Diversity Helps Immensely

In 2015 you published your seminal report Why Diversity Matters. What has changed since then?

We have seen growing awareness of inclusion and diversity in business more broadly. Our report seems to have influenced policy-setting and transformation efforts by companies and institutions. While social justice, legal compliance, or maintaining an industry-standard employee environment are typically the initial impetus behind these efforts, companies are increasingly regarding inclusion and diversity as a source of competitive advantage.

This sounds promising.

Yes, but progress has been slow. By 2017, the 346 companies in our 2015 report – mostly based in the USA and the UK – had increased average female representation on their executive teams by only two percentage points, to 14 %, and ethnic and cultural diversity by one percentage point, to 13 %. What’s more, many companies are still uncertain as to how they can most effectively use inclusion and diversity in a business case to support their growth and value creation goals.

Is this why you released the follow-up report Delivering through Diversity in 2018?

The motivation for the update was to give a clearer view of the status, but also of what approach and interventions really work. We are increasingly seeing companies building their own business cases, and looking at more precise performance metrics across productivity, innovation, and customer retention. The new report tackles these business cases from inside the organization and provides a perspective on how to take action to impact growth and business performance.

Similar to 2015, we defined diversity as a greater proportion of women as well as ethnically and culturally diverse individuals. We looked at a larger data set of over 1,000 companies covering 12 countries. We measured likelihood of financial outperformance using two measures – profitability using average EBIT margin, and value creation using average profit margin. We then studied 17 companies representing all major regions and multiple industries to have a more granular view of where in the organization diversity matters most. Crucially, we also focused on how leading companies have successfully harnessed the potential of inclusion and diversity to help meet their growth objectives, and what lessons there could be for other organizations.

So, your latest research reaffirms the correlation between diversity and business performance?

That’s right. The statistically significant correlation between a more diverse executive team and financial outperformance demonstrated four years ago continues to hold true on an updated, enlarged, and global data set. Companies in the top quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to have superior value creation.

But it’s not just gender diversity, is it?

Companies in the top quartile for ethnic and cultural diversity on executive teams were 33% more likely to have industry-leading profitability. That this relationship continues to be strong suggests that inclusion of highly diverse individuals – and the myriad ways in which diversity exists beyond gender, including neurodiversity, sexual orientation, age, or international experience – can be a key differentiator among companies.

Despite this, we found ethnic and cultural diversity on executive teams to still be relatively low. And in the case of women on executive teams, they were twice as likely to be in staff roles than in line roles, for example those most closely associated with revenue-generation, and most likely to lead to CEO.

What happens to companies that don’t try to change this?

Our updated data shows that the penalty for bottom-quartile performance on diversity persists. Overall, companies in the bottom quartile for both gender as well as ethnic and cultural diversity were 29% less likely to achieve above-average profitability than were all other companies in our data set. In short, not only were they not leading, they were lagging.

The relationship between diversity and profitability seems to be there. But what is the reason behind it?

Our data revealed that having more women on executive teams correlates the strongest and consistently positively with the likelihood of financial outperformance. The research points to a small number of important ways to explain this correlation, including improved talent access, decision-making, innovation and consumer insight, and employee engagement. The talent argument instantly resonates: A diverse and inclusive workplace is central to a company’s ability to attract, develop, and retain the talent – particularly high-performers – which it needs to compete.

Academic research shows that diverse and inclusive groups make better-quality decisions, often faster, in a more fact-based manner, avoiding “group think.” They bring different experiences, perspectives, and more creative approaches to solve complex problems. They are also often more innovative and can better serve diverse customers. Another benefit is implied by recent highly publicized issues with gender and racial discrimination, highlighting that, for many companies, diversity and inclusion are about preserving their license to operate.
 

With profitability at the core of the equation, shouldn’t the financial industry be the first to realize the importance of inclusion and diversity?

Financial services players as a whole showed the highest average representation of women on executive teams in our data set. This is also an industry in which whole-company representation of women is among the highest, providing a solid starting point to achieve higher representation at more senior levels. However, the sector also had the slowest growth in representation of women on executive teams, suggesting a plateauing effect and the need to accelerate efforts.

We see quite some variability in the pace and scale of companies’ progress with inclusion and diversity. There are industry-specific as well as geographic and cultural differences which mean different starting points. But we also find that across industries and in different parts of the world, companies that are making rapid progress share certain traits, the primary one being that they treat inclusion and diversity as a core business priority.

Isn’t it difficult to make inclusion and diversity a core business priority since they are often undermined by unconscious decisions?

That’s why much of our firm’s research has been about building the fact base around these areas. We have seen executives and managers change their viewpoints completely when we show them data on how performance ratings, manager support, experience of daily micro-aggressions, or sponsorship differ between men and women.

I think companies will continue to work on understanding the benefits that diversity and inclusion bring to them. This will lead to building a truly inclusive culture. Culture is one of the critical building blocks we have identified to driving a successful inclusion and diversity agenda. The other vital components are visible leadership commitment, alignment with business strategy, and measuring the effectiveness of interventions.