ESOP or EOT?
On the 21 Hats Sounding Board, subscribers are already engaging, including a discussion of the relative merits of employee stock ownership plans and employee ownership trusts.
Good Morning!
Here are today’s highlights:
Inside Wayfair’s very big new brick-and-mortar store.
Can you teach an AI bot enough empathy to handle customer service?
More employees are saying they want to be in the office full-time.
Small businesses are keeping paper checks alive.
THE 21 HATS SOUNDING BOARD
On our brand new Slack channel, where 21 Hats paid subscribers can ask questions, offer support, and network, we’ve already got some interesting discussions breaking out. One ongoing discussion involves the relative merits of employee stock ownership plans and employee ownership trusts, a conversation that grew out of last week’s podcast with Laura Anderson, founder of Local Ocean Seafoods, and Peter Koehler, co-founder of Lumo Group.
Jaci Russo: “Interested to learn how the trust is different from an esop and the other options. Some of our clients are starting to think about planning their exits so I'm always looking for good info to help advise them. Thanks!”
Jimmy Kalb: “The main difference, as I understand it, is that the employees don’t really own anything (like an ESOP)…so there is no appreciation of stock value that a worker might enjoy when they leave the company (voluntarily or non-voluntarily) even though those same employees helped to create the increased value in the stock in the first place… Laura gets her chips off the table but the employees really get nothing (the bonus / profit-sharing plan is mutually exclusive of the trust plan…and can be implemented by any company regardless of ownership structure…also…it’s at the full discretion of Laura).”
David Billstrom: “I've been researching EOTs since Anne-Claire Broughton introduced the concept to me two years ago; and so far I see nearly zero downside and a pile of advantages. I would have used the structure at a company where I helped the employees buy it from the original investors, but that pre-dated learning about it. Anne-Claire emphasized two things about EOTs... first, the structure is generalized. In each specific instance, you have wide latitude on how to set it up. Board of Director formation, election, replacement... all variables up to you. Mission, ditto. Boundaries, such as 'you will never sell this stock to an evil corporation?’ Yep, you can have that too. Super flexible.”
Peter Koehler: “Hi @Jimmy Kalb, thanks for your engagement with the pod. I was a guest on the pod and helped Laura on her transaction, so I figured I would reply. You are correct that workers do not directly own any stock. However I would push back on your characterization that ‘the employees really get nothing.’ They get an owner (the trust) who never wants to take a dividend or extract profits from the company (unlike nearly all human owners) and who, instead, has given the managers of the company a clear directive to redirect profit back to the employees who helped create it.
“I also think you are missing some nuance in your statement that the ‘profit sharing plan is mutually exclusive of the trust plan...and can be implemented by any company regardless of ownership structure.’ While it is of course true that a profit sharing plan can be implemented by any company regardless of ownership structure it is also true that that same profit sharing plan can be removed or radically reduced based on the whims of the owners or managers at any time.
“Under this structure, the new owner (the Trust), is directing the company to share profits with employees. Regardless of who is leading or managing the company, they must follow this directive. In this way, the profit sharing program is much more durable. Further, once the financing period is complete, it will also be more lucrative for employees than a comparable company with a human owner who is taking distributions/dividends (all else being equal).” FREE FOR PAID SUBSCRIBERS
RETAIL
But will it ever make money? “Out in the northern Chicago suburbs, a new 150,0000-square-foot behemoth of a home goods store is giving Ikea a run for its money. The towering white and purple building, opened in late May and designed by the architecture firm Gensler, is Wayfair’s first large-format brick-and-mortar store. Since launching in 2002, the company has specialized in direct-to-consumer online retail, developing a reputation for carrying just about every sofa, side table, appliance, and tchotchke under the sun. In 2023, the company reported an end-of-year net revenue of $3.1 billion, and it currently boasts 30 million products on its website.”
“Now, Wayfair is the latest in a stream of online retailers who are choosing to go the old-fashioned route and sell their wares in-person. While thousands of stores shut their doors during the ‘retail apocalypse’ just a decade ago, interest in in-person experiences shot up post-pandemic.”
“Even digital-native Gen Zers aren’t above putting some shopping cart wheels to the ground, with 64 percent reporting that they prefer to shop offline. Fashion brands including Skims, Revolve, and Halara are among those that have recently opened brick-and-mortars for the first time.”
