Welcome to Employee Ownership! (Without the Hype)

Introduction:

This week, we dig into employee ownership with two people who’ve lived it: Kris Maynard and Justin Jordan of Cathedral Holdings, a 100-percent employee-owned ESOP since 2011. Kris and Justin are enthusiastic proponents of ESOPs, but they’re also candid about what can go wrong. Yes, ESOPs come with big tax advantages. But the transaction can be complex. The debt can fundamentally change the risk profile of a business. And perhaps the most under-discussed challenge of all: not all employees embrace employee ownership. Some see it as little more than a glorified retirement plan. And here’s the thing: an ESOP can be a far riskier retirement plan than many understand. They differ from 401(k)s in that there’s no regulation requiring an ESOP to sequester its employees’ retirement funds. If the company fails—and like all businesses, ESOPs do fail—those nest eggs can vanish. Kris and Justin explain how they’ve addressed these issues and what they might do differently if they were starting over. They also emphasize an important point: Not all ESOPs are created equal. “If you’ve seen one ESOP,” Justin likes to say, “you’ve seen one ESOP.”

— Loren Feldman

Guests:

Kris Maynard is co-founder and executive chairman of Cathedral Holdings.

Justin Jordan is CEO of Cathedral Holdings.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Kris and Justin. It’s great to have you here. As you may know, I’ve had a number of guests on this podcast who, I think it’s fair to say, have been somewhat skeptical about ESOPs. These are not people who’ve actually done it. They’re people who’ve been thinking about it and trying to get their arms around it and have various concerns. I wanted to try to raise those concerns with the two of you because my understanding is that you’ve been quite pleased with your ESOP experience. Is that correct? Kris?

Kris Maynard:
For sure, yeah. I mean, we instituted our ESOP in 2011. I guess we’re 15 years in now, and I still think, as a selling shareholder, it was one of the best decisions I ever made—not just for myself but more importantly, I think, for the sake of our employee owners and the future of what I believe is a great business that we intend to last for many decades. So, well, I love it.

Loren Feldman:
That’s great. So first, let’s be clear about your roles. Kris, you’re one of the co-founders of—I think when you started the ESOP, you were Essential Ingredients. Is that still the ESOP, or is it Cathedral Holdings?

Kris Maynard:
At the time of the transaction, we were just Essential Ingredients, a wholesale chemical distribution company, primarily supplying ingredients to the personal care market. Since that time, I guess in about 2019, we rolled up a holding company called Cathedral Holdings, and at the same time we launched Cathedral, we elevated the ESOP to the holding company to give us an opportunity to start really new business verticals penetrating different markets throughout North America.

Loren Feldman:
So you were part of the co-founder group that decided to sell to the ESOP. You were CEO at the time, I believe. After many years, you eventually kicked yourself upstairs to chairman. Is that right?

Kris Maynard:
In fact, at the time of the transaction, we didn’t have a CEO. We had three selling shareholders. Justin was also what we called the office of the president. So we were really the executives at the time. But you’re right. Since then, I assumed the executive chairman position in 2022 when Justin assumed the CEO position after serving as our Chief Operating Officer, General Manager, for two decades.

Loren Feldman:
So Justin, you came into the company before the ESOP?

Justin Jordan:
I did. I joined the company in 2004, which was seven years prior to the ESOP.

Loren Feldman:
And as essentially chief operating officer or president, as Kris just said?

Justin Jordan:
In essence, the chief operating officer.

Loren Feldman:
And since Kris became executive chairman, you’ve been the CEO.

Justin Jordan:
That’s correct.

Loren Feldman:
Can you give us a sense of the size of the business: Employees? Revenue?

Justin Jordan:
Sure. This year, our plan is to do about 200 top line, $200 million, and we have 120 employees.

Loren Feldman:
Great. You hear a lot of things when you’re talking about ESOPs. One of the expectations owners who are considering this have is that it will improve the performance of their business— both because employees are going to be more engaged, and thus perform better, and because people just like dealing with employee-owned businesses. So it generates a certain amount of goodwill and good PR.

You’re a B2B business. I don’t know if that’s as big a deal for you, in terms of people liking to deal with employee-owned businesses, but what has been the case for you guys? Do you think it has made you a better performing business?

