Season 3, Episode 4
Join us for Episode 4 of the CitySCOPE podcast where we continue our exploration of the history of initiatives to support Black owned businesses in the United States. In this episode we feature conversations about the policy side of the story with Tim Bates, Professor emeritus at Wayne State University and Fred McKinney, recently retired Carlton Highsmith Chair for Innovation and Entrepreneurship at Quinnipiac University and the past Director of the People’s United Bank Center for Innovation and Entrepreneurship also at Quinnipiac University.
Kate Cooney (00:00):
This is CitySCOPE.
Eun Sun Cho (00:01):
A podcast on cities and inclusive economic development from the Yale School of Management.
Kate Cooney (00:07):
Are we ready?
Manuel Morales (00:08):
Kate Cooney (00:24):
Welcome to episode 4 of season 3 of the CitySCOPE podcast. I’m Kate Cooney, senior lecturer at the Yale School of Management and founder of the Inclusive Economic Development Lab. In this episode, we dig into the policy side of supporting and scaling Black owned businesses, a set of initiatives coming out of the Nixon White House that came to be known as Black capitalism. Here’s Tim Bates, professor of economics emeritus at Wayne State University.
Tim Bates (00:53):
Well here we get to Richard Nixon, who in his 1968 presidential campaign for president, remarkably, the centerpiece in his civil rights platform was promotion of Black capitalism. We were going to have Black owned firms in inner-city areas expand greatly in number and size and scope, and generate very large numbers of jobs.
Kate Cooney (01:19):
Fred McKinney provides some context for these policy initiatives.
Fred McKinney (01:23):
My name is Fred McKinney and I’m the Carlton Highsmith Chair for Innovation and Rntrepreneurship at Quinnipiac University and the Director of the People’s United Bank Center for Innovation and Entrepreneurship, also at Quinnipiac University. Nixon comes in 69 as president. The Nixon success in getting the White House was a reactionary move because it was a reaction to the riots of 68. The mantra of Nixon was law and order. He was a capitalist and his analysis was what’s wrong with the Black community? And it was mostly a discussion back in the late 60s of what Black and white and the Hispanic movement was bubbling up, mainly in California. But it was still kind of in the background. But Nixon was focused on what’s going on in these Black communities. Why are they rioting? Why are they tearing up the streets? He had some black folks who were counseling him, and they said, “You know, if Black folks had businesses, they wouldn’t tear them up. These aren’t their businesses that they’re tearing up.” And so, during the Nixon era there was the phrase, “Black capitalism,” was formed and that created a lot of controversy in a lot of communities. But in any case, Nixon put into place some executive orders to require that the federal agencies utilize Black businesses. So there were a number of executive orders along those lines.
Kate Cooney (02:49):
Part of the skepticism came from the fact that the data that existed on Black businesses did not suggest that this would be a promising strategy. Tim Bates.
Tim Bates (02:58):
But this encountered a monumental wall of skepticism for other good reasons. Now, the Census Bureau really didn’t collect any data whatsoever that might have answered questions like “What is the racial composition of small business and minority communities look like?” So we’re shooting in the dark here. But let’s go back to the first systematic study that was done of Black owned business. It was a very important study. It was actually done by a professor of statistics at Atlanta University in Atlanta, Georgia. The school was considering starting an undergraduate major in business administration, something that it never had before. Professor Pierce directed a study that surveyed hundreds of small, Black owned businesses in seven major cities, predominantly in the South, Atlanta and Durham were two of the cities, but also moving further north, Philadelphia and Baltimore and St. Louis were covered. This was a sophisticated survey. It was statistically valid. The surveying was sufficiently random. The sample size was adequate. So what came up? What was the profile of Black owned businesses in these cities? Well, for starters, over 40 percent of them fell into the barber shop, beauty parlor category that was by far in every city, the most common type of business, followed by restaurants, cleaning, and pressing, shoeshine was right up there. That was well over two thirds of all of the small businesses. Now one thing about barbershops and beauty parlors and cleaning and pressing and restaurants, the skills being utilized by owners here cooking, cleaning, personal grooming. These are not high prestige areas. These are not areas that attracted college graduates. In fact, if we look at Black college graduates during this era, we would find that overwhelmingly they majored in education and pursued careers as schoolteachers. And indeed, among the historically Black colleges and universities in the nation, back then, none offered a major in business administration. It was simply unknown. It was not something that a college graduate African-Americans were presumed to be interested in. Beyond teaching, the number two occupation pursued by African-American college graduates in this era was preaching. Look at the owners of the small businesses that Professor Pierce’s students surveyed. The typical owner had less than a high school degree. Census Bureau from the Census of Population does suggest that earnings from self-employment among African-Americans, irrespective of location in this era was lower than wage laborers. So we’re talking about neighborhood firms serving neighborhood, clients in marginal small businesses and personal services and restaurants. The job potential of this group of firms was just not apparent. Barbershops, beauty parlors, restaurants, shoeshine stands seemed like a pipe dream that Nixon’s idea was totally unrealistic, that it was not the kind of business that was attracting talented young people that needed to be lured into business ownership by attractive opportunities, rather attracted a lot of people who were pushed into business ownership by lack of alternatives in the labor market.