“Whereas the Wayfair store allows customers to decide how quick their trip needs to be, from my experience it’s almost impossible to escape from Ikea in under an hour (or three). That’s because the store’s pathway encourages all shoppers to move along a predetermined path through every department, often resulting in an extra plant or table lamp finding its way into the cart.” READ MORE
ARTIFICIAL INTELLIGENCE
AI learns empathy, which helps it deal with customers: “Back in April, the startup Hume AI released a demo of what it calls the first emotionally intelligent artificial intelligence voice: ‘EVI,’ short for ‘Empathic Voice Interface.’ Talking with EVI is a lot like chatting with one of the newer generations of AI-powered voice assistants — think Siri or Alexa, but with ChatGPT capability. You can ask EVI to read you a poem or explain what caused the French Revolution, and a soft, mild-mannered voice will recite a haiku or start a mini lecture on eighteenth-century France. EVI also has the bugs and lags that you frequently encounter with AI voice bots.”
“What makes EVI different is that after you ask for a poem, a list of nuanced emotional expressions the AI claims it is detecting in your voice appears on the screen, from awkwardness and confusion to contempt and surprise. Hume AI says it parses up to 48 distinct emotional expressions.”
“Lawyer.com uses Hume to improve it’s 1-800 line. Call centers are a natural fit for a technology that recognizes human frustration. But Cowen has bigger aspirations: personal AI assistants that can really comprehend what you want, optimized for your well-being. ‘It learns from you over time, so it’s more personalized to you,’ Cowen said.”
“AI trained on your voice and facial expressions could one day tell you, ‘Hey, did you notice you get kind of tired and irritated around 3 P.M. every day?’ Which sounds helpful, until a beguiling robot voice gently reminds you Starbucks Frappuccinos are half off until 4.” READ MORE
HUMAN RESOURCES
Return to office just hit a milestone: “June was a watershed moment for post-pandemic office attendance. That's according to the Office Building Index from location intelligence software company Placer.ai, which found the national average for office attendance was down only 29.4 percent compared to June 2019. Placer.ai's data was based on foot traffic analytics from commercial office buildings in major metro areas. That's the highest post-pandemic recovery rate yet — marking yet another example of how workplace trends around hybrid work are shifting as sentiments of employers and employees evolve.”
“There are signs the in-office momentum is likely to build even stronger in the remainder of 2024 — especially with September typically being marked by a jump in in-office rates. But beyond that, more top executives are expecting a full return to the office for many positions.”
“That would be a welcome sign for commercial real estate developers, landlords, cities and small businesses that are dependent on office commuter traffic.”
“New data from Resume Builder indicates 40 percent of full-time employees prefer working fully in-person, while 32 percent favor a hybrid-work model. That means more than 7 in 10 workers of the 1,250 full-time employees surveyed don't prefer full-time remote work.” READ MORE
PAYMENT
Paying by check is still a thing, thanks largely to small businesses: “Checkbooks have become a rarity in the checkout line, and retailers are hastening the decline of the old-school habit among consumers. Target became the latest national chain to tell shoppers that its stores will no longer accept personal checks beginning today, joining Whole Foods and Aldi. But when it comes to business-to-business payments, cutting paper checks is still common practice, founders say, with some businesses collecting the majority of their fees by mail. Despite the additional costs, hassles, and risks, entrepreneurs keep accepting checks from clients and vendors with no plans to stop any time soon.”
“When History Associates Incorporated, a history consulting firm in Rockville, Maryland, moved into a new office last November, something important got lost in the changeover: a check for more than half a million dollars. One of the company's clients, a major academic institution, mailed the payment to HAI's old address, and CEO Beth Maser says it took her team about six weeks of cutting through red tape to get the check reissued and deposited.”
“‘It is what it is. Do I love having an overhead expense for buying and mailing paper checks? No, but it is a cost of doing business,’ says Maser, whose team has been aggressively pushing clients to adopt electronic payments, but not always with success. The share of HAI customers that pay by check has dropped from about 50 percent five years ago, but 30 percent still choose to send checks. The 55-year-old CEO says, ‘Maybe it's my generation, my demographic, but it never crossed my mind to ever say we will never take a check.’”