Justin Jordan:
Let me take you back to 2011 at the time of our transaction. At that time, we were just under a $60 million business with 46 employees. So over the course of those 15 years, we’ve had decent growth. And to the question about whether or not people enjoy dealing with an employee-owned business, I think most of us appreciate the fact that when we engage in other businesses, we’re looking to have a conversation with somebody who has the ability to make an impact, to make a decision, to care well for us, to advocate on our behalf. And when you’re talking to an owner, whether that owner is an account manager, that owner works in logistics or customer care, knowing somebody has an understanding of the business, we always want to do that.

Kris Maynard:
Yeah, I would say just on the heels of that, Loren, that people enjoy doing business with really good companies. And I do happen to believe that employee-owned companies that are run well are really good companies. Some of it is employee engagement. Some of it is the retention that we have, because we don’t tend to lose many people. A lot of that has to do with the culture that we propagate as an employee-owned company, and our core purpose and our values. So again, I think companies enjoy doing business with great companies

Loren Feldman:
That said, Kris, if I recall correctly, you did have an issue shortly after you sold to the ESOP. And I only know this because you shared it publicly previously. I think your business did suffer for a while. And if I remember correctly, you even had to kick some money back into the business. Am I right about that?

Kris Maynard:
You had to bring that up, didn’t you, Loren?

Loren Feldman:
Yes, I did. [Laughter]

Kris Maynard:
Yeah, we entered, right after the transaction, what we affectionately called Death Valley. And for whatever reason, in the fall of 2011, we hit a bit of a drought, in terms of sales and performance. Anyway, for the first time in our lives, we were under bank covenants. We’d taken some level of debt for the transaction. We seller-financed a good amount of it, too.

But I found myself starting to really perform differently and run the company differently than we had previously. One of the reasons we didn’t sell to an outside suitor, a competitor, or a private equity, or anything like that was because I never wanted the numbers to determine how we behaved. But I found myself doing the exact thing that I didn’t want if a private-equity-owned company or a competitor had bought us. I was micromanaging our sales team, nagging them about closing business and orders.

And I remember distinctly sitting in front of our banker one morning. We had a monthly meeting, and we had failed covenants, and he looked across the table at me. He said, “Kris, what keeps you up at night?” I said, “Are you kidding me?” I said, “Every time I close my eyes, I see your face.” [Laughter]

You know, it was this haunting feeling. And you’re right, my partners and I got together, and I just said, “Guys, listen, I can’t live like this. I don’t think it’s good for me. It’s no good for our business. Let’s kick some money back to the bank, get outside of these covenants, and get back to doing business the way we’ve always done it.” And we did that. And once that pressure was off of us, we’re back off to the races again.

Loren Feldman:
Did you think there was any possibility that going ESOP was responsible for the decline in performance, or was that just a coincidence?

Kris Maynard:
I think there a level of, probably, disengagement from us as selling shareholders and senior leadership, in terms of a distraction for six or eight months, nine months of that year, really being heads down on trying to get a pretty complex transaction done. So there was an element of that, I think, Loren. I think some of it was, there was a bit of bad luck, in terms of timing. But I think the important thing is that we recognized some of our mistakes, I think, and we had the wherewithal to get out from under a rock and get back to doing what we do.

Justin Jordan:
Loren, let me contribute a little bit to that. If you can imagine a business that had run for decades without debt—we had small revolver debt up until 2011, but in essence, no debt—no covenants, no debt. All of a sudden, you leverage 100 percent of your business—100 percent. Everything. It changes the way you think. It changes the way you run the business, how you manage the business, manage people. The pressure that debt brings, it’s no surprise to anybody, will change the way you behave. And that, I think, as much as anything, contributed, along with what Kris shared.

We closed in August, but the month of September and the month of October was one of those odd arrangements where the market was weak. We didn’t have the type of revenue we typically were accustomed to. That just happened to span two quarters, two quarters where we failed covenants, and we’re off to the races with conversations with bankers.

What started with a quarterly review became a monthly review, became a weekly review, to almost a daily: How are we going? How are we going to change this? And that’s where the generosity of the three selling shareholders allowed us to reset. When they brought a portion of their closing assets, which were pledged dollars, back, it allowed us to take leverage, which for us, our senior leverage was four times EBITDA. We dropped that down to three, and all of a sudden we were off to the races. It changed everything. Debt is the issue.

Loren Feldman:
And that’s a necessary part of most ESOP arrangements. Are you aware that this has happened to other companies?