Kate Cooney (06:41):
The efforts of the times did establish some baseline data, and those initial research studies highlighted some key barriers Black entrepreneurs were facing. Unsurprisingly, given the decades of redlining, racial covenants, outright discrimination, and worse, access to capital was top of the list.
Tim Bates (07:01):
When Professor Pierce asked the business owners, what did they see as the greatest single barrier to success in the business? Overwhelmingly, the owners pinpointed lack of access to financing, lack of access to capital. So their own perception is that they just really didn’t have the capital or the access to capital that would allow them to expand their businesses or think of launching new types of businesses that were larger in size and scope. Now, among all the owners surveyed, three percent of them did have bank loans, they were concentrated interestingly in Durham, North Carolina, which was one of the cities with an active Black owned banks that went to minority owned businesses, Black owned businesses. That was a real rarity. So what’s absent here in the Black business community in Nixon’s era is what we would call broadly human capital. Professor Dubois talented tenth was not to be found creating small businesses. Rather, they were more likely to be teachers or preachers. Human capital, minimal financial capital, minimal marginal small businesses, no obvious economic development potential. Andrew Brimmer, very prominent Black official in the Nixon administration, he was the first African-American on the board of Governors of the Federal Reserve System attacked the whole notion as utter nonsense. The notion that Black capitalism or Black entrepreneurship would be an effective cure to local underdevelopment and minority communities was simply a pipe dream.
Kate Cooney (08:46):
Federal policy approaches were developed to address the capital constraints.
Tim Bates (08:50):
Nixon’s people proceeded anyway, and their particular device, which was substantive, was the program launched, whereby the U.S. Small Business Administration would encourage bankers to lend to minority businesses. And the encouragement was very, very attractive because SBA offered to guarantee these loans against default risk. So if a bank lent to a Black owned business, and the loan was successful, that was to the bank’s benefit, that was heads, the bank wins, the loan went into default, tails, SBA loses. So SBA took the downside risk and many banks, possibly for public relations reasons initially, but also some banks truly looking for more viable customers. Many of the larger banks in particular actually started lending to Black owned businesses. The screw and volume from several thousand in 1969-1970, it was approaching 4,000 loans annually by the late 1970s, not a large number of loans, but gradually many banks were beginning to realize there was a small market here. There was a viable subset of firms in the minority community that were good customers in terms of qualifying for bank loans, repaying them, and building businesses. Now the bank loan recipients, interestingly, most of them were not in the traditional lines of business because now that capital was available, they were more likely to open firms, not as barbershops or beauty parlors or restaurants, but rather construction firms, trucking firms, wholesaling firms, larger scale retailing firms. So those SBA guaranteed loans, not a major impetus to transformation of the business community, but a concrete demonstration that when you ease the constraints or financial capital becomes more available, you begin to alter the incentives and lure new people into self-employment because you’ve taken away one of the constraints.
Kate Cooney (11:11):
In addition to taking steps to open up capital access for Black entrepreneurs, market access through preferential procurement mandates were also established. Fred McKinney.
Fred McKinney (11:23):
But Nixon did something that hadn’t been done before when it came to supplier diversity. Those executive orders also included policies to require that prime contractors of the federal government, namely DOD contractors, also utilize Black and Brown and women business owners in their supply chains. And in the early days, going back again, late 60s, early 70s, there was a whole apparatus that was created within the federal government to monitor the performance not only of the agencies and departments, but to monitor the performance of the companies, the prime contractors who were supplying the Department of Defense. So the GE’s, the UTC’s, the Lockheed Martin’s, those companies now had to put in place what they called SBLOs, small business liaison officers, who whose job it was to monitor their utilization of Black and Brown and women owned businesses. And they were kind of like ombudsmen within these corporations with a good deal of power. Not that they could reverse a decision, but if these SBLOs reported back to the federal government that the companies that had these large contracts weren’t doing the amount of work that they were supposed to do, there were consequences for that. And so, you know, those types of compliance concerns led to many of these large defense contractors and other federal contractors to put in place policies to more actively and aggressively and effectively try to utilize the minority and women owned firms. And so you had this thing that was happening with large defense contractors being incentivized to utilize diverse firms. And then a little bit later, as the consumer products companies came in and said, “You know, this isn’t something that we should do because somebody is telling us to do it. This is something that we should do because there’s a market explanation for this. And if we do it right, we’ll be better than our competitors.”
Kate Cooney (13:47):
These new policies were put out into a political landscape where Black politicians had power at the city level for the first time. Tim Bates.
