By Stephanie N. Mehta Reporters: Christine Y. Chen, Feliciano Garcia, Karen Vella-Zarb

(FORTUNE Magazine) – A group of scientists from Lucent Technologies' vaunted Bell Labs are eating lunch and talking about the most delicate subject in corporate America, or anywhere else in America: race. Over sandwiches and pasta salad, they offer FORTUNE an upbeat view of opportunities for minorities at their company. Larry Seibles, a researcher in Lucent's process and chemical engineering department, proudly notes that everybody up his management chain is either a woman or a minority. Materials scientist Ainissa Ramirez is still amazed that her bosses let her give speeches on company time about diversity. Dora Abreu, a computer programmer, recalls interviewing for a job at Lucent three years ago and watching from the lobby as people of all racial and ethnic backgrounds streamed through the door. "They aren't just saying they're diverse. They are diverse," she remembers thinking.

When a reporter asks how Lucent could improve, however, the room goes quiet. Abreu suggests that the company could try to attract more Hispanics, who make up about 5% of Lucent employees. The others stare silently at their half-eaten meals.

So it goes with race relations in the workplace. The good news is, there's plenty of progress for companies and employees to talk about, especially at a place like Lucent, which ranks 25th on our list of the 50 best places for minorities. But what often doesn't get said, especially in mixed-race settings, is how much remains to be done. Executives may have no idea how differently minority colleagues can view the corporate culture that treats whites so well. Just ask Nextel Communications, which is facing complaints of racial and sexual discrimination filed by minority employees in late June. Or talk to Doug Ivester and Doug Daft, Coca-Cola's former and current CEOs, who both seemed genuinely shocked that anyone could consider Coke a biased place. Some of the company's black employees apparently saw things another way. (See the following story.)

That's why it's in everyone's interest to identify and honor the corporations that have done the most to make employees of all races into full participants in their businesses. In our third annual list of the best companies for minorities, assembled for FORTUNE by the nonprofit Council on Economic Priorities, we do just that: Each company on our list has made an exemplary commitment to diversity at every level--from its new hires, to its suppliers, to the charities its supports. In this year's rankings we pay enormous attention to diversity in the upper ranks of each company. In our average top-50 corporation, members of ethnic minorities hold about 16% of the board seats, make up 22% of the officials and managers, and pull down 13% of the 50 largest paychecks. Those are all key signs that a company has gone beyond political correctness. After all, no company would fill its top slots with unqualified people just to look multicultural.

Not that anyone would need to, since the nation is blessed with more executives of color than at any time in recent memory. Consider this: About 65% of the FORTUNE 1,000 have at least one member of an ethnic minority on their board of directors, up from 55% in 1998. Nearly one in five members of the Harvard Business School class of 2000 is a person of color, up from about 13% of the class of 1990. And Fannie Mae, Applied Materials, and Merrill Lynch all have African-American executives as the No. 1 or the heir apparent.

Indeed, it's now considered self-evident that a diverse work force is not just "the right thing to do"; it's a competitive advantage. The more points of view from which you attack a problem, the more creative your solutions will be. That's especially true in marketing: A unicultural management can't sell to multicultural customers. In addition, a reputation for including people of all kinds--and offering them good jobs and good salaries--will give you a leg up in luring new employees and keeping the current staff from exiting.

The question today, then, isn't whether you want minority workers. It's whether you are giving them what they want--and giving it to them consistently enough to get them to stick around. And what they want, of course, is what all your employees want: confidence that their efforts will pay off in money, fulfilling work, and opportunity for advancement.

Before you respond reflexively that of course your company is a level playing field, consider this: A staggering 45% of minority executives--these are senior people, mind you--say they've been the target of a racial or cultural joke at work, according to a study by search firm Korn/Ferry International and Columbia Business School. And while you may protest that no such outrage would ever occur in your office, remember that this figure does not count the unwitting acts of insensitivity that probably occur there all the time. Earl G. Graves, founder of Black Enterprise magazine, recalls inviting some businessmen to a charity dinner that his magazine was sponsoring. Before accepting, some guests demanded to know whether there would be other white people at the table. Every minority executive has similar stories to tell. You'd have to be nonwhite to know what it's like to have others assume you must be junior to a colleague because the colleague is white; to lose a sale when a customer finds out you are not Caucasian; to be waiting for your car and be mistaken for the valet. Some 44% of executives in the Korn/Ferry survey say they've had to stifle anger to avoid being seen as having a chip on their shoulder.