Kris Maynard:
I’ve never talked to anybody who kind of ran into the same situation we did. Loren, I think if I could go back in time, obviously, we wouldn’t have borrowed as much from the bank as we did. A lot of selling shareholders will do 100-percent seller financing so they don’t ever feel that pressure. You know, any pressure they feel is self-inflicted. So again, going back in time, we would have seller-financed a bit more than we did, keep us out from under any kind of covenants. And that would be probably my recommendation, if somebody asked me that question going forward.

Loren Feldman:
Were your employees aware of what was going on during that difficult period?

Kris Maynard:
No, I mean, at the time, I didn’t know what the Great Game of Business was, or what open-book management was. And when I talk to a lot of selling shareholders these days who are on the front end of contemplating an ESOP, one of my regrets is—strictly out of ignorance—we didn’t know what that tool was or what that system looked like.

But I believe when we integrated that into our game plan in 2015, opening up the books and involving our people in learning what it looks like to be an employee-owner, just the educational part of that, was really quite a revelation. So, when folks are asking me, “What would you have done differently?” One of those things: I would have rolled out the Great Game of Business at the exact same time we rolled out the ESOP.

Loren Feldman:
For those who don’t know, that’s the idea of open-book management, where you share the financial performance of the business with employees. Obviously, it’s important to train those employees so that they can read the numbers, know what they mean, and make sense of them. And that did make a big difference for you?

Kris Maynard:
I’d say it made a huge difference for us. And I know it made a huge difference for me personally. I mean, so you know, when I think back on that fall of 2011, the fact that our employees had no idea that I was experiencing these kinds of pressures—we were keeping that element in a secret vault. At the same time, my behavior is changing. They probably noticed something, but there was no correlation, because we had never shared at all the finances of the operation.

Loren Feldman:
I’ve spoken to some owners and also employees of ESOPs who, along these lines, have raised the issue of: Are they really employee-owners? And I guess I would ask you to think back to that period before you opened the books. Did their lives change in any material way at that point? Or was it really that they got a retirement plan?

Kris Maynard:
I’d say their lives changed in one way: They didn’t get a big Christmas bonus every year. [Laughter] Previous to the ESOP, we had a profit-sharing plan. And me and my partners would get together, and we called it a Santa Claus bonus. In retrospect, we would hand out cash based on the profitability of the business. And again, the folks didn’t know if we had a great year or a bad year until they got their Christmas bonus.

When we rolled out the ESOP, we decided to replace the profit-sharing program with the ESOP, essentially, and maintained our 401(k) and the matching program. But for those first couple years, we had a few folks who were like, “No Christmas bonus?” And we gave a little bit of money, but it was nothing like we had been giving previously. So Justin’s got a fun story about that, actually.

Loren Feldman:
What’s that, Justin?

Justin Jordan:
Prior to 2011, as Kris said, we had a profit-share program that generally contributed about 10 percent of your pay into the 401(k). You could see that deposit every year. So let’s just say you’re making $30,000 a year at that time. You’re expecting every year, you’re seeing about $3,000 contributed to the 401(k). So we do our transaction in August, and our share price at the end of the year, when we’re 100-percent leveraged, is $2.30 a share. And this individual gets 100 shares. So they get a statement at the end of that year that says, “Hi, you’ve got a share price of $2.30. You’ve got 100 shares. That equates to $230.” “You told me, Justin, this was a good deal. Last year, I got $3,000. This year, I got $240. Real slow, help me understand.”

And I explained, “Just like when you buy a house, you buy a $100,000 house. You put 5 percent down, or whatever. You still have a $100,000 house, but you don’t have that much equity. And you don’t have as much equity in the share, but it will continue to appreciate over time. Give it time as we pay off our debt.” Next year rolls around, our stock price goes from $2.30 to, call it $4.50. Now you’ve got an annual statement that shows you get $900 contributed this year. Now, your $230 is also worth $900. So combined, over two years, you’ve got $1,800, compared to the $6,000 you were expecting the year before the ESOP.

Now, year three rolls around. Now, we’ve figured it out. Now, we’re actually starting to think and operate like owners. Our share price pops from $4.50 to, call it $20. Now, I’ve got that same group of people lined up outside of my office saying, “Help me. Explain what I have to do in order to make sure that happens again next year.” It was great.

