Entrepreneurs Face Trust Challenges in the Middle East

Trust in the Middle East is based on social networks: how much I trust you depends on how often I have interacted with you and whether people I trust also trust you. Essentially, trust is a commodity that is built up over time. This model is found globally but there exist alternatives and substitute models that are applied when appropriate. One such model is the swift trust model that Americans often use when faced with situations where trust is needed but there is no time to build it up using a conventional model. This is a trust first, verify later model. A simple example is disaster relief groups which are composed from various sources who need to act immediately. This model is precisely why Americans seem to be able to repeatedly launch successful start ups, whilst in the Middle East many start ups seem stuck.

In business terms if one person, the trustor, decides to trust another person, the trustee, then they are giving up control over an outcome that can affect them (the trustor). Authority delegation is simply one example of trust. The first formal trust relationship is between shareholders and the board of directors of a company. The next level is between the board and the management, or in the case of a start up the founders.

It is this scenario that poses a great challenge to entrepreneurs, especially those in the Middle East. Unlike a mature company, there are many trust relationships and structures that are missing in a start up. First, the board will usually have directors who have not worked with each other at the board level. This means that intra-board trust is low. Compare this to the board of a mature company where board changes are relatively infrequent and so a majority of the board will have worked with each other for several years.

Furthermore, the board will unlikely have previously worked with the management, at least not in a board—management relationship. The next trust challenge is that the control functions within the start up, such as audit and finance, are new and untested. The icing on the cake is that the start up period is a high risk phase as cash flows out and there is zero or little cash flowing in. This increases the reputational stake of the board of directors which in turn reduces their propensity to trust.

All this lack of trust, or more accurately the slow pace of trust development, leads to a low risk-taking appetite. This is a problem as the start up phase is exactly when entrepreneurs need to ramp up risk. Distrustful and reticent boards end up suffocating the start up and smothering the entrepreneur, inevitably leading to disappointing results.

The successful entrepreneur needs to be careful in how the board is selected by his new investors. A safe set of hands is absolutely the wrong type of person. A person who has taken risks, managed them and succeeded is the better choice. Working on attracting board members who have worked with each other is also useful. Having two or more board directors who have worked with the entrepreneur is desirable. Finally, entrepreneurs should consider allowing the board to hire people they trust into control positions such as finance.

These trust issues also explain why family groups continue to have a better success rate of launching new ventures. Since more of the team will have worked together for a long time, control functions are run out of the group headquarters and the shareholder is also the management, i.e. the board is cut out completely at this stage, the start up does not face nearly as much of a challenge in terms of trust based indecision. It is not so much that the family businesses are better at start ups, it is that they circumvent corporate governance structures that are challenged by Middle East trust culture.

The Middle East culture isn’t going to change and embrace swift trust as a model, but entrepreneurs aware of the issues and proactive in dealing with them might be able to avoid the long slow death of the start up mired in trust based indecision.