Diversity Confirmed To Boost Innovation And Financial Results

Stuart R. Levine Contributor

“Diverse and inclusive cultures are providing companies with a competitive edge over their peers.” This quote summarizes conclusions from The Wall Street Journal’s first corporate ranking that examined diversity and inclusion among S&P 500 companies. The Journal’s researchers’ work joins an ever-growing list of studies by economists, demographers, and research firms confirming that socially diverse groups are more innovative and productive than homogeneous groups.

Employee diversity takes multiple forms. There are the commonly considered inborn traits of age, gender, ethnicity, race and sexual orientation. Other types of diversity, however, which one acquires through experience, are also important. They can involve areas of study, industry background, career path, veteran status and foreign work experience whereby one learns to appreciate cultural differences. Managers and teams having a mix of inherent and acquired forms of diversity appear to be most productive of all.

Smart leaders know that their companies benefit from attracting, developing and retaining a diverse workforce. In addition, they understand that creating and maintaining a welcoming and inclusive culture makes talented people want to join and stay. Yet, leaders are aware that they are not doing enough. Only 16% of corporate directors that were recently surveyed by PwC believed their companies scored “excellent” for recruiting a diverse workforce. Even fewer, 15% felt their companies were excellent in developing diverse executive talent, and 83% believed that companies should be doing more to promote gender and racial diversity. Diversity and inclusion clearly represent a business opportunity in the minds of these directors.

What are some of the ways that diversity and inclusion drive results? “Diversity jolts us into cognitive action in ways that homogeneity simply does not”, wrote Columbia Business School Professor, Katherine Phillips as she described hers and other research for Scientific American in “How Diversity Makes Us Smarter”. Diverse teams become better prepared for decision-making and accomplishing the task at hand. A sense of complacency and sameness in thinking is more likely in homogeneous teams than in diverse teams. Differences among team members force each person to anticipate that there will be alternative and unexpected viewpoints to consider and evaluate. Reaching consensus will take more effort. People must work harder to communicate their own thinking, and they need to broaden their own views to consider unexpected perspectives of others. This takes more work and preparation, but it’s significantly valuable.

When members of diverse teams see things in a variety of ways, they are poised to recognize new and different market opportunities, and they can better appreciate unmet market needs. Expanded market awareness produces results. HBR reported that diverse companies enjoyed better overall financial performance. EBIT margins for companies with diverse management teams were nearly 10% higher than for companies with below-average management diversity. Diverse teams are more capable of addressing market segments with demographics similar to some of the team members. A 2013 Harvard Business Review affirms that when at least one team member shares a client’s ethnicity, the team is more than twice as likely to understand that client’s needs than teams where no member shares that trait.

There is ample evidence that gender diversity drives results. Women are well situated to know and understand market opportunities. Women control 51% of U.S. wealth (40% globally), and women either directly make or influence up to 80% of all purchases. No wonder that Bloomberg reports that companies with gender-balanced teams have a higher return on equity. Credit Suisse Research Institute found that companies with one or more women board members had higher average ROI and better average growth than companies with male only boards. With such benefits from gender diversity, one wonders why 77% of S&P500 company boards are more than two-thirds male, and only 2% have more than 50% women members.

Diverse teams are better positioned to unlock innovation that drives market growth. Diversity further enables nonlinear novel thinking and adaptability that innovation requires. Moreover, those companies with the highest levels of digital investment exhibited the strongest link between diversity and innovation revenue. Diverse management teams were more innovative than less diverse teams, confirmed BCG after surveying 1700 companies of varying sizes and differing country locations. BCG used as the indicator of innovation the portion of revenue from products and services launched within the last 3 years. Companies with above-average diversity produced a greater proportion of revenue from innovation (45% of total) than from companies with below average diversity (26%). This 19% innovation-related advantage translated into overall better financial performance.

A diverse workforce and welcoming, inclusive cultures are front of mind for most boards, as the PwC data show. This strategic imperative requires commitment from the top. The CEO and C-Suite, especially the Chief Human Resource Officer, are charged with developing a comprehensive strategy to support and engage a diverse workforce. You cannot recruit a diverse workforce without having a healthy culture that attracts talent. People sense and learn though formal and informal channels what the company’s culture is like.

The workplace environment that supports a diverse workforce exemplifies best practices for an engaged healthy culture. Each employee knows that their voice will be heard, and that they are a valued part of the team. Everyone knows they are safe in expressing differing viewpoints and perspectives regardless of age, background or experience level. In fact, people are encouraged to do so, because when all voices are given airtime and everyone’s ideas are considered, it drives both the insights needed for innovation and the creativity to assess new markets and examine existing markets in new ways. Leadership rewards agility, risk taking, and an action orientation. Budgets, communications, business systems, technology, and metrics support and track the status of and progress towards a diverse inclusive culture. Team members have decision-making authority and leaders share credit for success. Management focuses feedback on what is actionable, working well, and going right. Fair employment practices are in place and include equal pay for equal work and a strong non-discrimination policy.

The results, data, and studies are in, and they show that organizations that prioritize diversity and inclusion as a strategic priority do better than less diverse peers. Both board and senior leadership attention to a diverse workforce and an inclusive culture becomes a fiduciary duty to the organizations and the stakeholders that they serve.