The fourth year, I had a member who was part of our committee, the ESOP employee committee, and she comes to me and says, “Justin, this just isn’t right. I’m looking at my statement. It can’t be right.” And I said, “Help me understand why it’s not right.” She says, “Well, I’ve been in the 401(k) for 10 years, and I have this much in my balance. If I’m to believe this statement, in four years, I have more in the ESOP than I had in 10 years’ worth of effort in the 401(k). I said, “Welcome to employee ownership. There’s more where that came from.” It was great. That preceded our open-book management efforts. Now, we really have a group of people that want to understand: What can I do to contribute?

Loren Feldman:
That still brings me back to the same question, Justin. Those people you just described, do you think they were looking at this as an enhanced retirement plan, once they realized how enhanced it was? Or did they feel like they were part owners of the company?

Justin Jordan:
I’d say both. I think, clearly, they’re looking at and comparing one retirement plan, the 401(k), to their ESOP. They’re clearly comparing that, and they’re thinking that way. But when they ask you that question, “What can I do to help improve the value of the business?” they’re starting to think like an owner, like a very engaged employee.

Kris Maynard:
Yeah, and again, Loren, it was just a faulty expectation for us to expect our people to start thinking and acting like owners before we gave them any education whatsoever on how to read a P&L. What does a balance sheet look like? How do we make money around here? How do we lose money? So it was an unfair expectation for us to even consider them to think like an employee owner—until we gave them the tools to be able to do that.

Loren Feldman:
One of the things I’ve heard from owners is that when they discuss this possibility with employees, they hear from some employees—and it sounds like it could have been the situation for you—“But wait a second. I’m going to get my reward in retirement. I need the money now.” And that’s the situation your employees were in initially, where they were looking at giving up a profit-sharing plan to put money in their pockets every year and instead getting the money down the road in retirement. How do you thi nk about that?

Justin Jordan:
Well, Loren, the profit-share program was a contribution into their 401(k). But what I’d tell you is, you really have highlighted, at least in our situation, where there is a dilemma, and the dilemma is: Are we caring for our employees at a level that they can really sustain themselves, live a life of dignity? And this whole question of what’s the proper pay for somebody to really enjoy life as an employee, and as an employee-owner.

Our business is doing remarkably well. They’re seeing that each and every year. But if you’re struggling to buy groceries, to pay rent, cover student loans, we’ve got a problem. And Kris, do you want to tell the story about what we discovered during Covid?

Kris Maynard:
Yeah, I don’t want to sidetrack us too much, Loren, but it seems like you’re taking us there. So, during Covid, we had heard some of this little bit of noise about folks needing more cash today to pay the electric bill or the car payment versus the holy grail of a great retirement. During Covid, we were, I think, two or three weeks into Covid. We were so used to working together. We’d always been eight to five in the office, all together, all the time. We found ourselves not at all together any of the time. And my assistant came to me one day, and she said, “What if we put together a care package, just a Covid care package and send it out to all the employees? It’d be fun.” You know, we found a couple of cases of toilet paper in the warehouse that were up on a top rack, and everybody needed toilet paper, we knew.

And so we made a fun basket, included RC Colas and Moon Pies and toilet paper and hand sanitizer and all the stuff people here in the South appreciate. [Laughter] And then Justin and I divided the local employees up into kind of ZIP codes and locations, and we loaded up our cars on a Friday and off we went delivering care packages personally to each of these homes. So we pull up to a house, run up, ring the doorbell, ding dong kind of thing, and drop the basket on the porch, and take a picture of our surprised employee when they come out, and say hi, and talk to them for me a few minutes, and then off to the next next house.

When we finished our rounds that afternoon, I called Justin after my last house, and I was really discouraged, actually. I was asking how it went and those sorts of things. And I said, “Did you notice anything?” Because I had noticed a few things. And he said, “Yeah, I noticed a few things.” He said, “I was kind of surprised. Some of the houses I visited, there was a level of disrepair that was surprising.” And, I mean, I had gone up to a couple houses and the grass was chest high. One house I went to, the steps were so bad in the front that you couldn’t walk up them. So I had to find myself going around to the back door because the steps were broken out front.

And I’m thinking to myself, when I get back in the car, “I can’t believe we’ve got folks working for us who I care for so much, who are living in conditions like this.” And so, Justin and I talked about that, and I said, “Let’s just wrestle over this, over the weekend. And on Monday, let’s you and I get together and talk about our experience.”

