Diversity in Business: More Optimistic Research

The Value of Diversity

We have made slow and incremental progress with awareness that diverse organizations tend to perform better than those organizations that demonstrate low levels of diversity. The link between company financial performance and gender diversity has strengthened in recent years with the emergence of a body of academic and qualitative research that links well-rounded and inclusive work environments with superior financial returns.

These findings have caught the attention of senior leaders and boards. In larger institutions and corporations, diversity efforts are led by roles such as Chief Diversity Officer (CDO) or Vice President of Diversity and Inclusion. According to HR Consulting Firm Korn Ferry, almost 60% of the Fortune 500 companies have CDOs or equivalent. Many large organizations accept the need to include a CDO in the C-Suite because they understand that a diverse and inclusive workforce is a key strategic imperative and integral to accomplishing their business objectives.

The value of diversity in the workplace has been challenged recently by a manifesto published by a former employee at Google. One of the manifesto’s main conclusion was that women are underrepresented in the technology sector because their biological differences from men tend to make them less suitable for the job. The author also suggested that biological differences were, in part, a reason why women were not fully represented in senior leadership. It should come as no surprise that the response to this manifesto has been swift and vocal.

As noted earlier, there are numerous studies and research projects that have been published in the past several years that offer compelling insights into how diversity improves business operations and financial return. I am highlighting a few of these reports that I believe provide substantial evidence that diverse organizations are more likely to thrive and to out perform their competitors.

The Numbers

After analyzing 1,600 corporations across all sectors, Morgan Stanley found that companies with better gender equality tend to have stronger fundamentals and better risk-adjusted performance. For companies in the tech sector, the link between gender diversity and performance is noteworthy. Morgan Stanley found that, over the five-year period ending in 2016, highly gender-diverse tech companies returned on average 5.4% more on an annual basis than the average yearly returns of their peers with less gender diversity.

Jessica Alsford, Managing Director and Head of Morgan Stanley’s Sustainable and Responsible Investment Research Team, states “Gender diversity can improve team decision-making and improve innovation capabilities for development of new products or services. It can also create alignment with diverse customer bases and, thus, open up untapped business opportunities.”

Credit Suisse Research Institute published a landmark study in 2014 “The Credit Suisse Gender 3000: Women in Senior Management”. The study concluded that gender diversity or the greater representation of women in senior roles was not just ‘nice to have’ but linked to excess stock market returns and superior corporate profitability.

The Credit Suisse report encompasses 27,000 senior managers at over 3,000 companies across a wide range of sectors and may well be the largest of its kind. It examines whether the evidence continues to link gender diversity to better performance and looks specifically at firms with more than 50 percent female representation in senior management. The report concludes that returns for shareholders are highly correlated to the percentage of women in top management.

Companies where women accounted for 25 percent of senior leadership outperformed at a compound annual growth rate of 2.8 percent; this increased to 4.7 percent at companies where women comprised 33 percent of senior leadership; and then jumped to 10.3 percent at companies where more than 50 percent of senior leaders are women compared with a 1 percent annual decline for MSCI ACWI index over the same period.

McKinsey has been examining diversity in the workplace for a number of years. Upon examination of proprietary data sets for 366 public companies across a range of industries in Canada, Latin America, the United Kingdom, and the United States, McKinsey published its key findings in the 2015 publication Diversity Matters. The global consulting firm looked at metrics such as financial results and the composition of top management and boards. The findings were clear and the implications are profound.

Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians. In the United States, there is a linear relationship between racial and ethnic diversity and better financial performance. Specifically, for every 10 percent increase in racial and ethnic diversity on the senior leadership team, earnings before interest and taxes (EBIT) rise 0.8 percent.

In McKinsey’s view, more diverse companies are better able to win top talent and improve their stakeholder orientation, employee engagement and retention, decision-making, product innovation and customer satisfaction. Optimized operational and human resource practices lead to a virtuous cycle of increasing returns. This, in turn, suggests that other kinds of diversity—for example, in age, sexual orientation, global mindset, cultural fluency, national origin, educational attainment, economic status—are also likely to bring some level of competitive advantage for companies that can attract and retain such diverse talent.

Looking Ahead

In January 2015, Intel announced the Diversity in Technology initiative, setting a bold hiring and retention goal to achieve full representation of women and underrepresented minorities in Intel’s U.S. workforce by 2020. The company also committed $300M to support this goal and accelerate diversity and inclusion—not just at Intel, but across the technology industry at large.

Intel’s plan is to use the $300M fund to help build a pipeline of female and underrepresented engineers and computer scientists. That includes funding programs that teach STEM to young people in underserved areas, collaborating with higher education institutions, investing in women and minority-owned companies and creating bolder hiring and retention incentives and programs to encourage diversity within Intel.

For the U.S. Technology Industry as a whole, the implications of achieving racial and ethnic diversity throughout the workforce in combination with full representation of gender diversity among leadership is compelling. According to Intel’s estimates, the power of full representation in the tech sector has the potential of yielding an additional $500B in new value, based on a combination of higher revenues and increased market values.

Barbara Whye, Intel Chief Diversity and Inclusion Officer, notes, “Our future success depends on full representation of perspectives and creative influences. Intel is committed to fostering a culture where our employees can bring their full experiences to their work—this is how we achieve innovation and how we drive our business forward.”

Brian Krzanich, Intel CEO, asserts, “Technology companies have talked about diversity for years, but the data show that progress has been slow. It is not enough to say that we value diversity; we must make actual, real progress. We set out to achieve by 2020 an inclusive workforce that reflects the diversity we see every day in the world around us. We expect to achieve full representation in Intel’s workforce by 2018, two years earlier than our original goal. We call on other companies to join us in this pledge, with a focus on real actions and results.”

When powerhouse technology leaders such as Intel make bold investments, it would suggest strongly that they are doing this to make their business more adaptive, more innovative, more efficient, and ultimately more profitable.