It’s a sign of our globalized times that rarely a day goes by without us being confronted by the importance of diversity and inclusion in the workplace. Global diversity campaigns like International Women’s Day is celebrated around the world, diversity management courses continue to proliferate, and high-profile companies like Google and Uber are churning out one diversity report after the other. Only the willfully blind would deny that diversity and inclusion have become integral to the current zeitgeist.
However, despite the obvious moral imperative, a prudent investor would be remiss not to ask how much of a company’s self-promotional noise around diversity constitutes politically correct window dressing and how much is bona fide strategy that will drive successful outcomes for the company, its employees, and of course, its shareholders.
One should not be too quick to judge the cynical investor; widespread corporate commitment to diversity seems to be at odds with reality. In the case of black Fortune 500 CEOs, the numbers have actually regressed from seven in 2007 to only three in 2018. Pale male hegemony remains entrenched with white men occupying 66 percent of board seats. Unsurprisingly, only 20% of Fortune 500 companies are prepared to publish their full diversity makeup. Those who do, are mostly tech companies like Google and Facebook.
That said, large tech companies have their own diversity challenges. There’s Uber’s well-published toxic culture under co-founder, Travis Kalanick, which led to his resignation as CEO. The subsequent pressure on the company to transform has now reached the point where executive pay is being linked to diversity and inclusion goals. Google’s 2019 Diversity Report showed that the internet behemoth is not exactly blazing a transformation trail either, with female leadership representation dropping to 26%. Tellingly, Google’s Chief Diversity Officer, Danielle Brown, resigned shortly after the report was released.
Just to muddle the picture further, there are also converse trends like the surge in Indian CEOs taking up the reins at American tech companies. Sundar Pichai at Google, Satya Nadella at Microsoft, Nikesh Arora at Palo Alto Networks, and Shantanu Narayen at Adobe are some high-profile examples that come to mind. A few Indian swallows do not make a diverse summer though. Even with Pichai at the head of Google, the company still struggles with diversity issues. Which bring us back to the original question – does workplace diversity drive better results?
The first step to a definitive answer is to understand the difference between diversity and inclusion and how they interact with each other. Diversity can be seen as all the traits that distinguish us from each other, such as gender, religion, ethnicity, nationality, age, and sexual orientation. Inclusion refers to how an organization can harness diversity to create a performance-oriented culture that is also conducive to personal success. Diversity is the raw material; inclusion is what you build with it.
As Tim Ryan, U.S. chairman of PricewaterhouseCoopers and co-founder of CEO Action for Diversity and Inclusion, mentioned in Fortune earlier this year:
“… a focus on diversity numbers alone can create dangerous tunnel vision … business leaders should balance their approach by paying more attention to company culture … a workplace where each employee feels comfortable bringing their true selves to work is key to supporting them to stay, thrive, grow, and contribute within an organization.”
That answers half of our investment question. Simply stuffing your organization with an exotic array of personalities is obviously not going to amount to much. You need to create a suitably inclusive environment that embraces all of your people’s differences and channel each person’s contribution towards common goals. But where’s the evidence that such an approach really improves the company bottom line and creates more value for investors?
The empirical case for workplace diversity and inclusion
The broader world provides some intuitive clues. Rock and roll, which dominated the airwaves for decades, evolved from diverse music styles like blues, jazz, folk, and country. The cosmopolitan melting pots of Singapore, London and San Francisco have all seen phenomenal economic growth over the past few decades. As an investor though, drawing parallels with company diversity would require more empirical evidence.
Thomson Reuters has made the job a bit easier with their Diversity & Inclusion Index, now in its fourth year. The index ranks publicly traded companies based on their ability to incorporate diversity and inclusion in their company strategy. It then tracks the financial returns of the top 100 companies. Over the past seven years the D&I index companies have consistently outperformed the total market.
Number one on the 2019 D&I index, Johnson & Johnson, is also number 37 on the Fortune 500 list with a market cap of $345B and the world’s largest biomedical company by revenue. Number two, Nestlé, is the world’s largest food and beverage company and number 76 on the Fortune 500 list with a market cap of $319B.
The Thomson Reuters index is not alone in its empirical analysis of the impact that sound diversity and inclusion strategy can have on a company’s performance. Many leading financial and advisory firms have produced research that also proves a strong correlation between D&I and bottom line.