And out of that whole thing, after talking to our other leaders about that and our board, we developed what we call a living wage program. So we did a study on what it takes to live here in our local county, for a family to get by on. And we instituted a living wage program and made a commitment to getting our folks to a living wage so that they could live that life of dignity that Justin mentioned.

Loren Feldman:
It’s not really related to the ESOP though, right? There was no ESOP element to it.

Justin Jordan:
There wasn’t, and there was. Because we explained to our employee-owners: This is the right thing to do. You want everybody that’s part of your team not showing up at work, trying to wonder, “How am I going to get groceries?” So any extra dollar we put into compensation is dollars that aren’t there on the bottom line when value is established. It’s not generating wealth. One could argue, is it not generating free cash flow going forward, or is it? I would argue, an engaged employee body who feels valued and rewarded for the work they do is going to be a far more productive employee. So I think it’s paid for itself.

Kris Maynard:
Yeah, and I would say, although it may not be directly tied to the ESOP, it is directly tied to our purpose and our culture here, Loren, and how we care. I mean, one of our core values is, “Who before what?” And you know, our people are more valuable to us than the EBITDA.

Loren Feldman:
Here’s another question about the retirement plan aspect of an ESOP. We often hear about people who work on the front lines of an ESOP for decades and eventually retire with a million-dollar nest egg—or, if not a million dollars, a very substantial nest egg. And that’s a great thing, of course, incredibly rewarding for all involved, I would think. But there is some potential risk there. Like any business, an ESOP can fail, and if it does, that nest egg can disappear, at least at some ESOPs, because ESOPs aren’t required to segregate that money the way it would be if it were a 401(k). I’m curious how you guys think about that.

Justin Jordan:
Well, I’ll jump in there. One of the things that we did early on is, we realized we knew what we knew and we knew what we did not know. So our board of directors, we were very intentional about bringing independent directors on who had been down this path beforehand. So we brought in several people who actually understood what an ESOP was, and what were the traps that other ESOPs had found themselves in? So we were very intentional about bringing in wisdom that could help us avoid pitfalls that would come in the future.

We got a liquidity dashboard where we look and estimate: What are our next three years’ worth of liquidity requirements in order to buy out shares, the best we can forecast? And we make sure at the end of each year, we’ve got that three years worth of cash sitting basically in a reserved account that’s nothing but for repurchase of ESOPs. And every year, we replenish it. So we’re being very intentional about not finding ourselves in a very difficult position where you have to borrow money to meet obligations.

Kris Maynard:
Yeah, I think intentionality is the word there, Loren. The horror stories that I’ve read, the autopsies that I’ve done on ESOPs that have failed, there was a lack of intentionality around that. So they find themselves in a situation where they’ve got a bunch of senior people walking out the door at the same time. They’ve got a huge, huge obligation to pay those folks, and they haven’t planned for it. So we addressed that early on and made a commitment that we’re going to keep that three years in reserve at all times, so we don’t find ourselves in that situation.

Justin Jordan:
Your nest egg is really a minimum. It’s not a maximum. We’re beyond that right now.

Loren Feldman:
Do you have a sense of how other businesses handle that? I mean, my understanding is that you’re doing this by your choice. There’s not a government regulation that requires you to set aside that money. And businesses that are not as healthy as yours, they could even have the same intentionality but run into a rough spot and feel compelled to dig into that money they’ve set aside. Are you aware of that happening at the businesses that you talk to, the ESOPs you’re familiar with?

Justin Jordan:
We stay in several communities with an ESOP space. I have heard some stories, but I’ll tell you something I heard early on, which is: If you’ve seen one ESOP, well, you’ve seen one. And just because we do something doesn’t mean everybody does it. This is why it was so important to us, once again, to have had people who’ve been down this road 15 years ahead of us who could guide us and coach us and mentor us on the journey.

Loren Feldman:
Do you think your employees are aware of the difference between having money that they’re expecting will come from the ESOP versus money that they put in the 401(k)?

Justin Jordan:
Yeah, they do understand that money is being sourced from two different places. This is why I point back to the Great Game of Business. The transparency of our financials allows employees to see what the cash buildup is. How are we doing towards those terms? How much money has been set aside? So I think they have an appreciation that it’s got to come from the business. We’re very intentional about helping them understand, and we’re also very transparent with letting them see: How are we doing against those objectives?

