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April 1, 1995

Pride and Prejudice

Black Business Leaders Ask: Is It Time to Set Quotas Aside?


D uring the coming year, Americans will begin a serious debate over the meaning and value of affirmative action. Among the early signs:

A proposed ballot initiative in California aims to amend the state constitution to prohibit preferential treatment in public policy based on race, sex, ethnicity, or national origin.

In Georgia, the state legislature considers a bill to end preferences for women and minorities in landing county contracts.

Senator and presidential hopeful Phil Gramm (R-TX) promises that, if elected, he will end major set-aside programs on his first day in office.

President Clinton orders an "intense, urgent review" of all aspects of government affirmative-action policy. Veteran Democratic strategist Susan Estrich says that as far as affirmative action is concerned, "now is truly the time to move on to some other approach."

The Supreme Court may oblige her. In agreeing to hear Adarand v. Pena, the Court threatens to reform, restrict, or undo federal set-asides for minority-owned businesses. Policy Review asked several black businessmen to describe the impact of race-based government contracting on entrepreneurship, and to offer their own insights into establishing successful businesses in an increasingly competitive market. Here are their stories:

Ward Connerly

Of all the terms used to describe America, none is more descriptive (and it is my favorite) than "the land of opportunity." Opportunity, the chance to advance in life, is the centerpiece of our value system. It is this concept that separates us from the rest of the world. For opportunity to have meaning, there must be entrepreneurs, people who are willing to take chances in order to succeed. True entrepreneurs are created not by government, but by God, and their natural talents are stimulated by the marketplace.

In recent years, our nation has begun to debate the effects and consequences of "affirmative action." Affirmative action comes in many forms; some are acceptable, even desirable, such as advertising the availability of contract opportunities in minority communities, and adopting strong measures to ensure that racial and gender discrimination have no place in our society.

Other forms of affirmative action, however, are very damaging to the nation and to those whom such programs and practices are designed to benefit. One of the most odious forms of affirmative action is the concept of awarding contracts on the basis of racial, ethnic, or gender preferences. There are many variations on this theme, but the approach taken in California is fairly representative and instructive.

Several years ago, the California state legislature passed a law requiring every state agency to award 15 percent of all contracts to firms owned by minority business enterprises (MBEs), 5 percent to firms owned by women-owned business enterprises (WBEs), and 3 percent to firms owned by disabled veterans (DVBEs). Minorities are defined as "socially and economically disadvantaged" groups and include blacks, Hispanics, Asians, and Native Americans.

What are the effects of this policy?

First, the prospect of getting government contracts, as a result of belonging to a protected group, is sometimes a false inducement for people to go into business without being adequately prepared to be in business. They often are undercapitalized and lack the business acumen to remain in business without government contracts. This is not itself a sin, but these businesses tend to become an extension of the government agencies themselves. Consequently, the agencies often create contract opportunities to sustain these businesses rather than acting to meet their needs or those of the taxpayers.

Second, the costs and headaches associated with administering the MBE and WBE programs are significant. A bureaucracy of MBE/WBE coordinators has been established in virtually every department of California's state government. This obviously increases the cost of government and creates enormous inefficiencies for companies that do business with the state. There is great inconsistency across departments, and many officials confess that their programs cost more because of these set-aside requirements.

Third, these practices are marginalizing better-established businesses because they are forced to share their contracts with MBE/WBE partners. Few businesses can sacrifice 23 percent from a contract and still make a profit. I hear the argument that 23 percent is not being taken off the top, but rather the total pie is merely being sliced differently. Sometimes that is true. Our firm, however, is usually able to carry out most portions of our contracts. Yet we must often create a role for those whom we are required to include. This generally means subcontracting for tasks that we could perform ourselves at lower cost. Whenever we take on a state contract, we lose profit, and our private-sector clients bear the burden of our higher prices.

After 22 years in business, I know that government procurement of goods and services is less costly when the specifications are clear and private contractors are able to fit these requirements into their methods of doing business. Whenever contractors have to customize their methods of delivering products, such as aligning themselves with new partners, the cost on a per unit basis of doing business inevitably rises.

Fourth, the quality of the work sometimes suffers. When you are forced into a shotgun relationship with firms with whom you do not regularly do business, it is inescapable that you lose some management control over the project.

Fifth, the policy invites deception. For example, there is evidence that some women or minorities listed as "owners" exercise no control over the day-to-day operations of their businesses. In some instances, the so-called owner rarely sets foot on the premises. How is the goal of equality advanced when, say, a man who has owned a construction business for decades suddenly switches ownership to his wife?

Finally, these set-aside programs are blatantly unfair. Consider my own business. I own 50 percent of the stock issued by my company. My wife owns the other 50 percent. Technically, neither of us "controls" the business, and we qualify for neither MBE nor WBE preferences.

We have chosen not to change the ownership of our business merely to qualify for preferences based on my race or her gender. But why should we operate at a competitive disadvantage just because we prefer to be considered on the merits of our work? How does society benefit when a business established 22 years ago, by individuals who were willing to risk their economic futures, is disfavored in order to lure others to go into business?

Minority set-aside programs are creating all kinds of dysfunction in the marketplace, they are unfair, and they are based on the false proposition that government should be creating business opportunities for women and minorities. What government should be doing is ensuring, through advertising and other forms of outreach, that opportunities are equally available, and then allowing the marketplace to produce the lowest legitimate bids for the goods and services that the government seeks to procure.

Daniel Colimon

I operate perhaps the largest black-owned litigation-support firm in California. We have been in business for 14 years, and our clients include at least 200 law firms from Santa Barbara to San Diego. We have never sought a government contract as a minority firm, and federal set-asides for awarding contracts to minority-owned businesses anger me to no end.

