As an Economics student, I am passionate about understanding the relationship between good financial output and people. This has led me to have an increasing interest in the ESG (Environmental, Social and Governance) side of business. In a business context, this often refers to sustainability. A sustainable organisation, for me, is one that strives to have a positive impact on both society and the economy. As exhibited clearly in performance data, the starting point for achieving these productive outputs is diversity.
In this article, I aim to identify the processes behind diversity in the workplace that result in greater business success. My conclusions can be applied to a wide range of industries and sectors at a time when diversity and inclusion has proven to be an essential factor in recovery from the COVID-19 crisis.
Three key takeaways:
- Consider the unconscious biases that may affect the representation across your employees.
- Acknowledge the wider benefits of investing in diversity: increased productivity, stock price momentum and excess risk-adjusted returns.
- Investigate, understand, and improve, the representation of diverse talent in your organisation.
What is Diversity?
Diversity of protected characteristics such as gender, ethnicity and disability are often referred to as ‘demographic’ or ‘identity’ diversity. Matthew Syed, author of the groundbreaking novel Rebel Ideas, employs the term “cognitive diversity” to define the variety of perspectives, thinking styles and insights achieved from diversification. The two types of diversity often exist in conjunction with one another. Demographic differences often lead to the formation of groups with diverse views, thus resulting in great decisive advantages when dealing with complex problems.
Understanding the Need for Diversity
Cognitive diversity addresses the problem of ‘perspective blindness’, by which individual perceptions and interpretations are subconscious to the individual. Our own ideas and perspectives are the outcome of years of experience, background and personal circumstances. Yet these ideas become so habitual that we may be unaware of our own biases and frames of reality.
For example, suppose you have two colleagues with contrasting interpretations of a work problem. Individually, each person possesses “blind spots” in their perception of the task at hand. Together, they are able to combine points of reference and create a comprehensive interpretation with fewer blind spots. By combining perspectives, a diverse team can generate more insight, not less, by providing a range of solutions to a problem with multiple layers.
Diversity and Risk
It won’t be a shock to read that workplace diversity is a key contributor to managing portfolio risk. Alongside this, there are risk-reducing benefits to a range of sectors aside from just financial services. Explanations from this vary from hormonal to psychological, but the risk case for diversity lies on the premises that diversity allows for multiple perspectives to be considered across a broader spectrum of outcomes. Similarly, a study using data from 1,500 S&P firms between 1996 to 2014 found that different views at a board level is an important governance mechanism, preventing risky choices from being made without appropriate rationale.
Diversity in Practice
Race: Professor Chad Sparber uses US census data between 1980 and 2000 to assess the effects of racial diversity on economic productivity at an aggregate level. His findings showed that racial heterogeneity increased productivity across a wide range of industries. In particular, an increase in racial diversity of one standard deviation resulted in a 25 percent increase in the productivity of firms in the legal, health and finance sectors.
Gender: In the S&P When Women Lead, Firms Win report, a comprehensive examination was conducted across time to investigate the representation of female executives and their relative outperformance against male peers. Alongside persistent underrepresentation of female executives, female CEOs were found to drive greater value appreciation, stock price momentum and excess risk-adjusted returns in their firms. Ultimately, innate talent is equally distributed among men and women. Until executives are chosen on the basis of talent as opposed to other biases, these changes will continue to be highly profitable. This would involve firms incorporating diversity and inclusion goals into processes of nomination, selection and hiring across all employees in a firm.
Gender and Ethnicity: In Diversity Wins, a report conducted by McKinsey into the relationship between executive team diversity and financial outperformance, employee sentiment was measured across 1,000 large companies in 15 countries to provide insights into the importance of inclusion. The findings reiterated the narrative of the need for gender and ethnic diversity in corporate leadership, as companies with the most diverse executive teams continue to outperform non-diverse companies in terms of profitability. Notably, gender diversity in executive teams led to a 25 percent increase in financial outperformance against peers in 2019.
The Case for Inclusion
Diversity of thought, as discussed earlier, can only be achieved under specific cultural settings, with inclusion and belonging being integral to this process. Diversity advocate and inclusion strategist Verna Myers used the idea of a dancefloor to explain the difference between diversity and inclusion:
Without inclusion to complement diversity, the increased participation, innovation and business growth from diverse talent representation will not arise. Allowing employees to feel valued in their differences, thus being ‘asked to dance’, enables belonging and greater decision-making powers.
What does this mean for your organisation?
Understanding the gains from diversity and inclusion in your organisation can help to inform you of better people decisions that will drive the gains mentioned in this report. Additionally, the COVID-19 pandemic has highlighted the importance of these trends in leveraging the opportunity to bounce back from the crisis. Now is the time to seek new opportunities to enhance diversity and inclusion for the sake of performance and organisational longevity.
Get in touch for a no obligation consultation to discuss how you can start making better people decisions with your diversity data and drive business performance through diverse talent.