Loren Feldman:
I think the point I’m hearing from you is that it’s a very different animal if you do an ESOP but don’t open the books and let your employee-owners actually know the finances.

Kris Maynard:
Yeah, I think it’s short-circuiting the system in a lot of ways. You’re trying to create an employee-owned community without that education. Again, it’s really hard to expect them to think and act like an owner without the right tools and education.

Loren Feldman:
So here’s another concern I’ve heard, and in fact, I heard it from you, Justin, more than five years ago, at a conference that we both attended. If an owner chooses to sell to an ESOP, it obviously means that the owner cares about his or her employees and cares about preserving the culture that has been created at the business, as opposed to selling it to a PE firm that’s likely to strip-mine it. And that owner has probably left some money on the table—not necessarily, but there’s a good chance.

But then a new generation of leaders comes along, and there’s a chance that they don’t feel the same sense of commitment to that culture. They might be more open to taking a deal, and in some eyes, they might even have a fiduciary responsibility to take an offer from a PE firm or some other type of business. I believe you guys have solved this problem. Tell me how.

Kris Maynard:
I’m not sure we’ve solved it, Loren. I’d say we’ve done our darndest to insulate ourselves against that kind of risk through a couple of different tools. First thing we did was work with our board and our trustee, really, on what we call our unsolicited-offer policy. So in a lot of these ESOP circles, you’ll hear folks talk about the boogeyman under the bed. You know, this person walks in some day, some way, and dumps a bunch of cash in the parking lot and wants to buy your company.

That just never happens, first of all. Typically, when an ESOP sells, it’s because, like you described, it could be a second-generation owner who didn’t get a real big bite at the first apple. And they see an opportunity, and they’re motivated to really kind of line their own pockets. So, we developed this unsolicited-offer policy, which really—again, in conjunction with our attorney, our ESOP trustee, and our board—sort of defines: What does that look like? You know, if this does happen, somebody walks in and they make what’s called a bona fide offer, what are you going to do about it? And so this document really spells out what that transaction would demand, what it would look like, and the hurdles they’re going to have to cross in order to get to the castle.

Loren Feldman:
Is this some kind of poison pill? Is the aim to make it impossible, or does it remain a possibility?

Kris Maynard:
I mean, it’s a possibility, but it’s designed intentionally to make it very challenging. Part of our unsolicited-offer policy, for example, indicates that at the point we get to your best offer, we’re not going to do an exclusive arrangement with you. We’re going to shop your best offer. Because I made up my mind years ago: If we end up getting to that point, to me, we can kiss our culture, our purpose, all that stuff goodbye. It’s really about maximizing value for our shareholders.

So if that’s the decision I’m going to make, it’s now all about the money—where before it was all about the culture and the purpose—if it’s going to be all about the money, by God, it’s going to be all about the money. Bring a barrel of it, and we’re going to shop your best offer. So, most folks who are inquiring into purchasing a company want some kind of exclusivity when they get down to the bottom of the ninth, and we’re just not going to give it to them.

Justin Jordan:
I’d add a couple of things to what we’ve done to limit the likelihood of a takeover or a sell-out, Loren. One, Kris just highlighted: our unsolicited-offer policy. It really is a process that governs: What is a bonafide offer? What do we do in the offer? A second is, we become a public benefit corporation, and so we’ve registered with the state of Georgia. We’re a benefit corp.

Loren Feldman:
Tell us what that means.

Justin Jordan:
Yeah, we exist to provide benefits to the public, into the communities where we serve. One of our tenets is we evangelize the notion of employee ownership. What that looks like is, we invite people in who are contemplating this as a journey. We participate in conversations like this one to help educate people. My goodness, 15 years ago, there were about 7,000 ESOPs. Many of them have been sold, but there’s still only about 7,000 today. So, we want to promote it. We want to educate others about it.

Another public benefit that we offer is, we believe in employee ownership. We exist to make sure that well, we deal with wealth equality by offering ownership to our employees. So you’d have to really make a good, hard case as to how post-transaction we would still be living out that purpose if indeed employee ownership wasn’t part of it. Selling to private equity would make that difficult. And then lastly, we hire to a standard, and we preach: Here’s why we’re on this Evergreen journey. Here’s why we believe that you take a 100-year mindset, which is one of our core values, and look at how the value will appreciate over a hundred years versus three, four, or five years, we believe employee ownership is a far better deal. There are many things that we’re doing to protect against the rogue approach.

