New rule raises stakes for minority shop owners

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A controversial change in minority ownership guidelines opens the way for ethnic agencies to cut more lucrative deals by selling larger stakes in their companies.

But most general-market agencies said they see little reason to change their investment approach.

On Feb. 1, the National Minority Supplier Development Council--an independent, corporate advisory group that certifies 15,000 minority-owned businesses for its 3,500 corporate members--established a new category: certified minority-controlled companies.

Under the new classification, an ethnic agency certified as minority-controlled can sell as much as a 70% ownership stake as long as 51% of the voting stock, daily management control and the majority of board seats remain in the hands of minorities.

Corporations aren't required to use minority vendors but public companies that answer to shareholders have faced increasing scrutiny on whether they are awarding business to minority companies. That means some mainstream agencies can be shut out from bidding, but the new certification class could loosen the standards. Governmental agencies that have minority supplier programs generally follow the 51% ownership rule.


Agency and industry executives said they don't expect general-market agencies that already have stakes of up to 49% in minority shops to increase their holdings, given that many clients are focusing less on minority-management and ownership status and more on agencies' ability to target certain ethnic groups.

"The majority of clients that we meet with, very simply, are looking at [whether] this ethnic agency can deliver what they need to deliver sales," said Valentine Zammit, president-CEO of True North Diversified Cos., New York. "Fewer than in the past are asking about [ownership]. If they have minority people within an agency who know how to deliver a message, that's the No. 1 criterion."


True North Communications in the past six months acquired 49% stakes both in African-American agency Don Coleman Advertising, Southfield, Mich., and Asian specialist Imada Wong Communications Group, Los Angeles. It already had a 49% stake in Hispanic shop Siboney USA, Miami, and a 40% stake in African-American agency Stedman Graham & Partners, New York.

Before the guidelines change, aggressive ethnic agencies with a desire to play in the big leagues had been selling 49% stakes in their businesses to agency networks, or were acquired in whole. Those relationships gave the shops access to national clients as well as important financial and marketing resources.

But "51% is an artificial majority," said Steven Rogers, a professor of management and finance at Northwestern University's Kellogg Graduate School of Management. "It relegates minority entrepreneurs to remaining small because they can only grow through debt financing."

The change has been sharply criticized as selling out and a repeal of affirmative action by groups such as the National Urban League, U.S. Small Business Administration and U.S. Hispanic Chamber of Commerce.


In that vein, the new guidelines also bring to a boil the debate over minority-owned vs. minority-managed agencies.

"Affirmative-action steps were put into place, and rightly so, to keep everybody decent and [avoid] discrimination," said Daisy Exposito, president of New York-based Bravo Group, the Hispanic agency established and 100% owned by Young & Rubicam. "But in a company like ours, I'm disqualified from going after certain pieces of business because I'm not minority-owned. But I am minority-managed and minority-staffed. It's time to rethink all those requirements."

Before Eliot Kang sold 100% of his New York-based Kang & Lee Advertising to Y&R last year, he said he had been trying for six years to get a meeting with one potential client. After the acquisition, he finally succeeded in getting a foot in the door.

"When people say I sold out, I tell people I sold out to expand the marketplace," Mr. Kang said. "What's the ultimate purpose of minority-owned businesses? If it's to make sure the majority of dollars go to minority vendors and individuals, none of that has changed."

Dolores Kunda, president of Leo Burnett USA's fully owned Hispanic agency, Lapiz, Chicago, said "the relationship with Leo Burnett is valuable, particularly when new clients are a little nervous about getting into this market. It provides a degree of comfort."

But other ethnic agencies say they can gain the same benefits by selling only a 49% stake and keeping their minority-owned status.


"The realism of business is that if you don't have control of your organization, the paradigm will shift," said Don Coleman, president of the agency that bears his name. "If you're just a manager, then you're going to capitulate to the wishes of the owner."

Mr. Coleman, who has become a member of True North's management team as CEO of New America Strategies Group, said he could envision selling more of the company under the new rules "so long as I retained voting control."


Omnicom Group took a 49% stake in Footsteps, New York, a new African-American agency it created with Alvin Gay, a former senior VP at New York-based Uniworld Group, and Verdia Johnson, former VP-general manager of Stedman Graham & Partners. Mr. Gay and Ms. Johnson are equal partners, holding a combined 51% stake.

Omnicom sees an additional benefit in limiting its stake.

"Our agreement is to help them build the business," said Thomas Harrison, chairman-CEO of Omnicom's Diversified Agency Services unit. Omnicom's stake "gives the managing partners a real incentive to grow the company because at the end of the day, they'll have something meaningful to sell" back to Omnicom.

One other issue agencies want resolved is whether public companies would be able to declare revenue from their investments if they increase a 49% stake in a company by acquiring non-voting stock.

"I don't think that this one change is going to change our point of view unless it means we can pick up more of the earnings," Mr. Zammit said. "If we don't get that benefit, there's no reason for me to increase our ownership."

Copyright February 2000, Crain Communications Inc.

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