Tim Bates (13:56):
The real impetus to preferential procurement was local government, and that local government piece represents the rise of Black political power, which we saw in many cities in this country in the early 1970s, when the case that is most prominent is the case of Atlanta, Georgia. Atlanta, in 1973 had a Black mayor, the first Black mayor in the city’s history, and Atlanta, Georgia, in 1973, launched a preferential procurement program that became a model nationwide. This not only set aside government spending, mainly construction spending for minority owned businesses, specifically Black owned businesses. But the mayor was solidly behind designing a program that will work, recognizing the financial constraints under which many minority construction firms operated. Atlanta adopted quick pay provisions such that when Black contractors turned in their invoices, they didn’t have to wait three months for payment. They were paid within 10 days. Waiver of bonding requirements. Construction projects require bonding of the contractors doing the work normally. Obtaining bonding was very difficult for Black owned firms, and these bonding requirements were therefore waived. Also, with preferential access to government procurements, the phenomenon of front firms came about. Whereby a white owned firm, would put up a minority, ostensibly as owner, when it was really just a front for a business that was white owned. The city of Atlanta monitor abuses like this. So what I’m suggesting here is they really tried to make this work. And it did. So before too long. In the city of Atlanta, particularly in the realm of construction, over 15 percent of the work was certainly going to minority owned businesses, predominantly Black owned businesses, and it was generating firms of size and construction firms were released from financing constraints and the requirements to obtain the bonding. It was attracting talent into the program. People who would never otherwise consider a career as a small business owner, given the chance to serve a client like the city of Atlanta, suddenly owning a small business became attractive. OK, well, it didn’t take long before Atlanta was being copied by Los Angeles another city with a black mayor, by Baltimore, by Washington, D.C. And it was the cities with Black mayors that in the early and mid-1970s really launched the preferential procurement programs that were effective. The federal government launched one. It was never effective, never has been because there was no real effort to make it work. But here we have Black political power manifested as a desire to truly get a viable, Black owned businesses off the ground. And it was working, serving a market much more exciting than this local neighborhood clientele buying personal services. We began to see some rather large Black owned construction firms emerge and seek business beyond their narrow geographic market. So we have some push and pull there. The number of corporations recognizing that it’s in their best interest to play along here.
Kate Cooney (17:41):
Nixon’s program to increase financing for Black entrepreneurs through SBA programming gave way to other policies from Congress.
Tim Bates (17:49):
OK, we get to the Community Reinvestment Act, which was in the spirit of the times. Banks have been redlining minority communities forever, which tends to create a certain vicious circle because consider a small business in a minority community, a minority owned firm. If nobody will lend your money, then you don’t have a credit rating. And if you don’t have a credit rating, then it’s hard to ever qualify for a loan. And indeed, most of the minority businesses did not have credit ratings. Most of the Black households, the heads of households did not have credit ratings. This is a market to where our real estate transactions were relatively rare. Banks didn’t offer home mortgages there. These were red lined communities where real estate often traded hands via complicated arrangements that were not all mortgages. Also, things like property assessments, systematic evaluations of the value of property were rare. So there were actual real barriers. How do you how do you get started? How do you get banks to stop redlining and start treating these areas as places where viable customers can be found? And CRA was a push, so it was passed and it was passed explicitly to fight redlining. And the bank regulatory agencies led by our Federal Reserve System oppose the legislation. The way the legislation was written, it was a general statement of intent that it was up to the regulatory agencies themselves to lay out the detailed regulations that banks would be required to meet.
Kate Cooney (19:36):
These policies were important precedents, but it took community action to ensure that they were enforced.
Tim Bates (19:43):
The detailed regulations that were laid out were a joke. They were not substantive. The agencies were making a mockery of this. There was no systematic effort to check the actual lending activity of commercial banks. So we had a CRA Act on the books, the Community Reinvestment Act, which stated in principle that the banks were required to service customers in all of the areas from which they took deposits and explicitly minority communities, and nothing was happening. The fact that nothing was happening motivated a lot of activists to start complaining about this, and activists complaining rather effectively in organized ways attracted media attention and media attention, attracted congressional scrutiny. And after CRA had been on the books, accomplishing nothing for about a decade, a simple act of Congress made a huge difference. Banks were required to make public their CRA ratings. And if your bank had a low CRA rating and the public knew about it, a certain group of customers were pulling their deposits out of banks that had low CRA ratings and putting them in banks that had high CRA ratings. These would be, in many instances, city governments like the city of Cleveland, community organizations, professional organizations, other people who were just offended by the fact that banks were redlining minority communities. So we’re getting congressional scrutiny, a loss of customers, bad publicity all the way around, and the regulators are getting the message too. They realize they better start enforcing this, and instead of almost every bank getting a good CRA rating, we went from about two percent of the banks getting below average CRA ratings to 11 percent of the banks getting below average CRA ratings. And then we have actual sanctions where banks are penalized because they have CRA ratings. This is a fascinating instance. This is essentially pressure from below. This is communities organizing and complaining and ultimately bringing attention to a serious issue that was retarding minority community development and making big changes. So by the late 1980s, virtually every large bank in a major metropolitan area with a significant minority population, suddenly they all had special programs targeting minority communities initially in real estate finance, but increasingly in small business finance. And one thing that made it easier to comply with CRA pressure was federal SBA guarantee loan program. Now that it was prudent to start actually lending to minority businesses within minority neighborhoods, banks could essentially pass on their default risks to the SBA. So why not? The course of least resistance. Some realized that there were good customers to be found here, and that redlining really didn’t make sense. Its day was over. It had become counterproductive. So we have these various initiatives, preferential procurement ties in here are two. I mean, if you’re a banker and you want to find a viable minority businesses, if you have a set of businesses that is generating multimillion dollar contracts from municipal authorities or from corporations, hey, they might be a good customer. And many of them were. So those types of businesses that we’re winning, the preferential procurement contracts suddenly found these banks awakened by a CRA necessity interested in and making SBA guarantee loans to them. It was good business.