Loren Feldman:
Justin, what’s the mechanism by which that is enforced? How does being a benefit corporation—I mean, what’s the difference between you just espousing those goals of preaching employee ownership, versus making it really difficult for the company to sell to someone who would not practice the same way?

Justin Jordan:
Right, so the articles of incorporation for Cathedral reference our benefit core purpose. Here are the purposes that we exist to do. So we’ve codified it. Our board of directors holds us accountable to every year producing a report that demonstrates how we’re achieving those things. What are we doing to deliver on that promise? Our trustee, who represents the employees in our trust, he, too, had to agree with us converting to a benefit corp. So there’s governance, and there’s responsibility and accountability to living it out each and every year.

Loren Feldman:
So it’s really up to the people in those positions. And that’s part of the reason a sale remains at least a hypothetical possibility. If everybody involved were convinced that this was the right step, it could, in fact, happen.

Justin Jordan:
Yes, it could.

Loren Feldman:
Since you guys did this, a couple of other forms of employee ownership have kind of gotten trendy, namely, employee ownership trusts and worker co-ops—much smaller, fewer numbers, even than the 7,000 you quoted for ESOPs, but they seem to be gaining some momentum, at least in conversation. Have either of you looked at them, thought about them? Is there any chance that you would have picked one of those formats if you’d been aware of it back when you made your decision?

Kris Maynard:
I’ve got a number of friends that have taken those paths. I think we share the same friends, Loren, but yeah, and I’m not saying—it is right for them. When I think about our desire to live out this purpose for 100 years, to me, there is a level of comfort in some of the legal restrictions around being an S CORP ESOP, as defined by the Department of Labor.

So, you know, some of those other models, I don’t think offer that sort of—I don’t like bureaucracy at all. But I think there’s opportunities to use some form to define what we want this to look like in the future. So that gives me comfort, versus an undefined future that could dramatically change under some different leadership.

Loren Feldman:
I think I just heard an entrepreneur say good things about regulation.

Kris Maynard:
That’s the one time you’re going to hear me say it. [Laughter]

Loren Feldman:
It’s interesting, because that is one of the reasons I’ve heard that people lean in the other direction. They like the flexibility. They like the idea that they’re—I mean, they understand they’re not getting the tax benefits that you get with an ESOP, but they also don’t get the government intrusion that they would.

Kris Maynard:
Government intrusion is, I think, a bit of an overstatement. I mean, there’s obviously some guidelines that we’ve got to live within and certain practices we’ve got to do. But I think we’d be doing those anyway. And we sure do like the tax benefits.

Justin Jordan:
Yeah, I would say that the regulatory burdens of a 401(k) is no greater than what I’ve experienced with the ESOP. So I heard when we did our transaction, “You can expect an IRS audit, DOL audit, within seven years of your transaction. I can almost guarantee it.” Seven years came, seven years went. We never got a sniff of it.

And I’ve been asking other people, “Did you guys get audited? Do you all get audited?” Nobody seems to have been audited. So I think there’s more noise around that, and maybe that’s the ESOP machine and the advisor community that really caution you that this could happen, but I’d be cautious. It’s not a guarantee that it’s going to happen. And if your ESOP is delivering, if you’re growing the value for the shareholder, I wouldn’t welcome the regulatory scrutiny, but I wouldn’t be fearful, either.

Loren Feldman:
So what’s the answer to the question that you raised Justin: Why aren’t there more ESOPs?

Justin Jordan:
Not sure I can really answer that question. I was not one of the owners of the business, pre-ESOP. I think their “why” for wanting to sell may just be different: maximizing the return. If that’s really what your objective is, if you want the money guaranteed, you want it real fast, an ESOP may not be the way. But the ESOP, from where I sit, has been a good investment for the employees. Kris, you can speak to whether or not it was for a selling shareholder. It looked good from where I sit.

Kris Maynard:
Yeah, I would say, we’re a purple unicorn, Loren, in a lot of ways.

Loren Feldman:
What do you mean by that?

Kris Maynard:
I do think Justin’s right. I think a lot of ESOPs get to the point where they create some value. They’ve got these employees who have been around a while, and they see a nice payday, and they feel good about taking care of this group of employees who are sitting in front of them right now. And that’s fine.

