The Lesser-Known Value of Diversity

150 150 Wendy Heilbut

By Wendy Heilbut
wendy@jayaramlaw.com

During day-to-day functions in the workplace, it is easy to see that diversity is a plus.  For example, it is great when a younger colleague is more familiar with a contemporary cultural reference, or a colleague who celebrates different holidays can remind us that clients sharing his faith won’t want to communicate on a particular day, or a colleague of a different gender identity can provide an external viewpoint and help us escape an echo chamber.  Exposure to a myriad of viewpoints challenges our opinions and allows us to learn and evolve.

We’ve all heard the quips that the pipelines are insufficient or that the applicant pool is just too small for a specified opening to consider diversity.  However, creating a workforce of diverse perspectives, opinions, backgrounds and ideologies is imperative in today’s global culture both for the company’s growth and for society at large.  The more integrated diverse cultures are to a company, the more ready it is to pivot.  Transversely, the more a given demographic is present in diverse industries, the more individuals in that demographic can rise within each industry.  Diverse leadership breeds diverse membership, breeds diverse enrollment, breeds diverse education, breed diverse goals and role models.  At a time where our socio-political climate is so polarized, we each have a mandate to embrace diversity.

But there is also a quantifiable value to having a diverse workforce.  After analyzing several studies, it is fascinating to see that the diversity a company has espoused has a clear positive impact on its bottom line.

Let’s first define diversity.  We know gender should be included and cultural/racial/ethnic identification, religion too.  What about diversity of experience?  This can be difficult for entities accustomed to hiring through a narrow pipeline such as a small set of universities or a particular group of companies they see as ‘training ground’ for their employees.  Two classifications in which I operate: law firms and VC funds, are both culprits of hiring through these narrow pipelines.  And what about socio-economic and geographic diversity?  Your job criteria might require a level of education or training that is out of reach to some applicants.  All of this is to say that diversity is not a concrete term in today’s business world; each company needs to set diversity goals and work diligently to meet them.

McKinsey looked at the financial performance of 180 companies between 2008 and 2010 and found that those with diverse teams on their executive board consistently outperformed those with a more homogeneous board.[1]  The companies in the top quartile of diversity (defining diversity as women and foreign nationals) has ROEs and EBITs on average 53 percent higher than the companies with diversity in the bottom quartile.

In 2012, Credit Suisse examined close to 2,400 large-cap companies and found that those with at least one woman on their board outperformed their counterparts with all-male boards by 26 percent.[2]  Similarly, these more diverse boards deliver higher return on equity and valuations.  Most interestingly is that post-2008 financial crisis, the out-performance by these diverse boards was more significant than during the less-volatile days in the middle of the decade.  This suggests that diversity is even more important in the face of adversity.

This leads to a third study published by PNAS which found that ethnic diversity deflates price bubbles.[3]  Examining markets in Southeast Asia and North America, the scientists behind this study found that market prices matched their true value 58 percent better in a diverse market. When the market was homogeneous, the traders’ errors were more common and overpricing was higher.  The thesis of this study was that diversity created more friction which enhanced deliberation and shattered conformity.

We certainly need more of that!  In this age of globalization, it makes sense that as a very diverse species, companies that ensure their workforce is equally diverse will have the advantage.

 

[1] Is there a payoff from top-team diversity? McKinsey Quarterly, April 2012.
https://www.mckinsey.com/business-functions/organization/our-insights/is-there-a-payoff-from-top-team-diversity

[2] Press Release from Credit Suisse, July 31, 2012.
https://www.credit-suisse.com/corporate/en/media/news/articles/media-releases/2012/07/en/42035.html

[3] Proceedings of the National Academy of Sciences of the United States of America: PNAS, December 30, 2014.
https://www.pnas.org/content/111/52/18524.abstract

 

 

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