Kate Cooney (23:44):
It wasn’t only the public sector. The private sector became engaged as well at this time. Fred McKinney.
Fred McKinney (23:51):
That one goes directly to Martin Luther King, who visited Chicago the year he was assassinated, and he met with corporate leaders in Chicago. And those corporate leaders asked Martin Luther King, Well, what can we do? And at that meeting, he says, Well, I know that there are some Black entrepreneurs who would love to sell your companies something. And so those corporate leaders, they felt obligated to do something. And what they did, you know, you have kind of like the George Floyd effect after Martin Luther King was assassinated. So those corporate leaders got together and they created the Chicago Minority Purchasing Council in 1968, and that council went on to become the National Minority Supplier Development Council in 1972. And that’s the organization. I ran an affiliate of that council from 2001 to 2015, but that was a council started by senior white executives and large public and privately held companies in Chicago that understood that Black and Brown and Asian business owners were not in their supply chains. They just simply didn’t, weren’t in there. And so the issue was, “Well, how do we get them into our supply chains? What do we have to do?” We’ve come a very long way from those late 60s early days of the Chicago Minority Purchasing Council, when again, these Black suppliers just didn’t exist for these large corporations. Now, you know, it’s not as good as it should be, and it’s getting better, I think, pretty much on a yearly basis. But that move to inclusiveness and supply chains is something that I never take for granted.
Kate Cooney (25:49):
For large public or private corporate supply chains, there may be resistance to incorporating new vendors.
Fred McKinney (25:55):
The easiest thing to do if you’re in supply chain is to continue to use the company that you’re using. The incumbency is hard to replace, lest they just literally screw up. Unless there might be some completely brand new opportunity that nobody is an incumbent, then you might have a chance. And so not only were the suppliers in most corporate America white, the decision makers in supply chain were mostly white buyers. And so some of them didn’t really have much of an interest despite what their CEOs were saying in public. And so it’s been a struggle. But, you know, I think it’s a struggle that we’ve seen some, some fairly significant success.
Kate Cooney (26:38):
So which firms were eager to embrace supplier procurement? Turns out it was a bit of a push and a pull. On the pull side, there was a business case. Here’s Fred McKinney and Tim Bates.
Fred McKinney (26:50):
There was a range of participation and commitment by the corporations. Some of that was due to the nature of the corporation, the industry that the corporation is in. And so what we found over the years was that corporations that were directly tied to consumers got the religion fast, that America was changing, that Black and Brown and Asian consumers and households had a lot of resources when looked at in total. You had these studies that were projecting, going back to the 90s, they were saying things like, “Well, you know, if you combine all of the Black income in America, it’s the same size as Portugal and Spain.” If you’re an American global multinational company, you don’t ignore Spain. You know, you put adequate resources into the Spanish market if you’re, if you’re selling directly to consumers. And so American consumer products companies led by the automobile industry and the food companies, Procter Gamble, and also the later on the pharmaceutical companies began to pay a good deal of attention to supplier diversity because they saw it as consistent with their other goals of making inroads into these markets in ways that was sustainable and authentic and believable to consumers that were previously maybe ignored. And so those consumer product corporations, they got it pretty early on.
