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Can Diversity Improve Business Outcomes?

When seeking socially responsible investments (SRI), we use diversity, equity and inclusion as core positive screens. We give preference to companies that prioritize diversity in their workforces and management teams because we feel it is the right thing for them to do. But a growing body of research points to an equally compelling reason companies should pursue internal diversity: their own bottom line.

A recent Wall Street Journal analysis showed the 20 most diverse companies in the S&P 500 performed better over 5- and 10-year periods than the least diverse firms, delivering a 12% average operating profit margin (compared to 8% for non-diverse companies). A 2018 McKinsey study reinforces this finding, with the top 25% of companies studied in terms of gender diversity proving 21% more likely to experience above-average profitability, and the top 25% in ethnic and cultural diversity proving 33% more likely to outperform on EBIT (earnings before interest and taxes) margin.

In the McKinsey study, companies that outperformed typically had more women not just in the overall workforce, but in leadership and/or revenue-generating roles. This finding is echoed in a Harvard Business Review working paper published in 2016: using a large sample of 22,000 firms globally, the study found that for the profitable firms in the sample, transitioning from having no women at the C-level or on the Board to a 30% female share was associated with a one-percentage-point net margin increase, or a 15% profitability increase on average. The effect was most pronounced with C-suite roles outside the CEO position.

Why does diversity lead to these improved business outcomes? A Boston Consulting Group (BCG) study published in 2018 suggests that the diversity of management teams leads to greater innovation, which in turn can drive significant revenue increases. In the BCG study, companies who reported leadership diversity greater than the average also reported innovation revenue a full 19 points higher than those with below-average diversity on their leadership teams. Almost half the revenue of these companies with more-diverse leadership came from products and services that were launched in the prior three years–a key statistic in today’s rapidly evolving business environment. As with the McKinsey and Harvard studies, those companies with more diverse leadership also demonstrated statistically significant advantages in financial performance, with EBIT margins 9 percentage points above those of companies with below-average management diversity.

Companies that have been keyed into these diversity and inclusion advantages offer clear reasoning behind them. In a 2015 Diversity Best Practices interview, Vildan Stidham, the Divisional VP of Global Talent Acquisition at Abbott (a long-time member of Diversity Inc’s top 10 companies for Diversity and Inclusion), pointed out that: “D&I can bring innovation, creative thinking, and different perspectives that are essential in our growing businesses, especially outside of the U.S.” When asked how diversity influences her leadership thinking, Michele Buck, CEO of Hershey Company, commented in a 2018 interview with top executive recruitment firm Korn Ferry that: “One of the best ways to get [different] ideas is to [bring together] people with diverse backgrounds and experiences . . . Diversity is particularly impactful in driving innovation and new ways of doing things.”

A shift in consumer expectations may also be driving change. Marc Pritchard, Chief Brand Officer at Procter & Gamble, explained the thinking behind P&G’s extensive diversity and inclusion initiatives to Forbes this way: “Our business model is to be the best. And when we’re the best, we grow categories, we grow markets, we grow share, we grow household penetration. And what consumers are now expecting is brands to do good for the world as well and to go beyond just providing a superior product. They want to know what your values are. Is it a diverse group of people behind this brand? Are you promoting equality of all types, whether it be gender or race, ethnicity, sexual or gender identity, ability, even age, and religion? Are you walking the talk both with your own company and then with who you work with?”

But while innovation and customer standards are key drivers, sources such as the World Economic Forum (WEF) also cite improved company culture, flexibility and versatility as benefits of diversifying workforces. According to the WEF, “a culturally diverse environment is the best way to acquire these qualities.” With the global workforce set to be made up of 75% millenials by 2025, expectations of workplaces as forums that promote and celebrate diversity will continue to grow. Companies that can meet these expectations should have an easier time attracting and retaining talent than those that don’t. Responding to Medtronic’s #3 ranking in the 2018 Thomson Reuters Diversity and Inclusion Index, Carol Surface, Medtronic’s Chief Human Resources Officer, credited: “an employment framework that inspires continuous development, recognition, and high performance, creating a powerful employee experience where diverse perspectives contribute to our shared Mission of alleviating pain, restoring health, and extending life.”

The CEO Pledge, sponsored by CEO Action for Diversity and Inclusion, is approaching 1,000 signatories. And a McKinsey Global Institute report has found advancing women’s equality in the workplace could add $12 trillion to global GDP. Unfortunately, today’s reality for women, ethnic and cultural minorities, lags well behind that promise. But with growing evidence that a focus on diversity and inclusion can deliver stronger profitability, stickier customer relationships, and happier workforces, more and more corporations are being forced to pay attention.