Most of us have a sense that fostering a diverse workforce is the right thing to do, but there’s increasing evidence that it’s good for business as well. How exactly? Here are five proven ways diversity pays off for organizations.
1. Diversity Improves Financial Performance
Let’s start off with the bottom line: Our Win-Win of JUST Jobs analysis found that companies that disclose their diversity and equal opportunity policies have a median five-year return-on-equity advantage 2.5%, higher than those that do not disclose their policy.
Our findings echo a study of 1,000 companies in 12 countries by the McKinsey consultancy. McKinsey found that companies in the top quartile of ethnic and cultural diversity on their executive teams were 35% more likely to experience above-average profitability than companies in the fourth quartile. For gender diversity, the comparable figure was 21%. The advantage was greatest for companies with more women executives in line (profit-generating) roles rather than staff roles.
These are impressive findings, for sure, but why are diverse companies more profitable? Well, that leads to the rest of our reasons…
2. Diversity Improves Innovation
Innovation is the Holy Grail for business today, as companies strive to stay ahead in a rapidly changing business environment. Good news: Diversity can help. In a study by the Center for Talent Innovation and described in the Harvard Business Review, employees at diverse companies were 45% likelier to report that their firm’s market share grew over the previous year and 70% likelier to report that the firm captured a new market.
“Diversity unlocks innovation by creating an environment where ‘outside the box’ ideas are heard,” the study authors write. “When minorities form a critical mass and leaders value differences, all employees can find senior people to go to bat for compelling ideas and can persuade those in charge of budgets to deploy resources to develop those ideas.”
In another study of more than 1,700 companies, the Boston Consulting Group found that companies with above-average diversity in their management teams reported much higher “innovation revenue.” (That’s revenue from products and services launched in the past three years.) These companies also reported 9% higher earnings (before interest and taxes) than companies with below-average diversity.
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3. Diversity Improves Decision-Making
Much of business success is about making the right bets at the right time. It appears that the same diversity of perspectives that helps companies innovate can also help them make better bets.
Harvard Business School professor Paul Gompers tracked the performance of investments by venture capitalists, who not only choose startups to invest in but also advise startup leaders on crucial business decisions. He found that when investment partners were all of the same ethnicity, their investments were one-quarter to one-third less likely to succeed. The venture capital world is heavily white and male; having even one woman in a VC fund increased financial performance by about 10%, Gompers found.
“Thriving in a highly uncertain competitive environment requires creative thinking in those areas, and the diverse collaborators were better equipped to deliver it,” Gompers wrote in the Harvard Business Review.
4. Diversity (Plus Inclusion) Improves Workforce Performance
For diversity to work its magic, two conditions must apply. First, diversity must permeate your organization, top to bottom. Second, people from all backgrounds must feel valued in the workplace. That’s far from assured, given that business leaders have a long history of ignoring, and even harassing colleagues who don’t fit the mold.
The consultancy Deloitte studied more than 1,500 employees in Australia. When employees felt their organizations supported diversity and they personally felt included, they were twice as likely to say they felt engaged in their work. Engagement is a high predictor of productivity and retention. Employees in diverse and inclusive workplaces were also much more likely to say their workplaces were collaborative, innovative, and high performing. The numbers came in lower for employees whose workplaces were less diverse or less inclusive.
5. Diversity Meets Stakeholder Expectations
When JUST Capital asked the American public about the most essential expectations for a just business, providing equal opportunity ranked fifth of 29 issues, ahead even of important criteria such as making safe and reliable products or minimizing pollution.
In 21st century America, providing equal opportunity means much more than not openly discriminating against workers. It means that when customers visit a store, neighbors visit local offices, or shareholders invest in a company, they will expect that some of the people at that company will look like them—not just the frontline workers but managers and executives, too.
Diverse and inclusive companies are more likely to understand the diverse desires, concerns, and priorities of their stakeholders. That understanding will be reflected in their products, their services, and their relations with their communities—and that will contribute to their sustained success.
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