Tim Bates (28:29):
If corporations view minorities as an important part of their customer base, then they will be involved in preferential procurement. If you have corporations that do nothing but sell to other corporations and are not targeting really a household clientele at all, much less minority clients, they will not be involved. In the 1970s, one preferential procurement is really starting to take off. As corporations become interested in this, a number of corporations had already targeted Black clientele. Pepsi Cola comes to mind. In the 1950s, Pepsi started actively marketing to African-American markets in large cities. In the 1950s, they actually hired their first Black executives, specifically with a mandate to expand sales of Pepsi Cola in Black urban communities. So there were corporations who recognize the market here, and there were other corporations, like I believe Budweiser was one of them, that saw a market here in the Black community, and it seemed like preferential procurement was a very popular PR strategy. Besides, there was a gentleman by the name of Jesse Jackson, who was operating something called Operation Push, that was going around prodding corporations to get on board and start preferential procurement. And it was not only a suggestion, but it was a veiled threat because Reverend Jackson’s operation would also selectively boycott large corporations that didn’t incorporate minority vendors into their supply chains. So we have some push and pull there. The number of corporations recognizing that it’s in their best interests to play along here. And a second group which is pretty far behind. If you have major defense contracts with the federal government, you are probably involved in integrating minority businesses into your supply chain. It’s just one of the things that as administrations change, it creates a positive public image of a defense contractor that’s, say, targeting a few billion a year and to purchases from minority businesses, that’s a good image and that helps in a tight competition for procurement contracts. So they’ve been there since the 1970s, the consumer products companies have been there since the 1970s and the big corporations that just sell to other corporations, they’re not there. So I would guess that Burlington Northern Railroad probably does not have a preferential procurement program. It doesn’t mean that the owner is a bad guy. They’re just not involved in the customer metrics that would interest them and making that a pragmatic part of the image that they want to create for the corporation to further their own interests.
Kate Cooney (31:39):
And so this would drive diversity among minority owned businesses to the extent that these supply chains aren’t purchasing construction necessarily, right, there might be something related to auto parts in the. Is there, are there niches within these, let’s say, consumer goods and auto supply chains that stand out or is a real variety of minority owned businesses that get those contracts?
Tim Bates (32:09):
In the corporate supply chains, I would say the professional services niche is the most common type of minority firm involved, and then, of course, the firms actually producing parts. Now as more and more owners of these businesses have become college graduates, many with graduate degrees, we’re seeing a growth in professional services in the 21st century that’s been really quite pronounced. So legal services, this ties in with contracting, particularly construction, contracting with cities and states, still big business. But now minorities aren’t just driving the trucks and working in the skilled trades. They’re also in architectural firms and engineering services firms. They’re lawyers drawing up contracts. So this has been in the 21st century, actually the most rapid type of growth, highly skilled individuals running professional services firms. Another growing area has been business services broadly. Now, business services is diverse. Services, you sell the business that runs everything from janitorial services up through ad agencies, personnel agencies. So in terms of the owners, a wide variety of skill levels and education levels, but indeed business services would be right behind professional services in terms of a tremendous growth area. Two interesting things about construction and business services. They are the two industries that rely most heavily on minority employees. Professional services tend to have a more racially diverse labor force, although the majority of the employees of minority owned professional services firms are minorities. OK, so a broadening of industry diversification very heavily tilted toward the high end.
Kate Cooney (34:08):
So that makes sense. That would be the way that those firms that are consumer facing and care about that audience. That would be a way both to diversify on the supply chain, but also get some specialized marketing experience for the consumers that they’re trying to reach. I asked Tim Bates and Fred McKinney about what we’ve learned over the decades about what makes this diversity supplier procurement programs run well. Here’s Fred McKinney. When you’ve seen these hire diversity programs work really well. What are some of the key ingredients? On either side? You take each side separately.
Fred McKinney (34:46):
I think if you look at the corporate side, the most important thing from my perspective is leadership, leadership at the top of the organization, the board of directors and the chief executive officer. They have to be behind these programs. And if they’re not visibly behind these programs, then they just don’t get done well. And I was invited to speak to a group last month is the New York Power Authority. They were having part of their Black History Month. They invited me to come and speak to their company. I had developed a tool to help a company sort of objectively tell them where they are on a scale on their supplier diversity program. So it’s a series of questions that either yes or it’s a no. So it’s no maybes, no fluff. Either you do it or you don’t. And so the CEO of the New York Power Authority was, you know, we started talking and this is part of kind of an interview meeting. And he was saying, “Well, what tell me about this scale. Give me an example.” I said, “Well, for one example, has the CEO attended a supplier diversity event in the last year?” And he said, “Got that. Check that box.” Yeah, so he was right. That’s right. So that’s this is important. You have to be seen at these types of things in order to convey a message to the people that you work with that you’re supportive of this. And there are other questions about leadership that you have to show. I mean, you can’t do this for nothing. And that’s again goes back leadership. A lot of leaders want to have things done, but they don’t want to pay for it. If this is not something that you can start without, an investment is like any other investment. You’ve got to put some money into it before you can expect the return.
Kate Cooney (36:37):
You alluded to this in discussing the consumer facing brands, but have you found there are different kinds of business cases that resonate? And could you give us a sense of the range of those?