How might such experiences color the way minorities really perceive opportunity at your company? It's naive to think that unconscious, patronizing attitudes don't find their way into decisions directly affecting minority employees' careers. The minority executives in the Korn/Ferry survey clearly felt they did. Nearly 60% of them say they've observed a double standard in the delegation of assignments. Little wonder, then, that almost half of all minority employees feel their employers aren't doing enough to create opportunities for people of color, according to employee-attitude research by Sirota Consulting. If you want to win the trust of your minority employees, then, there's no way around it. You're going to have to work at it.

Racial stereotyping may be the most pernicious when applied to black employees, but it's hardly limited to them. James Cheng, a director in the mergers and acquisitions department for phone company GTE, tries to be philosophical about it. "I have close friends who will tell me, 'Well, you're Chinese, therefore blah, blah, blah.' " he says. "That's not discrimination, it's just opinions between co-workers." Not everyone would be as good-natured about this as Cheng, but even he acknowledges that co-workers' "opinions" can leach into the culture and affect opportunities. "Have I been viewed positively or negatively because I am a minority? Definitely," he says. Cheng, 47, says "positive" characterizations of Asians as hard-working and deferential can be just as damaging as negative ones: Asian employees can end up relegated to roles as corporate workhorses--not leaders. "You do see at the entry level a lot of Asians in GTE on the technical side," Cheng says. "Why aren't we being pushed toward higher-level positions?"

Hazel Weathers, a no-nonsense senior marketing manager at GTE, describes how an unfavorable stereotype can snowball without any conscious act of discrimination. Weathers spent most of her career at IBM, a company she credits with being fairly forward-thinking on the issue of diversity. Still, she remembers a time at the computer giant when she supervised a group of about a dozen people, and her top employee was an African-American man. As it turns out, he also was the lowest-paid person in her group. "How does that happen?" she asks. "It doesn't happen because one manager decides to cut his pay by 25%, but because one manager looks at raises and gives him 5% less, and the next does the same. By the time five managers have done that, well, he's making 25% less. It is done in little pieces along the way."

Very often minority executives are held back because no white manager will take a chance on handing them that first important management gig. David A. Thomas, a professor at Harvard Business School and the author of a book on successful executives of color, says minority managers spend more time than their peers in the "bullpen" waiting for their big chance. If they get it, they then have to prove themselves all over again with each new post. "We see people of color incurring a tax, even when they are superior performers," Thomas says.

In this way, discrimination is almost clandestine. Minority employees get left out of high-profile projects, so they can't exhibit skills needed to earn promotions. They start at a lower base salary, and fall a little further behind with each pay raise. A manager looks at that low pay and assumes there must be something wrong with the employee--not with the system.

Thomas' research supports the feeling, widespread among successful minorities, that they've had to put in extra hours and additional effort to achieve the same status as their white contemporaries. Bruce Gordon, president of Bell Atlantic's enterprise group, says he has always felt that he needed to be better than--not equal to--the competition. But he also thinks that these added efforts have made him a better executive, and he counsels other minority employees to pursue the same ethic. "It's not enough to be as good as the next person," says the 54-year-old executive. "We have to be better."

Far and away the best way for companies to level the playing field is to cultivate and promote minority achievers like Gordon. Minority executives in senior posts not only keep the corporate culture honest--they don't have the same blinders as white executives--but also reinforce the essential message that employees of color can succeed there. Dixie Garr, a vice president at Cisco Systems, echoes that thought: "When talented minorities thrive in an organization, it sends a powerful message to up-and-comers in the company."

And to those outside. "Minority executives tend to be more careful in evaluating the quality of the corporate culture of companies they might be joining," says Joanna Miller, a managing director with Korn/Ferry International. Putting high-achieving minority executives in high-profile jobs is the best way to signal that the culture welcomes the sort of manager you'd like to attract.

