Racial quotas for city contractors may ruin this family business

December 18, 2023 | By ERIN WILCOX

This article first appeared in the winter 2023 edition of Sword&Scales.

In the mid-nineties, Jerry Thompson was headhunted for a Texas company that paid good money. He was a whiz at sales. So he moved his wife, Theresa, and two kids from Michigan to Texas.

He loved living in Texas. But two years in, he couldn’t stand his job.

Why’d you hire me if you’re not going to let me make decisions? he thought.

When he told Theresa he wanted to try working for himself for a change, she supported him. Jerry and Theresa are high school sweethearts. “I love her to death,” he says.

They put everything they had into a commercial landscaping business. “First year was not fun,” Jerry remembers. “I thought I was going to go out of business.” Then he landed a couple good contracts. “Haven’t looked back ever since,” he says. He thinks more people should take the risk of striking out on their own as a family business. “It’s been good for us and our family,” he says.

Today Jerry and Theresa own two companies in Houston: Landscape Consultants and Metropolitan Landscape Management. Their two kids—a son and a daughter—“now pretty much run the business,” Jerry says proudly. “I just get us into trouble—like this thing.”

By “thing,” Jerry means the lawsuit.

When being good isn’t good enough

Most of the Thompsons’ landscaping work is for the government: They have contracts with the City of Houston, Houston’s Midtown Management District, and nearby cities and counties. Their companies do irrigation installation, flood control, tree planting, and routine maintenance, including for schools.

But lately it’s been tougher to win and manage government contracts.

Since 1984, Houston has been setting aside a percentage of its contracts for minority-owned businesses. In the past couple of years, nearby cities and counties have followed Houston’s lead, meaning that more and more jobs in the Houston area come with stipulations about race.

The Thompsons are white. That can make things difficult.

In 2022, the Thompsons bid on a field maintenance job for Midtown Management District. The district evaluates contractors on a point scale: You can score up to 50 points on financial considerations, 25 points on organizational qualifications and references, 15 points on your proposed approach to the job, and 10 points on being a certified “Minority, Women, Disadvantaged Enterprise.”

Of all contractors who submitted a bid, the Thompsons scored highest in every single category—except Minority, Women, Disadvantaged Enterprise, in which they scored zero.

They didn’t win the contract.

The winning contractor scored a total of 87.68 points, including 10 points in the Minority, Women, Disadvantaged Enterprise category. The Thompsons came in second highest with 84.98.

In other words, the Thompsons lost to a company with a worse bid in every way—by the district’s own standards—because of the color of their skin.

“And the sad part about that is we had that contract on and off for 15 years,” Jerry says, “so they knew we were good.”

Twisted incentives

Last year the Thompsons thought about selling the business.

It’s not just the contracts they lose that bother Jerry; it’s also what they have to agree to these days to win.

For their five-year contract with the City of Houston, the family must agree to subcontract 11% of the job to certified minority business enterprises (MBEs). It’s a $1.3 million contract—so the Thompsons are forced to divert at least $143,000 of work away from their (largely minority) staff, whom they trust, to unnecessary subcontractors.

The Thompsons don’t like managing subcontractors. As a family business, they run a tight operation: 45 employees, mostly working out of their homes, without a lot of overhead or waste. That’s actually typical of family-run businesses: According to Harvard Business Review, family businesses are more frugal, carry little debt, and retain good talent better than their competitors do. “[T]hese practices come more naturally to executives who feel an obligation to be stewards for the next generation,” the publication explains.

It’s not easy for a family business with tight margins and high standards to give away a tenth of their work to subcontractors.

“If we have to give up 10% or 15% or 20% of that contract to someone we don’t really know and trust—I mean, who’s responsible for that contract at the end of the day?” Jerry asks. When subcontracting, the Thompsons have to manage subcontractors’ liability insurance issues; they have to be comfortable with subcontractors at sensitive jobs, like schools, where “your people have to be good people.” To fulfill the subcontractor requirement, the Thompsons have to choose from a list of government-certified minority business enterprises. “How do I know who they are?” Jerry says.

So yes, it occurred to Jerry that it might be time to sell the business and move on.

“But my kids are involved in it,” Jerry says, “and my son doesn’t want to sell it.”

Jerry’s daughter is less emotionally attached to the business. It’s given her a good job, but she’d be okay if the family had to sell. It’s Jerry’s son who really loves the business—who talks about growing it and puts his foot down when anyone starts talking about selling.

Ironically, if the family restructured the whole business to give Jerry’s daughter majority ownership and had her take over most of the daily decision-making responsibilities, she could probably get certified as a woman-owned business enterprise. The business would suddenly be treated differently by the government.

Imagine leaving your adult children to navigate a twisted incentive system where the family business would be shown government favoritism under one child—the child who’s not actually interested in running the business—but not the other.

Working for each other

Edelman’s Trust Barometer, an annual report tracking trust in institutions, ranks family-run businesses as the most trusted type of enterprise—above public companies and far above government.

“I come from a family business,” Karen Mills, former administrator of the Small Business Administration, told C-SPAN in an interview about the future of American small businesses. Karen’s grandfather was an immigrant who started a textile company from the back of a shoe shop. Karen worked for him growing up. “He used to say, ‘Our family doesn’t work for other people. They work for themselves,’” Karen remembers.

In other words, family business owners work for each other—for the good of the family, across generations. That’s precisely what makes customers trust family businesses. In a time of widespread distrust for capitalism, with some Americans worried that self-interest has atomized society, family businesses are a kind of salve. Studies show family businesses tend to invest in their communities, to preserve workplace values, to care about their reputations, to perform well in crises, and to prioritize long-term success over short-term rewards. At a family business, self-interest is inherently family-interest.

Jerry wants to protect his kids’ future. He used to be confident that as long as their landscaping business provided the best work for the lowest price, they’d be successful. Now he’s less confident. Race-based set-asides have changed the game. They’re affecting more and more of the Thompsons’ business.

“It’s hitting harder, it’s hitting closer,” Jerry says. “It’s starting to surround us.”

On a purely economic level, the racial set-asides are bad enough. “Anytime you do business with a government entity, the money comes from the taxpayers,” Jerry says. “So [the government] should be more protective of every dollar. I mean, I think we all agree with that.” Local governments are now rejecting the lowest bids from highly qualified contractors and allowing themselves to be up-charged solely in the name of diversity, equity, and inclusion. “They’re spending other people’s money, public money, tax money, to fulfill some kind of a goal they think they need to do,” Jerry says.

But it’s not just tax dollars at stake. Legally—and morally—it’s also fundamentally wrong for the government to take money out of one business’s pocket and give it to another because of the business owners’ respective races. It violates the Equal Protection Clause of the Constitution.

After Jerry stumbled onto a Pacific Legal Foundation blog post about Houston-area racial set-asides, he reached out to PLF. He wasn’t sure he wanted to actually pursue a lawsuit. The rest of his family definitely wasn’t sure. His kids were worried that fighting the MBE program would draw blowback in the community. They care about the business’s reputation.

But after Jerry started talking to PLF, he and his family decided to sue the City of Houston and Midtown Management District.

“I can just see this thing destroying our business if we don’t at least try,” Jerry says. He and Theresa have three grandchildren now. He’s thinking about what his grandchildren will be left with.

Most businesses aren’t going to speak out against the racial set-asides, Jerry says, even if they’re crushed by them.

“Because we can’t afford to take on City Hall,” he explains. “That’s why this PLF thing intrigues me. Because they’ll just get away with it otherwise.”

This article first appeared in the fall 2023 edition of Sword&Scales.