Fred McKinney (36:51):
Yeah, there’s one clearly that on the consumer front, if you’ve got a growing group of consumers who are diverse in nature, you have a reason to include more diverse suppliers in your supply chain and use that information to support your work in these communities. You also have on the H.R. side, increasingly, as Blacks and women ascend to board level positions in large corporations, they often are asking the question, “You know, we’re doing fine here or with minority consumers, and we may be doing fine here with bringing in more minorities in the mid management and upper management. But what are we doing on the supply chain?” And so those questions get asked. Now the company, the CEO, the senior management, they have to respond. And so we see that. The other thing that that I think is a driver and this is primarily a public sector type of driver has to do with, you know, taxpayers are diverse. And so if you’ve got a state that is, you know, spending, collecting a lot of money from taxpayers and then spending it, then people want to know who you are spending it with. So I had a big fight when I was with the council, with the Connecticut lottery. And you know, here’s a case where you have a quasi-public sector organization that had literally no business. They did less than $10,000 with Black women on business when I went to see them. And this was brought to my attention by a Hispanic marketing company in Hartford. That they are not doing much business with the Black and Brown community in Connecticut and the marketing company said, “You know, we’ve done all we can. They just, we’re just like pounding, saying they’re not listening to us.” So they said, “we’re members of the council. Can you help us?” And I said, “Well, let me see what I can do.” So I called the commissioner that was in charge of the lottery and I said, “I’d like to talk to you.” And I went up and he met with me and he said, “OK, we’re doing fine. We got we got all of the minority firms that we need.” Well, that might be true from your perspective, but let me tell you what you’re not doing, you’re not doing any business with Black women on business. You got a difficult time. You’re not doing any business with Hispanic marketing companies. And I mean, I said, “Who buys these lottery tickets?” And he says, “Well, we’ve got a diverse group of consumers.” I said, “But, is your consumer base as diverse as your supply chain?” And he said, “No, that’s not why. That’s not how you run a business.” So he told me, he said, “Well, we’re not going to do anything. We’re fine. We’re meeting all of our goals.” And so I called the president of the lottery who reported to the commissioner and I said, “You know, I’m not getting anywhere.” And he said, “Well, we’re meeting all our goals. We don’t need to do anything else. In fact, we’re over our goals. You guys need to go away.” I said, “OK, is that your best and final answer?” They said, “Yeah, yeah, that’s it.” And so I went back to my Hispanic marketing firm, I say, “Let’s put up a billboard. And I want the billboard to say they want our money, but not our business.” And I put that billboard up right across from the state Capitol in Hartford. I put it up in Bridgeport on I-95, and I put it up in Waterbury on I-84 and it was up one day and I got a call from the governor. He called me, said, “Fred, you got to take that billboard down.” And I say, “why?” He said, “Because it’s not true, we are doing business.” I say, “you’re not doing business.” So we have we had a shouting match. I had a shouting match with the governor and he said, “You got to take that down.” I said, “Governor, I just paid for that billboard. I got 30, 29 more days. I’m not taking it down.” And so he said, “Well, I want you to come up here and meet with the president of the lottery in my office.” And so I went up the next day and met with her and her. She brought up seven or eight people. I just showed up by myself, and they yelled at me for about 10 minutes. And I said, “Well, look, this is, is this true or not true?” And they couldn’t, I mean, the facts were the facts. And so that was a pretty, you know, nothing was accomplished that meeting, we decided not to do anything. But the next week I get a call from the president of the lottery and she tells me, she says, “Well, we did some research on our uses of firms.” Her name was Anne Noble. She was president of the Connecticut Lottery. And she says, “You know, I think you might have something to argue. Can you come back up and talk to our board?” I said, “Sure.” And so I presented to the board what the problem was, and to her credit, she said, “Let’s, let’s address it.” And so they said, “What do we have to do?” I said, “First of all, you need to have somebody that’s responsible for dealing and doing business with these firms. If it’s dispersed, then you’re not going to get anywhere.” So again, you talk about what? What does success look like? What do companies need to do? They need to have leadership, they need to have resources. And part of those resources are having people within the company who are advocates for these firms and can help move the needle. But that was a case of consumers as well as taxpayers as a reason for doing something.
