The 50 Best Companies for Asians, Blacks, & Hispanics Companies that pursue diversity outperform the S&P 500. Coincidence?
By Geoffrey Colvin Reporter Associate Eileen P. Gunn

(FORTUNE Magazine) – "We are in a war for talent. And the only way you can meet your business imperatives is to have all people as part of your talent pool--here in the United States and around the world." That's Rich McGinn, CEO of Lucent, No. 8 on our 1999 ranking of America's 50 Best Companies for Asians, Blacks, and Hispanics. He's answering the big question you've got to ask when you look at this list: Why?

Why should a CEO order all the activities a company must undertake to make this list? It doesn't just happen, after all. Getting into this group requires big-deal initiatives on hiring, training, promoting, purchasing, and giving, all of which take time and most of which cost money. And while it sounds nice and feels good to be one of the best companies for minorities, let's face reality: Wall Street won't pay extra for it, at least not directly. So if I'm a tough, skeptical CEO in this value-obsessed age, why can't I just run my company in a fair, ethical way, focus on performance, and let other things take care of themselves? Why would I do all this other stuff?

Note first that there appear to be some good answers. The directory holds many top-performing companies, starting with No. 1, Union Bank of California, whose stock has appreciated at a 34% compound annual rate for the past five years. More impressively, these companies as a group have performed terrifically, about matching the S&P 500 over the past year and beating it over the past three and five years. That doesn't look like a fluke; last year's inaugural list of companies also outperformed the S&P. So minority-friendly companies tend to be superior performers. In other words, maybe Wall Street does pay extra for it. What's cause and what's effect is a deep question, but anything that correlates with strong performance will get a CEO's attention fast.

If why is the big question, performance is the big answer executives give. They come at it in a lot of ways, but probe their reasoning and it comes down to improved results--almost, but not quite, always. Occasionally the moral argument is heard: that making a company especially friendly to minorities is worth doing simply because it's the right thing to do.

Tony Burns, CEO of Ryder System (No. 50), says he's certain his company's efforts toward minorities have been good business, but he also says he began them back when he became Ryder's president in 1979--and at the time he had no evidence the initiatives would pay off. So why did he launch them? "Because it was the right thing to do," he says, noting he also became president of the Urban League in the '80s, which was how he got to know Vernon Jordan, now on Ryder's board of directors.

Lucent's McGinn makes a similar argument: The company adopted its diversity stance because it made good business sense, yes, but in addition, "it was the right thing to do. It was an issue around equality."

For the purest expression of the pragmatic rationale, stop by the New York headquarters of Bell Atlantic (No. 28) and listen to CEO Ivan Seidenberg. "I've never used the expression 'It's the right thing to do,' " he says. "I think it's a '70s expression. And doing this is no more right than upgrading the facilities." In other words, for him, as for many, it's all business.

Like several executives at these companies, Seidenberg leads with the argument that diverse groups make better decisions. With telecom going through mammoth changes in technology and competition, he figures what Bell Atlantic needs most is "more diversity of thinking. If everybody in the room is the same, you'll have a lot fewer arguments and a lot worse answers." Same reasoning from McGinn: "Diversity is a competitive advantage. Different people approach similar problems in different ways." This argument holds extra power for companies that operate globally. For them, diversity means not just ethnicities but also nationalities; a group with eight passports represented will be stronger than a group with one or two.

Executives at most of these companies also consider it obvious that being a good place for minorities will be good for marketing and customer relations in all sorts of ways. The advantages are especially clear at Union Bank of California, because it operates in America's most diverse state. Nearly half of California's population is Asian, black, or Hispanic. So, explains George Ramirez, a senior vice president, a few years ago he suggested the bank think about a marketing group to go after consumers with his own Hispanic background. Good idea, said his bosses. Then "a group of African-American employees said we should see how we could do more with those markets." It has all paid off in that knockout stock performance. UBC's highly diverse work force (54% minorities) also helps on the frontlines. "Walk into a branch in a Latino area, and you'll see lots of personnel who are Latino," says vice chairman Rick Hartnack. Adds Ramirez: "We do awareness studies. We ask customers. The answer is yes, it makes a difference."

A big enough difference to be worth considerable effort. For example, "Toyota's got many different hands out to try to locate capable, viable minority dealer candidates," says Lloyd Chavez, a car dealer for 50 years and a member of the minority advisory board at Toyota Motor Sales (No. 5). "They'll go outside the automobile industry to get somebody who is energetic and shows promise and wants to become an automobile dealer. Then that person will take an awful lot of schooling and training."

