RE-DEFINING “MINORITY BUSINESS”: CHALLENGES AND OPPORTUNITIES Matthew C. Sonfield Hofstra University

ABSTRACT After considerable debate, and amidst major controversy, the National Minority Supplier Development Council, the principal link between Corporate America and the minority business community, has modified its definition of “minority business.” In line with government minority assistance program requirements, a “minority business” previously had to be at least 51% minority-owned. Under the new policy, a firm can have as little as 30% minority ownership and still be eligible for corporate minority-targeted contracts. This paper explains this re-definition and discusses the resulting significant implications facing the management of many minority-owned companies. Research implications are also discussed. INTRODUCTION Since the late 1960s, the development and support of black-owned business has been an objective of both the public and private sectors in the United States. At that time, various Federal, state and local government agencies initiated programs to further this objective, and subsequently many large corporations began programs of their own. In more recent years, the focus of these programs has been expanded to include other minority groups and women. The Federal government was the leader in developing these programs. In 1969 the Office of Minority Business Enterprise was established within the U.S. Department of Commerce. Its primary activities have involved the funding of a wide variety of local programs to provide one-on-one and group assistance to minority businesspersons. (This office is now called the Minority Business Development Agency.) At about the same time, the U.S. Small Business Administration began to tailor some of its programs specifically towards minority businesses; both direct and guaranteed loan programs and federal contract set-aside programs. The latter, better know as the “8(a)” program, has been especially central to the SBA’s efforts to establish and grow minority-owned small businesses (Sonfield, 1997, Whistler and Wichmann, 1979; www.mbda.gov; www.sba.gov; ). In the 1970s and 1980s many large American corporations, in response to both ethical and economic pressures, initiated efforts to increase the number of minority and womenowned companies as suppliers of the goods and services they purchase. These corporations established their own programs within their procurement departments and joined with other big businesses to form minority procurement coordinating groups to act

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as clearinghouses between small minority firms and large corporations (Fitzgerald, 1995; Gupta, 1992; Klimley, 1996; Morgan, 1995; Sonfield, 1997) In recent years, these public and private programs have come under both praise and criticism. Supporters argue that such programs have been necessary to level the playing field and create opportunities for minority business creation and growth, and for job creation as well. Critics have contended that these programs are a form of “reverse discrimination” (Freeman, 1994; Theodore, 1995). Supreme Court rulings have set tough new legal standards for Federal, state and local minority assistance and set-aside programs, and both President Clinton and many state and local politicians have issued executive orders to constrain or halt these programs. On the other hand, most corporate programs have not been impacted and remain strong (Holmes, 1995, 1996; Kirk, Franklin and Robinson, 1996; “Many Minority,” 1995; Sonfield, 1997; Wexler, 1995). In order to insure that these governmental and private programs are successful in assisting minority and women-owned businesses, most utilize formal definitions of such ownership. Central to the Federal definition, and virtually all other public and private sector definitions as well, is that at least 51% of the firm be directly and unconditionally owned by one or more members of a minority group. Often the term “minority” is now replaced by “socially disadvantaged,” but the listing of such groups clearly involves minority status: • Black Americans • Hispanic Americans • Native Americans • Asian Pacific Americans (www.sba.gov) Certainly these various public and private programs have proven effective, as recent government data indicate that minority-owned businesses are one of the fastest growing segments of the U.S. economy (SBA, 1999). A NEW DEFINITION While the 51% minority ownership guideline may seem logical, in recent years certain problems with this definition of “minority business” have arisen. Many minority owners of larger businesses have complained that the 51% rule has limited their ability to grow their companies. If a company is currently at or slightly above the 51% point of minority ownership, then further funding can only come from an expansion of debt. Similarly, even firms with 100% minority ownership are limited in the amount of new non-minority equity funding they can obtain. Most minority companies want to grow for the same reasons as any firm does; but an additional impetus has arisen for minority-owned suppliers as many large U.S. corporations have chosen, for efficiency purposes, to reduce the number of their suppliers to a group of fewer and larger firms. This new pressure for equity funding opportunities comes as the IPO (Initial Public Offering) has again become a major feature in the economy.

