How Do You Define a
Minority-Owned Business?
By PAULETTE THOMAS
Staff Reporter of The Wall Street Journal.
From The Wall Street Journal Online
For a great American success story, consider Bartech Group. The grandson of Alabama sharecroppers, Jon E. Barfield graduated from Harvard Law School and built his high-tech personnel service with a string of blue-chip clients. He counts Ford Motor Co. Chairman William Clay Ford Jr. among his closest friends. Bartech revenue is expected to exceed $100 million this year. An initial public offering is in the works.
Mr. Barfield is African-American. Does that make him a disadvantaged minority?
He emphatically says yes -- and so do his big corporate clients, who want to continue to accrue credit for working with minority-owned firms no matter how large those suppliers grow and how diluted their minority ownership becomes.
Board Certified
At a time when courts and voters have scaled back racial-preference programs, corporate America is headed along a different road. The National Minority Supplier Development Council, comprising representatives from the biggest U.S. corporations, certifies "minority ownership." In October, its 80-member board is likely to loosen its definition of minority-owned, which in government and corporate procurement has always required at least 51% minority ownership. Most board members expect the new requirement will be closer to 20%, along with proof of minority management.
The change would allow firms such as Bartech Group to drastically diminish their minority ownership in order to go public. It would allow the biggest corporations to boast to their customers and shareholders how much business they give to minority suppliers. And it will probably determine more than anything else the biggest winners and losers among minority entrepreneurs in the years to come.
Those few able to make the leap to the ranks of hefty, publicly traded suppliers will be well-positioned to take advantage of the business that corporations do with minority-owned vendors. In 1998, for instance, Kraft Foods Inc., spent about $340 million buying from minority firms, while Ameritech Corp. spent about $270 million and Ford Motor Co. spent $2.5 billion on minority suppliers.
Membership in the council is voluntary -- there are no "targets" or requirements for doing business with minority firms -- and these efforts are separate from government affirmative-action programs. Instead, it is a marketing tool to reach out to minority consumers who now represent close to $1 trillion a year in buying power. When asked how much of the $1.9 billion that General Motors Corp. is spending on minority firms this year (out of $56 billion in North America) is to meet government rules, purchasing czar Harold Kutner replies: "None. This isn't a program. This is plain good business."
The 51% rule "has been sacrosanct up until now," says Harriet Michel, president of the council, who favors the change. The rule, after all, was intended to prevent sham white owners from benefiting through minority "fronts." Yet that concern pales compared with the disappointment felt within the council over how few minority-owned firms have made it into the big leagues of publicly traded companies even during the roaring 1990s. "Too much of minority business efforts have been aimed at start-ups," Ms. Michel says. "Not enough has been aimed at growing companies. Isn't that the point, after all?"
The numeric shift sounds arcane. But the longstanding rules for minority ownership strike at the heart of delicate issues of race and cold-hearted commerce. The council was conceived as a way to simplify the interaction between big business and small minority-owned shops -- 15,000 certified so far -- paving the way for the small shops to grow. And big corporations rely on the group's stamp of approval so they needn't research which firms are minority-owned. The easiest way for the council to determine whether companies are controlled by minorities is to look at the size of minority investment in each firm.
Minority businesses that want to expand, though, can't go far with bank lending; they need equity investors. If too many investors are white -- which is likely if they go public -- it tips the balance of ownership to that of a white firm, and they risk losing the very business that allowed them to go public in the first place.
'The Rich Will Get Richer'
But for smaller minority-owned firms unable to attract big infusions of capital -- the vast majority -- the idea that a $100 million outfit such as Bartech needs a leg-up as a minority firm provokes only a bitter laugh. Scott Flores, a Hispanic and president of Die Cut Technologies, a Denver-based gasket-manufacturing firm with annual revenue of $4 million, hasn't broken into the ranks of auto suppliers despite years of effort. "The rich will get richer" under the rule change, he says. "They'll go from $100 million to $500 million, and 99% of the other minorities will get less business. And the Big Three will say, 'Gee, we've reached our goals, we don't have to make an effort to mentor small business.'"
Nor do all the corporate representatives on the council favor the shift. William Blue manages DuPont Co.'s efforts to increase minority contracting, and he fears the rule change will spark a political backlash. One of the primary arguments against affirmative action has been that it often benefits those who need help least. "If a company reaches the level where it needs to get institutional equity, great, go for it," he says. "But they aren't minority-owned anymore." If a firm wants to preserve its minority-owned status, he says, it should sell equity to the growing numbers of pools of minority investors.
A Handful of Giants
Two opposing economic crosswinds are prompting the debate. For one, to cut costs, America's corporate behemoths are slashing their armies of suppliers down to a handful of giants, which automatically excludes virtually all minority-controlled firms.
Meanwhile, the clout of minority consumers has grown. It is no longer possible to have a leading brand without a large minority following, and studies have shown that minority consumers are brand loyal to companies that reach out to them. And those who fear discrimination lawsuits know it is wise to establish a minority-friendly track record.
Calmly paddling through these currents is Jon E. Barfield of Bartech, based in Livonia, Mich. To his mind, the rule change will simply allow his business to deploy all the financial tools available to white-owned firms. All his minority status gives him, he asserts, is "an opportunity to compete. That is all we receive by virtue of our minority status, and this is appropriate."