“It likely will take at least another generation for paper checks to completely phase out and be replaced by electronic money transfers, such as bank-to-bank payments through the Automated Clearing House, and other digital alternatives like PayPal and Venmo, says Texas Christian University economics professor Stephen Quinn, who studies financial history and has written about the rise and decline of checking.” READ MORE
ENERGY
Houstonians are asking themselves why the city can’t keep its lights on: “Houston is no stranger to natural disasters, but living through two crippling power outages in two months has driven some in the city to consider what may be the ultimate evacuation plan: moving out. The more powerful of the storms, Hurricane Beryl, devastated the power infrastructure over nearly the entire city. When it hit, thousands of people were already living in shelters and hotels, according to state officials, because they had been displaced by an earlier weather event, the spring thunderstorms that caused wind damage and flooding.”
“More than 2.2 million customers of the local utility, CenterPoint Energy, were without power at the peak of the outages last week. As of late Monday, around 135,000 were still in the dark. Gov. Greg Abbott, who was on an economic development mission in Asia for most of last week, blamed the utility for the widespread power failures, saying on Monday that it had ‘dropped the ball.’”
“Those who could afford them scrambled for generators, fearing what a storm even more powerful than Beryl, rated as a Category 1 when it made landfall, might do. ‘Beryl was the weakest a hurricane could be. Why does it feel like Houston isn’t the same?’ The Houston Chronicle asked in a headline.”
“‘I think this storm has broken people,’ said Lawrence Febo, 47, who works in the energy sector and was without power for six days in the hurricane after being in the dark for four days in the May storm. ‘It’s the energy capital of the world and we cannot electrify a couple of million people?’” READ MORE
OBITUARY
Herbert Hoelter helped business leaders convicted of crimes find alternative ways to pay their debt to society: “Mr. Hoelter’s client list was a Who’s Who of corporate and financial scandal, including Leona Helmsley, the hotel baroness convicted of tax evasion; Bernard L. Madoff, the architect of the largest Ponzi scheme in financial history; Ivan F. Boesky, the financier convicted of insider trading; Michael R. Milken, the so-called junk bond king; and, after she was convicted, [Martha] Stewart. Mr. Hoelter’s main role in these cases was writing lengthy biographies of his clients — to help them appear sympathetic to judges and to offer possibilities for alternative or lesser sentences.”
“When he worked for Ms. Stewart, Mr. Hoelter argued that her conviction, on charges that she lied about why she had sold shares of a biotechnology company, had already severely damaged her reputation. (The judge threw out a securities fraud charge during the trial.) Her legal team also presented an alternative to prison time: teaching disadvantaged women how to start their own businesses. The judge sent her to prison anyway, but for only five months, well short of what prosecutors wanted.”
“After Mr. Milken was sentenced to 10 years in prison, his lawyers hired Mr. Hoelter, who produced data showing that the sentence was tougher than what others had received after being convicted of similar charges. His legal team also argued that Mr. Milken had been a role model in prison, tutoring other inmates, and could continue that work near his home in Los Angeles. A judge reduced Mr. Milken’s sentence to two years, plus three years of community service.”
“Thousands of lesser-known white-collar criminals also benefited from Mr. Hoelter’s counsel. ‘Our whole philosophy is that one should pay back the community, either in terms of financial restitution and/or social restitution,’ he told [Anderson] Cooper on CNN. ‘I mean, we’ve had construction magnates build wings of hospitals for kids with spina bifida. We’ve had food executives create large amounts of food coming into food banks. There’s wonderful creative ideas that one can fashion that judges should look at, as well as the background of the different individuals that are there that come before them for sentencing.” READ MORE
THE 21 HATS PODCAST
Family Businesses Aren’t Dysfunctional. They’re Disastrous: This week, in episode 204, Jay Goltz and special guest Cathy Caroll talk about family businesses, with Jay asserting that they are even more combustible than most people realize and with Cathy offering some smart coping strategies. We start with Cathy explaining how her own experiences in a family business propelled her to write a book, Hug of War, and to become a family business coach. Why are family businesses so difficult? Well, says Cathy, it’s because you’re trying to combine a family mindset with a business mindset, which she says, is like “living in socialism and capitalism simultaneously.”
Of course, she says, it also has to do with mixing love and money—“You’re just gonna get sparks”—and with the brutal challenge of transitioning from one generation to the next, when every decision can feel like a repudiation or rejection. Still, it was that stew of anxiety, resentment, and trauma that helped Cathy find her calling, which is to help others do in their family businesses what she could not in hers.
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Thanks for reading, everyone. — Loren
