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By Jeremy Quittner in New York
FEBRUARY 9, 2000


Can a Minority Business Be Nearly All White?

A new ownership definition for contract set-asides has minority small businesses in an uproar

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When does a business that's run by minority executives cease to become a minority business? That question has sparked a firestorm of controversy at one of the country's most influential minority business groups, the National Minority Supplier Development Council.

Composed of 3,500 businesses that purchase goods and services from minority suppliers, the NMSDC tries to level the playing field by fostering business between its members and 15,000 qualified minority-owned companies. But that atmosphere of cooperation has been shattered since January, when the council's board voted to allow businesses to reduce their minority equity ownership to a mere 30%, from 51%, and still qualify for minority status.

The change applies only to financial equity and not to voting control. Minority owners must retain control of at least 51% of a company's voting stock to be considered for contracts administered through the NMSDC's guidelines. And the change is still subject to review by the NMSDC. Still, it has touched off intense debate among minority businesses over how to advance their interests and promote growth in a business system where the deck often seems stacked against them.

NMSDC officials say the change is intended to help minority businesses attract private equity investments, which in turn would allow them to grow more quickly and compete more effectively against larger, majority-owned businesses in bidding on big corporate-supplier contracts. But critics in the minority business community argue the move would open the door to nonminority financiers hoping to profit from preferential treatment.

The stakes are considerable. The NMSDC's corporate members did $41 billion worth of business with minority suppliers in 1998. And the vote comes at a time when many large corporations are thinning the ranks of their suppliers, looking for bigger companies to meet a broader range of their needs.

INVISIBLE ROLE? For minority businesses, the council's vote has touched a nerve that runs deeper than the dollar value of contracts. Many minority business owners would like nothing more than to compete on an equal footing with other companies, regardless of the composition of their ownership. At the same time, groups like the NMSDC are viewed as vital to the financial health and survival of many minority businesses. The action by the council reveals deep divisions among minority businesses that could have long-term implications for the way they organize and lobby for advantage as a group.

Among the supporters of reducing the requirements for minority equity ownership is C. Michael Gooden, president and chief executive officer of Integrated Systems Analysts Inc., an information-technology company based in Arlington, Va. Gooden says one of the biggest problems he has encountered as a midsize company with 650 employees is that large corporations equate minority businesses with small businesses. "Corporate America doesn't view minority businesses as capable of taking on significant roles in meeting broad segments of their requirements," Gooden says. Instead, he says, minority companies are often relegated to an invisible role as subcontractors that never develop deep relationships with their customers.

In the 19 years since Gooden founded ISA, the company has increased its annual revenues to $52 million in 1999, largely through acquisitions funded by commercial bank loans. Gooden says he could grow faster by bringing in nonminority equity investors, but that would risk ISA's status as a minority contractor. Several of the companies ISA has acquired bring with them preexisting minority supplier agreements with large corporations. In November, for example, ISA acquired a commercial systems and services unit from Lockheed-Martin that had supplier contracts with Ford Motor Co.

For Gooden, the NMSDC's vote frees minority business owners to adopt the same strategies for growth used by other companies. "I don't know of any major corporations that are 51% controlled by the owners," he says. "Most of them have been built through some sort of equity investment over time."

GOING TO WAR. But for small businesses, the council vote appears more threatening. Harry C. Alford, president and chief executive officer of the National Black Chamber of Commerce in Washington, D.C., one of the largest national associations of black-owned small businesses, is strongly opposed. He regards the NMSDC's action as an excuse for the failure of Corporate America to diversify its procurement mix. "We are going to go to war on this thing," he says, adding that he has told the Chamber's 64,000 members to voice their opposition to the vote and companies that honor it.

Alford rejects arguments such as Gooden's. He says the minority-supplier set-asides are there for smaller businesses, whose minority control should remain intact. By the time a minority business has revenues of $50 million, he says, it has joined the mainstream and shouldn't benefit from any special status. "Be a large player, get the equity financing," he urges. "But get out of this crib that protects minority businesses through development. You are not disadvantaged any longer."

In Alford's view, the NMSDC's vote raises the potential for nonminority investors to buy a controlling stake in a minority company and reap the benefits of minority contracts. The NMSDC "can say [they] have billions of dollars out here now from these white companies that all of a sudden are black," says Alford.

SHELL GAME. For some, that kind of talk comes painfully close to resurrecting the old image of carpetbaggers who roamed the South after the Civil War. "It's an insult to the intelligence of minority businesses," says Weldon Latham, senior partner for law firm Shaw Pittman in Washington, D.C., and a specialist in minority-business law.

For its part, the NMSDC says it plans to avoid the problem of finding itself with a lot of shell companies through its certification process. Under the new plan, companies won't be certified by the NMSDC unless minorities continue to hold at least 51% of the voting stock, exercise control over day-to-day operations, and have a majority on the board of directors. What's more, only institutional investors can hold the nonvoting stock of NMSDC-certified companies.

Still, other groups are joining the opposition. The Greenlining Institute in San Francisco, a minority small-business civil rights and consumer coalition, promises a fight. "These [NMSDC members] are the companies with the worst records, and that is the only reason they have pushed through, and in secret, a vote that is highly unpopular among those who are supposed to benefit from it," says Bob Gnaizda, the group's general counsel. The institute plans to demand that the NMSDC's board of directors, and all the large corporations on the council, make public the percentage of business contracts their companies have with minority-owned small businesses.

Not all the NMSDC members are comfortable with the new ownership rules. The council says 76% of its board members that voted were in favor of the new classification, but it would not say how many board members actually voted. One board member that abstained was Xerox Corp. "We feel that a vote is not warranted until there is more active discussion from other business groups," says Christa Carone, a company spokeswoman. In 1999, Carone says, 9.5%, of Xerox's more than $2 billion in supplier purchasing went to minority businesses. "It's a sensitive issue, and we are not ready to cast a vote until we have heard from all parties," she added.

Xerox's demurral may be more eloquent than words. But many minority business owners aren't waiting to speak up.



jeremy_quittner@businessweek.com


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