Kate Cooney (42:22):
Tim Bates (42:23):
OK, preferential procurement can be a slippery slope. Here’s the problem. Some cities and states are really trying to do a good job, and I emphasize Atlanta because it typifies the type of government entity where the program really, truly is designed to create substantive minority owned firms who hire a lot of workers in the minority community. Not every city and state is doing that. Some cities and states could care less. In the case of states, there is a federal mandate that state level construction spending, which is heavily subsidized by the federal government, particularly when we talk about highway construction. Most of that money comes from the federal government, and these states are required to allocate at least 10 percent of that to minority contractors. Well, who monitors are these really minority contractors on these big projects, the minorities generally work as subcontractors. So who checks to see that the programs open up, that these are not front firms? Or many states ask the prime contractor to monitor the prime contractors selection of minority vendors, which strikes me as asking the fox to monitor the chicken coop as the prime contractors that forever and construction have been enmeshed and old boy networks and old boy networks are the firms you have worked with for a long time, often across generations. Prime contractors like to work within their old boy network because they all know each other. They’ve work together on the past. This is a big projects, typically, there’s timing. You have to have subcontractor A get his job done on time, so Subcontractor B can pick up. So there has to be coordination. You need reliable firms and they don’t want minority vendors. They don’t know them. They’re not part of the old boy network. They don’t know how reliable they are. So they just use front firms. So that’s rife. And that’s a big problem. So we can’t just say the preferential procurement programs are a great boon overall. Rather, one has to look at preferential procurement programs as one of the true battlegrounds as to whether or not this effort will be successful or not. Where do you get really good preferential procurement programs? Very simple rule. If the person on top is solidly behind the program and wants it works, it will work. In Atlanta, in nineteen seventy three, that was Maynard Jackson. He was mayor, and he wanted the program to work and he made it a top priority and all the way up and down the line, the program was engineered very, very carefully. People who were administering it were rewarded for doing a good job. The program worked. Carried over to the private sector, Chrysler Corporation has done an excellent job. The CEO of the corporation was solidly behind the program, and he did things like check on very, very diligently front firm abuses. But even more importantly, Chrysler is a big corporation with a lot of managerial hierarchy levels, and every year at the salary review time, when managers at various levels are reviewed for their annual salary increase, the question comes up “Did you meet your preferential procurement goals?” So when that’s a regular part of your merit review, “did you meet your preferential procurement goals in your particular area of expertise?” Believe me, they’ll be met. And it’s because the CEO has structured the incentives so that those lower down will carry out his intent. Always, if those on the top are pressing for the program to work, it works. If those at the top are delegating authority to lower level people, it probably runs anywhere from mediocre to not working at all. In terms of the federal government and the preferential procurement programs they run in their own agencies, there has never been pressure from the top. All of the programs have never been effectively monitored. They don’t even really seriously try to weed out front firms in any systematic fashion. So preferential procurement, simple generalizations. This is a great tool. This is a bad tool. It’s much more complicated than that. It’s much more political than that. This is as properly seen as a battleground. And if people are not fighting to make it work, then it won’t work.
Kate Cooney (47:06):
One thing that struck me talking with Tim Bates is how Maynard Jackson in Atlanta figured out how to make these programs work a year or two after their inception. And while it is complex, honestly, it also sounds like it comes down to whether or not it’s a priority for the leadership at the top. And that’s an indictment, given how many of these programs don’t function optimally 50 years later. Tim Bates offers a couple of indicators you could use right now to check how well your preferential procurement program is run.
Tim Bates (47:38):
I would say if one is looking at one particular trait for whether preferential procurement program is well run or not, look at quick pay. We have agencies of the federal government that take six, seven, eight months to pay their vendors. If you’re a minority vendor and you’re waiting eight months to be paid for the work you’ve done for government, that’s the kind of development that frankly destroys many minority owned businesses, particularly in areas of construction. Banks have never really appreciated construction firms all that much as customers because they’re very, very seasonal. The industry is quite boom and bust. That’s a very effective way to have a bad program. Another thing that come about is if a particular vendor is highly dependent upon one client, that’s not good at all. To have a firm generating 50 percent or more of its revenue from one government client is a flag. It’s not that common. A nationwide, probably about nine percent of minority businesses today have government entities, state, federal, local as clients. It’s much more common to have business clients about 31 percent service-base business clients. It’s actually much more common for minority businesses to sell to corporations and their preferential procurement programs than it is to government. General rule, It’s a red flag if a minority business is driving more than twenty five percent of its revenues from one client, it should have a diverse clientele, and our governments should very clearly avoid becoming the dominant customer of a business. A business to be viable wants to have a variety of clients and not have just one or two huge clients whose absence a loss of one client, if that’s going to threaten to destroy your firm, which it probably would, if you’re getting 50 percent of your sales from one client, that’s something to be monitored and utterly avoided. Overwhelmingly, I think even a better rule of thumb is below twenty five percent. No single customer should be even that high a percentage of the sales of any small business, whether it’s minority or non-minority.
Kate Cooney (50:11):
So we’ve talked about how to set these programs up, how to run them effectively with the right incentives and leadership commitment from the top, but what about the business side? What are some of the challenges for businesses to move into these opportunities? Once those markets are open to them, what have we learned about that side of these kind of programs?