Though usually reserved, low-key and thoughtful, he heats up contemplating the color of the corporate landscape. "Minority-owned firms are so far away from being on the lowest rung of the Fortune 500 that it's not funny," he says. Indeed, the $596 million in revenue of the largest black-owned firm, Mel Farr Automotive Group, in Oak Park, Mich., is dwarfed by the smallest Fortune 500 company, Ball Corp. of Broomfield, Colo., with $2.9 billion in revenue.
And expansion could ripple through the minority business community, Mr. Barfield argues. "If Bartech is able to grow and achieve our objective, we can be in a position to help smaller minority-owned firms," he says. "I don't think we do anyone much good if we stay a $100 million company."
The First to Profit
The roots of the Barfield family business illustrate the many ironies of affirmative action and the proposed rule change. Bartech was among the first to profit from the interest auto makers showed in minority suppliers back in the early 1970s. The auto industry itself took the step last year of adopting the rule change contemplated by the council. But Bartech's business has now grown far beyond the auto makers: the company's clients also include utilities and insurers, among others. And unless the council changes its ownership rule, Bartech will either have to choose between being a smaller minority company or a larger, publicly held firm.
It was Mr. Barfield's father who launched the family business. John Barfield came north to Detroit from Alabama and in 1954 began a contract cleaning business with his wife. At a time and place when African-Americans got few breaks from the white establishment, the hardworking Barfields saw their business thrive.
In 1969, Mr. Barfield sold Barfield Cleaning Services for an undisclosed sum to ITT Corp. By then, he was respected around Detroit as a successful entrepreneur with strong ties in both the white and black communities. He packed young Jon off to Princeton University in 1970, and later to Harvard Law School. Meanwhile, in the aftermath of Detroit's devastating race riots of the era, the elder Mr. Barfield served on a commission that searched for minority businesses to work as contractors to the auto makers, to ease unemployment. There were scarcely any, and he saw another business opportunity: launching a staffing service.
In 1981, with the company's revenue at $4 million, Jon took the post of president while his father served as chairman. An avid golfer, jazz saxophone player, and collector of African-American art, Jon moved with ease in clubby corporate circles. He tapped academic and business connections, forming a close friendship with fellow Princeton alum William Clay Ford Jr., the chairman of Ford. Mr. Barfield once escorted Mr. Ford and his 7-year-old son to the locker room of the Detroit Pistons to pose for a photograph with Grant Hill. "Jon knows everybody in town," Mr. Ford says.
Mr. Barfield saw his minority status as just another business tool, "another arrow in the marketing quiver," as he likes to tell his 2,300 employees. He preached quality and "added value" nonstop. He added consultants to his employee ranks (65% women and minorities) and began advising clients on how best to deploy their staffs. Bartech began stacking up various "supplier of the year" awards from the Big Three auto makers, new contracts with utilities and insurers, and was named Black Enterprise magazine's 1985 company of the year.
But while Mr. Barfield obsessed about quality, affirmative-action policies that often got him in the door were taking a beating. A U.S. Supreme Court ruling in 1995 sharply curtailed the circumstances in which a minority firm would have a specific edge in government procurement. Voters in California and Washington state outlawed racial preferences in education and state government procurement in referendums.
Even more ominously, the 1990s tidal wave of corporate cost-cutting came crashing down. Facing intense international competition, the Big Three in particular began to slash suppliers, consolidating their business. In Bartech's field, staffing, Ford cut its number of suppliers to 29 companies from more than 600 over three years.
For Mr. Barfield, the turning point came in 1997. A Ford purchasing executive gathered minority suppliers together in a conference room to issue a warning and a challenge: find innovative ways to expand their businesses or lose out to larger competitors. Whom would Ford deal with, Mr. Barfield thought, $9 billion Manpower Inc. or $100 million Bartech? He had to grow.
Mr. Barfield hired a consultant, who advised him to expand through acquisitions or mergers -- to be financed through an initial public offering -- and to shoot for $500 million in revenue in a couple of years. But the IPO is on hold until the council decides on the new rule. Meanwhile, Mr. Barfield has gone as far as he can to prepare the company in other ways, pulling together an outside board of directors for Bartech, as well as committees on compensation, auditing and strategic planning. "He's already operating as if he's got a public company" says Harold Dubrowsky, partner at Grant Thornton, the consultant advising Mr. Barfield.
If it is a tall challenge, Mr. Barfield has allies: U.S. auto makers are leading the charge among other industries, determined to help minority partners succeed. So, as the National Minority Supplier Development Council discussed abandoning the 51%-ownership rule, U.S. auto makers took the issue into their own hands.
Last year, in a pact with the Small Business Administration, they vowed to increase business with minority firms to 5% from 4.2% of their total procurement budget, as well as to force top vendors to do more business with minority-owned firms. To do so, they changed the definition of "minority-owned" to companies with at least 10% minority holding as long as the firms had minority management. It paved the way for the council's change, but most of its board members believe that the 10% equity is too low, and will be increased in its final ruling.
The Big Three announced the deal with fanfare at the White House with Vice President Al Gore on hand. There for the ceremony, nervously gargling from a bottle of salted Perrier to soothe laryngitis, was Mr. Barfield, pleased to be a living symbol of minority suppliers. "Our country," he told the White House crowd from the podium, "will only be as strong as the weakest among us."
Email your comments to sjeditor@dowjones.com.
Read More...
Collapse...
