need for focus had nothing to do with my overall evaluation. Had I explained myself better when we sat down that second time, he could have put my comment into perspective.
c. Think about accuracy, not implications.
It’s often the case that someone receiving critical feedback gets preoccupied with the implications of that feedback instead of whether it’s true. This is a mistake. Conflating the “what is” with the “what to do about it” typically leads to bad decision-making. Help others through this by giving feedback in a way that makes it clear that you’re just trying to understand what’s true. Figuring out what to do about it is a separate discussion.
d. Make accurate assessments. People are your most important resource and truth is the foundation of excellence, so make your personnel evaluations as precise and accurate as possible. This takes time and considerable back-and-forth. Your assessment of how Responsible Parties are performing should be based not on whether they’re doing it your way but on whether they’re doing it in a good way. Speak frankly, listen with an open mind, consider the views of other believable and honest people, and try to get in sync about what’s going on with the person and why. Remember not to be overconfident in your assessments, as it’s possible you are wrong.
e. Learn from success as well as from failure. Radical truth doesn’t require you to be negative all the time. Point out examples of jobs done well and the causes of their success. This reinforces the actions that led to the results and creates role models for those who are learning.
A version of this article appears in the Sept. 15, 2017 issue of Fortune.