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In response to both the complaints from large minority firms looking for new equity financing and major corporations looking for larger minority suppliers, a major minorityoriented organization has shaken up the minority business community by changing its definition of “minority business.” The National Minority Supplier Development Council (NMSDC) is a private organization which provides a link between Corporate America and minority-owned businesses. Chartered in 1972, it is supported by 3500 corporate members, including most Fortune 500 companies, which rely on the NMSDC’s evaluation process by which it certifies the “minority” status of firms wishing to become eligible as suppliers to these large corporations. About 15,000 minority-owned businesses have been NMSDCcertified (by 39 regional affiliated councils) and in 1998 its corporate members reported $41 billion in contracts with minority suppliers. When the NMSDC proposed a change in its definition of “minority-business,” in October 1999, the level of response was unexpected (Holmes, 1999; Johnson, 1999; Thomas, 1999). Basically, the NMSDC proposed to allow currently-certified minority-owned firms to sell equity and lower minority ownership as low as 30% and still maintain certification. The objective was to provide equity-funding opportunities to those minority firms that desired to grow in this manner. However, a number of major minority organizations immediately voiced strong opposition to the proposal. The NAACP, the National Urban League and the U.S. Hispanic Chamber of Commerce, along with other national minority groups and spokespersons, argued that the proposed change would further erode the whole idea of affirmative action. More specifically, the concern was that the change would open the door to “front” companies, in which minorities have prominent positions but the firms are actually owned and controlled by whites. Further concerns were that an increase in such front companies, and/or companies only 30% minority-owned receiving set-aside contracts, would discredit the concept of affirmative action at a time when it is already under fire, and that the proposed change in definition might lead Federal and other government agencies to re-think their own definitions of “minority-owned.” While some major corporations, including Pacific Gas and Electric and Bank of the West, joined in opposition to the proposed change, many more large companies, including IBM, DuPont and the Big Three auto makers, supported the proposal, arguing that it would allow minority companies to grow and compete with larger white-owned firms, and that it would also allow big corporations to satisfy their concurrent needs for large suppliers and minority-owned suppliers. In response to the controversy generated, the NMSDC postponed the vote of its 80member Board of Directors, composed mostly of representatives of its corporate members, from October 1999 to January 2000. During this time period, the NMSDC conducted a major public relations campaign to ease concerns and opposition by emphasizing the safeguards built into the new definition of “minority-owned.” Terming

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the re-definition the “Equity Capital Initiative,” the NMSDC argued that only currentlycertified minority companies would be considered, and on a case-by-case basis; and that minority interests would still have to maintain 51% of the voting stock, control of day-today operations, and a majority of seats on the firm’s board. The NMSDC furthermore stated that only a very few minority firms were expected to take advantage of this new certification opportunity (NMSDC, 2000; Thomas, 2000). On February 1, 2000, the NMSDC announced that 76% of its Board of Directors had voted in favor of the change, and that the new certification guideline was to be placed in effect (Schwab, 2000; Wynter and Thomas, 2000). CURRENT SITUATION To administer the “Equity Capital Initiative,” the NMSDC has formed a special national certification committee which will review each case. As stated above, the applying firm must be currently certified as minority-owned, and the new equity funding must be in the form of non-voting stock, with control of company operations and the board of directors remaining at least 51% minority. Non-minority investors must be approved by the certification committee, and various other measures will be implemented to avoid the possibilities of “front” companies being certified. The NMSDC emphasized that the new guidelines will enable large minority companies to complete against even larger whiteowned firms, rather than compete unfairly against smaller traditionally-certified minority companies (NMSDC, 2000). Opponents of the original proposal voiced their dismay over the change, but reaction from government officials was mixed. Courtland Cox, director of the U.S. Department of Commerce’s Minority Business Development Agency, supported the change. On the other hand, the U.S. Small Business Administration’s chief, Aida Alvarez, opposed the change and stated that S.B.A. minority business definitions would not be affected (Doby, 2000; Romney, 2000). CHALLENGES AND OPPORTUNITIES The new NMSDC guidelines present both challenges and opportunities to many minority businesses. Business owners and directors, with the responsibility for strategic decisionmaking, must now consider new options previously not available. Is growth to new levels desirable and feasible? Are non-minority investors available? Can we work effectively with them? If our firm is currently privately-held, what is the value of our equity? Such questions may require the assistance and involvement of financial/IPO experts. Other questions must be considered as well. Company growth through equity financing may place the firm in a new competitive arena. Do we want to, and how well can we, compete against larger and more-established firms? While equity financing may be allowed under the new NMSDC rules, we would no longer be considered a minorityowned company by most government agencies. Are we willing to forego the possibility