- Morgan Stanley research from 2016 showed that companies with more female employees outperformed those with less gender diversity by adding an extra 2% return on equity.
- A 2018 study by AXA investment managers identified high diversity and inclusion as a competitive advantage and indicator of future profitability.
- In 2017, Boston Consulting Group compared perceptions of company leadership diversity at 1,700 companies in eight countries with the portion of total revenue derived from new products and services launched. Their conclusion was that companies with above-average management diversity earned on average 19% more revenue from innovation.
- McKinsey’s 2018 report, Delivering through diversity, also confirms the connection between diversity and company performance. The report analyzed the profitability, long-term value creation, and diversity at various levels of over 1,000 companies in 12 countries. They found that the companies with the most gender diverse executive teams had 21% more chance of above-average profitability and were 27% more likely to create value over the long term than the companies with the lowest executive gender diversity.
Growth in diversity indexes and certifications like Bloomberg’s Gender-Equality Index and the Economic Dividends for Gender Equality (EDGE) Certification are further signs of the increasing importance of accurately measuring the impact of diversity and inclusion strategies on company performance.
Sources: Bloomberg | EDGE Strategy
Company executives used to be hesitant to ascribe too much influence to diversity and inclusion, but it seems the tide is turning. Alan Joyce, CEO of Qantas, went so far as to credit resilience and innovation borne of a diverse and inclusive culture for the airline’s miraculous turnaround from a demoralizing AUD$2.8 billion loss in 2013 to a record profit of AUD$850 million in 2017.
Why are diversity and inclusion such powerful drivers of company growth and profit?
The above-mentioned research, as well as feedback from companies like Unilever that have implemented detailed D&I strategies, has highlighted some specific reasons why more diverse and inclusive companies outperform their peers.
- It promotes critical problem solving by fostering collaboration and removing biases.
- It leads to better decision making and corporate governance.
- It fast-tracks innovation by valuing different perspectives and new ideas.
- It drives better employee engagement by being more welcoming and representative.
- It gives access to a wider and deeper talent pool, which in turn can help build a distributed organization.
- It makes companies more agile by forcing them to adapt quicker to changing circumstances.
- It enhances brand and social reputation by reflecting the environment that the company operates in.
Implementing a diversity and inclusion strategy is not without its challenges though. A leadership team with multicultural experience, some international exposure, and sound relationship management skills implies a strong advantage. Leaders with well-developed emotional intelligence will also find it easier to relate to people on multiple levels and view issues from different angles.
International business services firm, Deloitte, defines inclusive leadership in terms of six Cs: cognizance, curiosity, courage, cultural intelligence, commitment, and collaboration.
Organizationally it is crucial to hire right, promote from within, and have a clear succession plan. More importantly, companies need to clarify early on who is ultimately responsible for driving diversity and inclusion. The current trend at large organizations like Facebook and Google is that it should be the Chief Diversity Officer or Chief Transformation Officer. In my opinion, there is a strong case to be made that such an important pillar of company culture should remain under the remit of the CEO, especially at early-stage companies.
Can tech help drive diversity?
Boston Consulting Group found in their research that digital technology has a multiplier effect on the relationship between diversity and innovation. Simply put, companies that prioritize digital solutions and tools tend to reap bigger rewards.
In response, D&I technology has grown substantially as businesses started waking up to the value of a diverse and inclusive work environment and simultaneously experienced societal, regulatory, and shareholder pressure to get rid of workplace bias and discrimination. According to Mercer, the world’s largest HR consulting firm, there are currently more than 100 vendors of D&I technology which covers all aspects of the employee life cycle: talent acquisition, development, retention/engagement, and analytics.
Entrants to this new market include platforms like Handshake, a job portal for university students and graduates that makes it easier for employers to find candidates based on more granular diversity and inclusion metrics. Jopwell is another talent acquisition startup which matches companies with Black, Latinx, and Native American candidates.
There’s no denying the mounting evidence that diversity and inclusion is good for your investment dollar. Just make sure the company is doing it for the right reasons. Simply focusing on numbers, be it the bottom line or quotas, does not guarantee long-term results. Using diversity to foster continuous innovation and source the best possible talent does.
Birgit Thümecke is co-founder and CEO of Eventerprise.com, a global marketplace platform that connects event organizers with event professionals as well as vendors of event-related products, services, and venues. As a recipient of a Stevie Award for Women in Business she is committed to building a world-class distributed organization that serves all its stakeholders with growing value.