We’ve got this core value that we’re going to try to last 100 years, and we want to bless generations of employee-owners. So rather than looking at the generation sitting in front of us now, we dream about: What’s it going to look like in 20 years for these 20-somethings who are coming in here now, who’ll be in their 40s at that point, still enjoying this great place to work, still fulfilling this great purpose we have? And really, to me, being a great example of what business can look like in a business community that can look pretty sour sometimes.

Loren Feldman:
One effort to increase the number of ESOPs that’s gotten some attention is—it sounds like an oxymoron—a private equity firm, KKR, has been buying businesses and converting them to employee ownership. One partner there, Pete Stavros, has been behind this. I think 60 Minutes did a story about it and gave it a very positive review. I’m curious what you guys think about their approach: a private equity firm creating employee-owned businesses.

Kris Maynard:
You really want to know?

Loren Feldman:
I do. I absolutely want to know, Kris.

Kris Maynard:
Personally, I don’t like it. Again, I think it’s a very short-sighted approach. It does some good for a handful of people at, I’d say, a minimal level, because there’s obviously a desire to flip that business at some point. That’s what private equity does. It could be a longer flip, perhaps. Instead of being five or seven years, maybe it’s eight or 10.

So they come in, typically, from what I understand and do a 10-percent ESOP on a purchase like that. And folks in those situations may walk around with a six-figure number, a low six-figure number, or something like that, when the deal is all done. And to me, it really misses the point of what a great, purposeful company can do for the long haul. So it really comes back to just the dollars. And when I think people focus strictly on the dollars defining what great looks like, to me, that’s where I think we start missing the mark.

Because to me, purpose, culture, the way we interact with our customers, suppliers, our stakeholders, to me, that’s where the real value is created. It’s in those relationships and interactions. And to me, the byproduct is a very profitable, fantastically run, rewarding company. So I just get discouraged when people start minimizing success over cash.

Justin Jordan:
I think there’s opportunity for that model to get better. I love the notion that those employees, an engaged workforce, basically has a stay bonus for, call it three to five years, whatever it takes before that second transaction occurs. It’s a stay bonus, and it’s leveraging the power of employee engagement. If that ownership stake would enhance the likelihood of success in that model, it makes sense. I’d just like to see that model perpetuate in the second transaction, that they would still maintain some degree of equity in that business. When it completely goes away in that second transaction, the equity that the employees have. They got a bonus. And that’s good, but it doesn’t perpetuate employee ownership.

Loren Feldman:
I’ve tried to ask you the kinds of questions I hear from skeptical owners who are thinking about this, but I don’t want to miss whatever joy you’ve experienced operating in ESOP. Tell me what makes this all worthwhile. What should somebody considering this decision know about what it’s like to run an ESOP over a period of many years?

Kris Maynard:
I would say it’s a fantastic opportunity, which was a fantastic opportunity for me to experience a liquidity event—I grew up in a lower-middle class family, three boys in a one-bathroom house—to experience a liquidity event that I could have never dreamed of. Could we have sold it for more if we had done a different type of transaction? Probably so. But I’m telling you what, I mean, I’ve been blessed beyond measure. So to be able to do that, and at the same time, be able to repeat something similar to that—on a lower level, but to bless folks around here as employee-owners with more than they could ever dream of working somewhere else over a long period of time.

At the same time, they’re building value in the business because they are treated like employee-owners. They’re educated, they’re trained to think like an owner, and they do their job with excellence. And when you see all that, you see that engine running so fantastically, it is one of the most rewarding things you can imagine. I think the latest stats that I heard is we’ve retired, or will retire, at least 21 millionaires based on our current value. And that’s just unheard of. And that’s just based on the ESOP value, not their 401(k). And I’ve got friends who’ve got even much grander stories than that. So I think for me, as a selling shareholder, being able to touch lives in that way, and again, at the same time, create a business that I think is just beautiful in so many ways, in the way we care for people and our stakeholders, to me, is one of the most rewarding experiences of my life.

Loren Feldman:
My thanks to Kris Maynard and Justin Jordan of Cathedral Holdings. Thank you both for taking the time. I really appreciate it.

Kris Maynard:
You’re welcome. And if there’s folks listening to this, and they’re still on the fence, and they want to call me, you’ve got my number, Loren. Give it out.

Loren Feldman:
I appreciate that. I certainly will.