The idea that many potential minority customers are highly aware of a company's minority-friendliness--and make buying decisions partly on that basis--is more important than many nonminority executives seem to realize. Managers at many of the 50 best companies confirm that the effect is real. Victor Lopez, who began his career at Hyatt (No. 18) by sneaking past a receptionist to ask an HR manager for a job running a coffee shop, sees it in his position as a divisional vice president. "I've been able to bring business to our company with my background," he says.

The effect operates even without direct company-to-consumer contact. Weldon Latham, a high-powered Washington attorney who counsels several FORTUNE 500 CEOs on diversity matters, points out that African Americans consume more soft drinks per capita than the overall population. "And let's face it, it's pretty easy to substitute one soft drink for another." If a company's diversity stance alters their buying just a little, the effect is substantial. How heavily a recent lawsuit against Coca-Cola alleging discrimination will add to that company's problems isn't yet clear (see Coke story in this issue).

The effect certainly operates in business-to-business and even business-to-government sales. The CEO of a major company on our list, who didn't want to be named, says he recently met with a group of managers from one of his company's five largest customers, "and there wasn't a single white male on the other side of the table." It was enormously helpful, he says, to carry his company's minority-friendly record into that room. And if you sell to Washington, says Latham, "lots of government leaders are African-American or Hispanic, and they're very sensitive to these issues."

When a company decides to become a good place for minorities, it eventually discovers that doing so creates a self-reinforcing cycle, in which good minority job candidates join the company because they see minority workers doing well there. "If you become known as a great place for women or blacks or Asians, you'll attract the talent," says Maria Elena Lagomasino, who heads global private banking at Chase (No. 12). "They get a sense that they'll just be much happier in the company--and that's as important as title or money." How valuable is such a reputation? "We are in a very labor-short environment, and a company that has a reputation as valuing all people does have an advantage," says Solomon Trujillo, CEO of US West (No. 14). If about 25% of the work force--the total for Asians, blacks, and Hispanics nationwide--suspect they won't be welcome at your company, you're headed for trouble.

For all the opportunities in becoming a minority-friendly company, the prospect of gain is rarely the only force motivating the kind of major corporate-diversity efforts that land a company on our list. There's also the threat of loss. CEOs don't much like talking about this answer to the why question--it isn't the message they want to send--but the effect is strong and undeniable.

They've watched the horror stories and in some cases been part of them. A number of companies in the 50 best got religion at gunpoint. ("And it takes all the better, doesn't it?" asks Latham). Advantica (No. 6) is the parent of Denny's, which paid $54 million in 1994 to settle a series of discrimination suits. Shoney's (No. 39) paid $134 million to settle similar charges in 1993. Bell Atlantic (No. 28) and AMR (No. 23) are defendants in current lawsuits. Both companies stress that the suits' allegations are unproven, and both plan to defend.

When CEOs really speak candidly, they acknowledge that Texaco was the case that changed everything. Paying $115 million to settle explosive charges of discrimination was bad enough, but what grabbed CEOs' attention was the fact that Texaco's market capitalization dropped by about half a billion dollars in two days on the allegations. "Texaco is the biggest story," says Latham, who advised Texaco CEO Peter Bijur during the episode, "because they're real good now, and they were real bad three years ago." Their market cap came back. A lot of CEOs would just rather avoid the hell Bijur went through.

Jesse Jackson played a major role in the Texaco case, threatening to lead a massive boycott of the company, and it has to be said that when you ask the why question, he's another large part of the answer, along with organizations like the National Urban League and the NAACP. After Texaco, it's a safe bet that no CEO in America would not take a call from either Jackson or one of those groups.

Beyond talk of threats and opportunities, you now see another kind of motivation starting to shape corporate behavior. Here's an example: The CEO of a midsized Midwestern manufacturer says he knows his company isn't very diverse. But now, when he looks to hire managers from the outside, he's starting to ask recruiters to identify some women candidates. A big reason is that the CEO of one of his most important distributors is a woman, who gently criticized him at a recent meeting. He has no minority directors on his board, but he says next time there's a vacancy he'll probably fill it with a minority candidate. Why? A mutual fund that owns millions of his shares is run by a black manager, who has chided him about it.

The distributor, the fund manager--they're fans of the company and the CEO. But they're in powerful positions, and they'd like to see some changes. The CEO, being smart, will make them. As he does, and as the same phenomenon plays out across the country, another kind of self-reinforcing cycle gets rolling, because it results in more minorities reaching positions of power, exerting more influence of this kind, and so on.

Bottom line: You can be as tough and skeptical as you like--CEOs face hard decisions and easy decisions, and trying to become one of America's best companies for minorities is looking like the easiest decision of the week. Safe prediction for the near future: Some companies will still be much better than others for minorities. Lots of companies will try hard to be among the best. But hardly anyone will wonder why.