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of government set-aside and other assistance programs? And further down the road, are we willing to forego even NMSDC minority status, if we take on even more equity financing, sell voting stock, or bring non-minorities into our top management and onto our board? Successful business growth becomes addictive, and the eventual resulting choice between minority and non-minority status may present major dilemmas in the future. Implications exist as well for consultants to minority small business/entrepreneurial clients. Most minority clients may be unaware of this NMSDC change or may assume that they are too small to be affected by it. Yet this policy change will affect a large number of minority firms. Even if such equity financing is not appropriate for a particular minority company, it may be appropriate for some of its competitors. And if large corporations are consolidating their supplier networks, then that company may lose contracts or contract opportunities to those competitor firms that do choose equity financing. Consultants must now make their minority clients aware of the nuances of this change, so that they can monitor their competitors and corporate customers to foresee any potentially adverse decisions by any of them. Minority clients should be assisted in evaluating all of these issues, should be prodded to consider the pros and cons of growth through equity financing, and not be allowed to simply assume that this option is not appropriate for them. Both the supporters and critics of the NMSDC re-definition of “minority business” are correct about one point: many minority-owned companies will sooner or later be affected by this change. RESEARCH IMPLICATIONS This re-definition also presents implications for researchers in the field of minority business. Over the next few years, if a sizable number of minority firms successfully receive this new certification, then opportunities will arise to study these firms and their non-certified competitors (both minority and white-owned) . Will this new certification achieve its objectives and create higher levels of growth and profits for these companies? Will minority firms that are not re-certified suffer in comparison to their re-certified competitors? Will larger white-owned suppliers be impacted by stronger and more successful competition from these re-certified minority firms? And will any national, state or local government agencies follow the lead and develop their own re-definitions of “minority business”? If this new re-certification program progresses as the NMSDC envisions, then a variety of comparative and longitudinal research studies will be appropriate within a few years.

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REFERENCES Doby, H. (2000). Changing the rules. Black Enterprise, April, p. 23. Fitzgerald, M. (1995). Affirmative procurement. Editor & Publisher, June 3, p. 8. Freeman, G. (1994). St. Louis: bringing minorities into the mainstream. Black Enterprise, May, p. 64. Gupta, U. (1992). Affirmative buying. The Wall Street Journal, April 3, p. R12. Holmes, S. (1995). U.S. issues strict new tests for affirmative action plans. The New York Times, June 29, p.1. Holmes, S. (1996). White house to suspend a program for minorities. The New York Times, March 8, p. A1. Holmes, S. (1999). What is a minority-owned business? The New York Times, Oct. 12, p. C6. Johnson, J. (1999). Protest over plan to ease rules on minority contracts/business could be 70% white. San Francisco Chronicle, Nov. 27, p. A1. Kirk, D., Franklin, G. & Robinson, R. (1996). The impact of affirmative action set-asides on small business: the adarand decision. Journal of Developmental Entrepreneurship, 1(1), p. 75. Klimley, A. (1996). Minority vending. Black Enterprise, June, p. 285. Many minority businesses fear impact of court ruling on set-aside programs (1995). The Wall Street Journal, June 14, p. A2. Morgan, J. Minority supplier development in action: problems and solutions in corporate programs. Purchasing, Aug. 17, p. 49. NMSDC (2000). www.nmsdc.org. Romney, L. (2000). Definition of minority ownership eased. The Los Angeles Times, Feb. 3, p. C3. SBA (1999). News Release: SBA Number 99-16 ADVO, April 15. Schwab, R. (2000). Minority-business rule under fire/ownership definition changed. Denver Post, Feb. 4, p. C2.

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Sonfield, M. (1997). Strategic responses to the decline and/or elimination of government set-aside programs for minority and women-owned businesses. Journal of Developmental Entrepreneurship, 2(1), p. 59. Theodore, N. (1995). Measuring the impact of set-aside programs on the minority business sector. International Journal of Public Administration, July, p. 1115. Thomas, P. (1999). Group of black leaders opposes plan to redefine minority-owned businesses. The Wall Street Journal, Oct. 1, p. B2. Thomas, P. (2000). Definition of minority-owned business is expected to allow deeper equity sales. The Wall Street Journal, Jan. 25, p. A6. Whistler, M. & Wichmann, H. (1979). Providing economic opportunity to small minority enterprises. Journal of Small Business Management, 17(4), p. 1. Wynter, L. & Thomas, P. (2000). New definition of ‘minority business’ splits blackshead of supplier group alters eligibility guidelines, riling fellow african-americans. The Wall Street Journal, Feb. 2, p. B1. www.mbda.gov (Minority Business Development Agency) www.sba.gov (U.S. Small Business Administration).

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