After our firm did some work for the legal department of a state utility, one of its officials told me that if we became a certified minority enterprise, they would make us their primary vendor. There was no discussion of the quality of our work--none whatsoever.

They merely needed to rack up points with the state's Public Utility Commission, which requires all state agencies to do at least 15 percent of their business with minority- owned companies.

I said no. Commission officials called me every other week for two and a half months. They warned that if we continued to refuse, they would simply opt for another vendor. They did, and I have since lost 80 percent of their business.

It is time for America to acknowledge that affirmative action doesn't work. There are fatal flaws in set-aside programs, which, despite all of the good intentions, hope, and government intervention, have produced very few positive changes. If anything, the white "backlash" to affirmative action has perpetuated the polarization of America's various ethnic groups.

If affirmative action was to be the vehicle by which we travel the road to racial equality, somewhere along the way we lost first the keys and then the map. If affirmative action was to redress past discrimination against African Americans and other racial minorities, it has failed miserably:

  • White males dominate the social, political, and business landscape as never before.
  • Racial minorities are still largely absent from the private sector's management or executive boardrooms.
  • Worst of all, affirmative-action programs have established an extremely damaging stereotype that places African Americans and other racial minorities in a very precarious position. We are perceived as a group of people who--regardless of how hard we work, how educated we become, or what we achieve--would not be where we are without the preferential treatment afforded by affirmative-action programs.

Throughout my life, I have been taught that the best place to look for help is in the mirror. I grew up poor and black and in a single-parent household. I graduated from a predominantly white university. I have worked since the age of 12. I founded an extremely successful litigation-support firm that employs people of all races.

Although I have suffered with the burden of being a businessman who happens to be black, never have I been given nor have I expected preferential treatment simply because I am black. I defy anyone to put an asterisk next to any of my accomplishments. I have always demanded that I receive respect, not by virtue of what I am, but of who I am. Conversely, I have always accorded the same treatment to all I have encountered, regardless of race, creed, or national origin.

My personal experiences with affirmative-action programs, in the business community and outside it, have all been negative. It is not popular to be black and opposed to affirmative action. When discussing this with other blacks, I've been told that I have sold out to the white agenda. On the contrary, I argue that we don't need any affirmative-action programs precisely because I believe so strongly in my capabilities and those of all people of all races.

Such programs are not the solution to America's race problem. Truly "affirmative" action should take the form of equal-quality education, which will help lead to equal political access and equal economic opportunity. Additionally, it is imperative that we acknowledge the existence of institutional racial discrimination. Rather than disavowing responsibility for it or wasting 25 years on programs that have not worked, we should aggressively ferret out those who practice clear discrimination and prosecute them.

Only then will we truly be able to say that we have equal opportunity. The measure of this will be a society where people can achieve success regardless of race, where people "will not be judged by the color of their skin, but by the content of their character."

Herman Cain

When Pillsbury Co. hired me as president of Godfather's Pizza, one of its failing subsidiaries, we couldn't count on a government contract to revive the chain. Not only did we want to rescue the chain from debt and looming bankruptcy; we wanted to have the industry's highest average sales per unit and the highest average profitability per unit. You don't get that without a commitment to quality and an acute sensitivity to your market.

When Ronald Gartlan and I later led a team of other managers to buy Godfather's Pizza, we didn't use a set-aside program. We had to fight and defend and sell the banks on our merit as investors. Our success or failure was based on our own raw business ability.

If there were no federal programs to assist minority business owners, the 1 percent of businesses owned by the black community would probably be zero. But federal set- asides are a double-edged sword: Any time you have a guaranteed participation level, you may not have the same incentives or the same motivation to perform as in a situation that is driven by performance. On the other hand, without set-asides, many minorities candidates for contracts, jobs, or services would not even be considered for inclusion.

Remember, you need capital to start a business. The lack of access to capital is the number one reason for the tiny percentage of black-owned businesses. Set-asides do not address the capital issue as it relates to starting, maintaining, and running a business.

One of the most important aspects of being successful is relationship-building. The vendor and the customer have to develop a relationship based on trust and performance. But you can't legislate relationships; set-aside programs won't build relationships between minority businesses and their customers.

As a businessman and as a black American, I know there still exists institutional racism, which tends to exclude people from consideration. As a result, I've practiced several principles to help me achieve my goals:

  • Because I am a black American, I've had to perform better than my white counterparts. This is a personal standard that I've set for myself: I've got to perform a little better in order to get the same opportunity. I can't just be as good; I've got to be better. It should not be this way, but it is.
  • When I come across those barriers, such as racial bias, I have to let my performance be my barrier buster. That's just the price you pay for success.
  • I have to maintain focus and be tenacious in achieving my objectives.

I have been very successful in corporate America because I have refused to allow any of the normal obstacles--and there have been many--to stop me. Part of my success is linked to getting an opportunity, but another part is taking advantage of the opportunity by staying focused. That is something you can't legislate or put in a program.

When I came to Godfather's, I sought the views of the management, the operations people, and the franchises on how we got into the mess we were in and how we could get out. By focusing on our strengths and on the market niches where we could win, we embarked on a path to recovery. In just over a year--and against intense competition--store sales increased about 10 percent, with some restaurants running as high as 25 percent. More important than the numbers, however, is the fact that over the last several years we have built a foundation for sustained profitability.

I'm a firm believer that we are put on this earth to make a difference. I happen to have been blessed in that I have achieved some business success. But what's truly important to me is that I'm able to use the position, compensation, and incentives that go along with business success to help make a difference in other people's lives.