Fred McKinney (50:33):
Yeah, the businesses, you know, it’s still the business. Business is still business. And so the entrepreneurs also have to be led by good business leaders who see opportunities and understand that if they don’t have the capacity right now to address those opportunities, if they’re interested in addressing those opportunities, then they’re going to have to do some things to make that happen. And so really, the successful minority businesses, in my view, have been led by entrepreneurs. I mean, real entrepreneurs who know how to make adjustments, know how to make moves on their feet to deal with the changing market conditions, and markets change dramatically. I mean, if you look at the early generation of minority firms in corporate supply chains, they were almost uniformly in things like janitorial. They did that. I mean, it was, you know, again going back to sort of the racial stereotypes of what would Blacks and Brown people can and should do or do well. It wasn’t in computer technology, it wasn’t in corporate finance, it wasn’t in law, it wasn’t in any of those things until you started to see also, Black and Brown folks in America move into those types of jobs and careers and occupations that they also began to move into businesses in that space. And so, yeah, the key on the supply side is that you’ve got to have good leaders who can figure things out. I mean, so you know, nobody’s giving you anybody, anything, including capital to run a business. Well, so you’ve got to figure out how to get that capital and who to get it from. And not everybody is successful in doing that. But those who are successful are the real success stories, the real sort of shining stars in minority business development. And no, no, no company shines brighter than Worldwide Technology out of St. Louis, Missouri, which is now maybe a $10 billion Black owned firm run by a friend of mine, Dave Steward. And Dave built that company based on the early government programs that gave him an opportunity. They call those programs the 8(a) program. They were literally set asides for minority firms. And so he was able, unlike a lot of firms who were in a very protected market. Once they lost that protection, they failed. Dave understood business. He understood entrepreneurship. He understood that the temporary advantage that he had is an 8(a) firm was going to go away, and he was going to have to make it on his own in a brutal market that you know, nobody’s looking after, out for your welfare in that industry. But he was able to survive and thrive. So there, you know, there are other examples like that, but he’s probably one of the better ones.
Kate Cooney (53:45):
We were so appreciative of the opportunity to learn from these two scholars who have been leading in the policy, practice, and research space on efforts to support Black enterprise for almost the entirety of the 50 year policy window under examination here. As we closed, I asked Tim Bates about a big idea paper he had submitted a few years ago. I was reading that you in 2012 got a white paper into a big idea contest at the Federal Bank of Atlanta, and you were interviewed about your big idea and it was related to this issue of working capital, working capital loans. And you were drawing on an example from perhaps the Department of Transportation and you gave an example out of Maryland.
Tim Bates (54:35):
Yeah, that’s a fascinating story. When I was an assistant professor a long, long time ago, a graduate student from Carnegie Mellon called me. His name was Stanley Tucker. He was writing a paper on Black owned business. Well, fast forward, Stanley today is 72 years old. He’s been in this business for 50 years, and he has generated some of the most innovative programs in the country. He heads a Maryland state agency whose mandate is to assist minority owned businesses and grow the firms. Now one all of Stanley’s programs that typifies pragmatism. Let’s say you’re the minority contractor and you just won a big contract. Stanley’s firm will guarantee that you have the working capital, if you have that contract in hand, his firm will guarantee that you have the working capital and the bonding to fulfill that contract successfully. So they will tailor the bonding and lending specifically to your contracts, to your advantage so you always have the working capital right there. So it’s not a question of, if, you know, going into it, that you’ve got the capital and they only have one requirement, they require that your accounting system be a real accounting system. It can’t be a cigar box full of bills and trying to balance your checkbook once a month, and the construction firms are the worst offenders. And so the number two man in the firm does have a CPA degree, and they explicitly help them set up very, very tight, solid accounting systems so they’ll know their costs. They’ll know how to bid. And believe me, knowing your costs and knowing how to bid when you’re talking about million dollar contracts, those are very important skills. So to support infrastructure that goes far beyond simply saying, “OK, we’ll lend you the money.” They could lend money directly to a minority contractor, not only ones with government contracts, but with corporate contracts as well. They have an equity capital branch, so they might indeed invest equity capital and some of the firms they work with, which they do. So this is just very creative. What can we do? Type person who I’d probably nominate as the most effective in the country and not only coming up with these ideas but implementing them. So that the construction firm is the typical one if they have the technical skills to do the job, Stanley’s firm pretty much guarantees that they will complete the contract successfully. In many instances, preferential procurement can be a great tool if it is used to identify viable firms, owners with the expertise to deliver and appropriate support services are provided. Stanley Tuckers of the World are running the programs that should be implemented and always in these programs, whether it’s in the government sector or the corporate sector, it’s always the people at the top who give us our true direction. And in New Haven, it would be the same thing. If this program is going to work, then the mayor really has to be behind it. I haven’t seen any other formula that’s really worked. If the mayor really wants this to work, I mean, a pal of mine like Stanley Tucker would be happy to go talk to him and fill his or her ears with a dozen great ideas about how to run these programs.
Kate Cooney (58:28):
Join us next time for episode five, The Stanley Tucker interview.