The dictionary definition of trust is quite interesting:
- firm belief in the reliability, truth, ability, or strength of someone or something; acceptance of the truth of a statement without evidence or investigation.
In today’s environment of “alternative facts” and “fake news” can we have firm belief in anyone? We have people still believing that the earth is flat, others that the moon landing was faked. Currently that financier Jeffrey Epstein was either murdered or assisted in his suicide. But as The Wall Stree Journal article Trusting Jeffrey Epstein Taught a Retail Legend a Hard Lesson: Be Careful Whom You Trust by John D. Stoll, points out, trust is necessary in business.
It’s a question that brings into focus the role trust plays in American business. Long seen as nearly as essential as money for the economy, it is as powerful as it is dangerous. Trust serves as the secret sauce in every transaction, business plan and employment arrangement. But, behind every Ponzi scheme, market meltdown and corporate fraud lies a serious case of misplaced trust.
What does this article about trust have to do with founders? Plenty! Leslie Wexner became a billionaire by founding the Limited and other retail giants. Yet he was duped out of millions of dollars by Jeffrey Epstein. However, as “Roderick Kramer points out most successful business folks are risk takers. Risk requires trust, and leadership types tend to overestimate their ability to size up people or situations.” Mr. Kramer did a study about ten years ago that showed that “about 95% of M.B.A. students were routinely placing themselves in the upper half of the class when rating their ability to size up the trustworthiness, reliability and honesty of fellow classmates.”
Why do so many people get duped in startups, as the investors and employees of Theranos, the million dollar fraud did? Another expert weighs in:
Alexander Stein, a human-behavior expert and founder of Dolus Advisors, consults on white-collar misconduct and said we get duped because we “outsource trust.”
“It becomes less about who we trust and more about what we trust,” Mr. Stein said. “It’s not the person, it’s the image of the person, or the persona and the brand.”
So what’s a founder to do? Well when it came to dealing with his Russian adversaries, Ronald Reagan employed the Russian phrase trust, but verify. But if we go back to the dictionary definition, this proverb is an oxymoron: trust is the acceptance of the truth of a statement without evidence or investigation. Verification requires evidence and/or investigation!
There are two skills I try to encourage my mentees to develop that help ascertain if they can trust an individual or organization due diligence and testing.
According to Wikipedia:
Due diligence is the investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or contract with another party, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.
The need for due diligence is inversely proportional to a founder’s personal experience and knowledge of the person or business in question – the subject. For founders the subject can be a prospective partner, candidates for staff positions; interested investors; professional service providers, like lawyers, bankers, consultants and accountants; contractors and vendors – in other words, virtually anyone and everyone a founder might do business with. The need for due diligence is also directly proportional to the importance of the transaction or business agreement. For example, you need to perform a lot more due diligence on a prospective VP of Sales than on the contractor who cleans your office. And more due diligence is generally required for a relationship than for a transaction.
But how do you perform due diligence? Excluding having actual direct experience working with a person or business, founders must rely on their subject’s reputation. There are two types of due diligence for reputation: primary and secondary research. Like market research, primary reputation research means communicating with people who know, and preferably have worked with, the subject in question. But I’m not talking about typical job candidate references. Who in their right mind would provide a bad reference? Rather I’m referring to a blind reference – someone who knows the person or business in question but is not provided to you as a reference. Unfortunately LinkedIn has bollixed up my practice of finding blind references, as it can be very hard to find blind references on people with an excess of 500 LinkedIn connections. But the real problem with LinkedIn is there is no way to measure the strength of the link, as Google does, by measuring the strengths of links to and from the target – the PageRank. However, all is not lost. You still may be able to find former classmates, investors, fellow workers or even neighbors who know your subject, but haven’t been put forth as references.
The second way to perform due diligence is through research. If LinkedIn shows connections that you share with your target you can communicate with them directly to try to find out how much you should trust the subject, in other words, how reliable and truthful they are. Of course, checking the candidate’s web site, blog or social media posts can also be helpful. And finally, you would be surprised what a Google search can provide, assuming you can enter a unique search phrase for your subject. Let’s hope it isn’t named John Smith or Acme Corp!
If we go back to our handy online dictionary, test is defined as a procedure intended to establish the quality, performance, or reliability of something, especially before it is taken into widespread use. For our purposes I would modify that definition to say A procedure intended to establish the quality, performance, or reliability of someone before we decide to trust them. It can be difficult to test everyone you plan enter into a business relationship with. For example, they may be very senior to you and take umbrage at being tested. Or they may have been referred by someone you do trust and testing them may cause your friend to take umbrage. In fact, the basic problem with overtly testing people is that it can cause your subject or others to take offense. Taking offense doesn’t build trust! But I have found at least two ways to test those who may be offended: traveling and playing a sport. Both activities can test a subject’s tolerance for failure, their manners or lack thereof, their competitiveness, patience, persistence, and other important character traits. Travel and playing sports, at least golf, are embedded in business and it’s the rare candidate who would take offense at being asked to play a sport with you. Setting up a trip may be somewhat more difficult, but it can be worth it for an important subject, like a key hire.
I also believe in testing prospective partners. I usually ask them to do a simple task by a fixed date, such as provide me a document relevant to my business or to connect me with someone in their organization. The task doesn’t matter, but it has to be non-trivial and something that can’t be outsourced. You would be surprised by the number of eager partners who can’t meet an agreed upon date for completion of such a task and who offer weak excuses for their inability to do so. Ideally your test should result in something of value to you in the business discussion, like a sample contract.
I highly recommend founders read the entire WSJ article and be on the lookout for other articles about trust. Trust is an important building block in any venture. Trust me on that!