At Lucent's Bell Labs, chemical engineer Ralph Taylor-Smith says that the presence of role models with his complexion gave him assurance that his ability, not his race, would decide his professional success. "I interviewed at a lot of top FORTUNE 500 companies," he says. "At Lucent, there were a number of clear-cut, successful people of color." He cites Jim West, a renowned Bell Labs scientist who invented a key microphone technology; Shirley Jackson, who has since left to become president of Rensselaer Polytechnic Institute; and Jim Mitchell, materials research vice president at Bell Labs. "It was an easy decision to come here," he says. Taylor-Smith, 32, is no slouch himself, by the way. He holds three patents, and MIT's Technology Review recently named him one of the nation's top young innovators.

Quickly getting minorities into decision-making roles also helps counteract the wrong kind of buzz. And as of the early 1990s, perhaps no company had worse word of mouth among minorities than Shoney's. (In 1992 the company paid $132.8 million to settle a class-action lawsuit brought by 20,000 employees and rejected job applicants.) "Our former leadership had a practice of--I guess this is the best way to put it--promoting from the 'buddy system,' " says Jesse Spaulding, a regional director of operations for Captain D's, a seafood chain owned by Shoney's. "That left people of color by the wayside, because there were no people of color in higher positions who could make decisions on promotions."

Spaulding's own career is a case in point. The talkative go-getter started at Captain D's in 1981 as a 21-year-old manager trainee. He quickly became an assistant manager, then a general manager. While he was still in his mid-20s, he was named an area supervisor--at which point his career stagnated for ten years.

Shoney's is a different place now. In the wake of the lawsuit, management has made a decisive effort to broaden opportunity, and the company (this year's No. 36) has ranked in FORTUNE's top 50 for each of the three years we have done the list. And Spaulding has vaulted from being a victim of Shoney's old, all-white "buddy system" to helping to shape its new, multi-ethnic version. He delights in bringing along qualified people of color. For example, Spaulding says, he recently hired a new area director from a rival. "He was a topnotch performer, but his former bosses were waiting for a spot to open up in an area where they thought he would 'fit in' " (in other words, a nonwhite community). "We hired him right away."

The turnaround at Shoney's--and at that other reformed sinner, Denny's (No. 1 on this year's list under its corporate moniker, Advantica)--demonstrates what Coke is learning only now. You don't gain the trust of minority employees simply by having vague multicultural intentions. You need to give minorities great jobs. You need to set measurable goals and track your progress using the sorts of yardsticks employed by FORTUNE's ranking. You also need to give managers an incentive to reach those goals. It's no accident that 38 of the 50 best companies for minorities, or about 76%, tie managers' bonuses to diversity goals. By comparison, a 1998 sample of human resources executives found that only one in four FORTUNE 500 companies made the same commitment.

There is, after all, no reason that corporations shouldn't lead America in eradicating discrimination. Bruce Gordon, the Bell Atlantic group president, says he chose a business career because he felt the private sector had the greatest power to effect change. "It all comes down to profits," he says. "You get over your discriminatory instincts when you realize that you're getting paid to win, and it doesn't matter what the skin color is of the person who helps you win."

In the meantime, businesses that have been the first to put their money where their hearts are will be the first to reap the rewards. Jennifer Kannar, 44, a Hong Kong-raised product manager at UPS (No. 31 on our list), recently proposed a bilingual support center to win the business of Korean-American entrepreneurs in Southern California. The company took a couple of months to evaluate the proposal, to Kannar's frustration, but it ultimately gave the center the green light. Kannar is now expanding to include Vietnamese, Chinese, and Japanese businesses. Had UPS not consciously striven for a diverse work force, it might well have missed the opportunity Kannar saw.

In fact, who knows how much talent might have been lost to the work force had the companies on our list not made the effort to bring minorities along? Ludyn Campos, a native of Guatemala, rose from houseman--essentially the man who hands out supplies to the maids--to chief engineer at a Marriott Residence Inn in Manhattan Beach, Calif. That might not have been possible had Campos not learned English, with the help of his employer (No. 37 on our list). Then there's Dora Abreu, the Dominican-American programmer at Lucent. Where she grew up, in Queens, New York, girls were urged to be teachers or secretaries, if they were to work at all. Abreu nevertheless poured her energy into math and went on to earn two master's degrees. Who wouldn't want employees like Campos or Abreu? The only question is, are you worthy of them?

FEEDBACK: smehta@fortunemail.com

REPORTERS: Christine Y. Chen, Feliciano Garcia, Karen Vella-Zarb