Plan to Ease Rules on Minority Designation Prompts Protests

A proposal to relax rules governing which firms can call themselves minority-owned has ignited fierce protests by minority business organizations.

Next month, the National Minority Supplier Diversity Council, whose policies are followed widely by corporations, will consider allowing certain firms to keep their minority designation if investors dilute the minority owner’s interest to as little as 25%. Current rules require companies to be 51% minority-owned to receive minority certification.

The proposal is intended to encourage minority-owned companies to grow and compete for bigger contracts at a time when corporations are increasingly bundling them to achieve economies of scale. But minority business advocates say relaxing the rules would violate the spirit of minority contracting programs and further erode affirmative action nationwide by offering a hand to those who need it least.

Feeding the fears of opponents, Small Business Administration administrator Aida Alvarez said recently that she will likely explore a similar proposal for public contracting if the measure passes.

Private companies are under no legal obligation to contract with minority suppliers but do so because it makes sense when ethnic buying power tops hundreds of billions of dollars. The federal government, however, requires that its suppliers meet contracting goals with so-called small, disadvantaged businesses, most of which are owned by ethnic minorities.

A coalition of minority business organizations led by San Francisco-based Greenlining Institute plans to protest the vote next month. In a letter objecting to the change, the institute suggested that allowing large corporations to reap the benefit of minority status is “akin to a proposal to promote golf among inner-city youth by giving Tiger Woods a lifetime corporate contract.” And Rep. Nydia Velasquez (D-N.Y.) criticized it as “a deal with the devil . . . [whereby] the already rich would get richer.”

The opponents--which include Latino, Asian and African American business groups from Los Angeles--are aggressively lobbying corporate board members to reject the change.

A “yes” vote by the council--which has certified minority-owned companies to do business with corporations for 27 years--would likely affect only a select group of enterprises skilled enough to attract equity capital, said council President Harriet R. Michel.

The organization has built safeguards into the measure to prevent abuse, she added, including requirements that investors hold no voting stock, and that the minority owner manage the company and control the board of directors.

Yet, the vote has become a referendum of sorts on the state of minority business programs. The proposal and the protests underscore the fears and challenges that minority enterprises face in an era of scaled-back affirmative action and corporate consolidation.

Proponents of the change insist it would bring crucial equity capital to select minority enterprises so they can grow even bigger and continue to compete as prime suppliers for some of the nation’s biggest corporations. Corporations, in turn, would be able to count those hefty contracts toward highly publicized minority contracting goals.

Opponents say relaxing the rules would backfire against small minority-owned firms for whom corporate and government contracting programs were developed.

If corporations can count deals with companies that may be 75% white-owned toward minority contracting goals, they will be less likely to reach out to small fry, critics say.

“It’s a good setup to establish front organizations and goes against what the program was designed for,” said Jorge Corralejo, who represents the Latin Business Assn. in the Greenlining Coalition.

Others emphasize that once a business attracts institutional investors and services $100-million contracts, it’s time to graduate from affirmative action programs.

“If you get that kind of equity financing, fine, but it’s time to get out of the cradle,” said Harry Alford, president of the Washington-based National Black Chamber of Commerce. “Congratulations, you are mainstream. Throw away the crutches.”

Opponents also fear that the standard will be adopted for government contracting. In fact, the idea to open the process to companies with diluted minority ownership began as a pilot program in the public sector and was spearheaded by the Big Three auto makers, who sell vehicle fleets to government agencies.

In a highly publicized agreement with the Small Business Administration last year, the Big Three promised to boost their minority contracting dollars to 5%. A little-publicized aspect of the three-year pilot program allowed them to count contracts with minority-managed firms that are as little as 10% minority-owned.

The idea, the auto makers say, was to encourage minority suppliers to go public or to seek outside investment, bringing them to a level where they could compete as prime suppliers. The auto makers helped the National Minority Supplier Diversity Council draft its private-sector proposal.

“We have to look at ways of getting [our minority suppliers] to grow in expertise and to grow in size and hopefully grow to serve our long-term needs,” said Ray Jensen, director of minority supplier diversity for Ford Motor Co.

Under the proposal, a council committee would handle certifications on a case-by-case basis as exceptions to the 51% rule, Michel said. Only companies that received their investment from an institutional fund with a $25-million minimum portfolio would be considered.

Not all minority business advocates oppose the measure. “Don’t destroy these role models,” said Hank Wilfong of the Los Angeles-based National Assn. of Small Disadvantaged Businesses. “We didn’t start this program so we’d always remain small and ineffective.”

But Wilfong said applying the standard to public contracting “would be devastating.” That, however, may come to pass.

“I’d like to have consistency,” said Alvarez of the SBA. “Why should we impede these [minority-controlled] corporations from competing?”