Several New Studies Tie Diversity to Innovation, Profitability

Several New Studies Tie Diversity to Innovation, Profitability

As more research explores the impact of diversity and inclusion on businesses outcomes, the bottom-line case for diversity and inclusion grows ever stronger. Three studies last month added to this growing body of evidence in favor of D&I, finding that gender parity and racial diversity, particularly in decision-making roles, has a meaningful impact on companies’ innovation, productivity, and profitability.

The first study comes from Richard Warr, a professor of finance at North Carolina State University, his colleague Roger Mayer, and Jing Zhao of Portland State University. The researchers’ headline finding is that companies that score well on indicators of diversity tend to be demonstrably more innovative, Fast Company’s Ben Schiller explained in a post highlighting the study last month:

The study looks at the performance of 3,000 publicly traded companies in the years 2001-2014 across nine measures of diversity. That includes whether firms have women and minority group CEOs, whether they promote women and people of color to “profit and loss responsibilities,” whether they have positive policies on gay and lesbian employees (say, offering benefits to domestic partners), and whether they have programs to hire disabled employees. …

The big takeaway: Companies that fulfill all nine positive diversity requirements announce an average of two extra products in any given year, which about doubles the average for a major company (those that tick fewer boxes are less innovative proportionally). Moreover, the researchers find that companies with pro-diversity policies were also more resilient in terms of innovation during the 2008 financial crisis.

The paper does not conclusively prove a causal relationship between diversity and innovation, Schiller notes—companies that invest in diversity may simply be investing intelligently in other areas that impact product development more directly—but combined with what we already know about how diverse teams are more likely to challenge their assumptions and biases, more likely to engage in productive debate, and able to access a wider range of perspectives, the correlation Warr and his co-authors uncovered looks suggestive.

Another study comes from McKinsey, expanding on their 2015 report on why diversity matters. The new analysis uses a larger data set of more than 1,000 companies in 12 countries, measures both immediate-term profitability and long-term value creation, and takes a broader view of diversity. McKinsey’s Vivian Hunt, Lareina Yee, Sara Prince, and Sundiatu Dixon-Fyle discuss their key findings, which show that diversity on executive teams has a particularly strong impact on company performance:

For gender, the executive team shows the strongest correlation. We found that having gender diversity on executive teams, specifically, to be consistently positively correlated with higher profitability across geographies in our data set, underpinning the role that executive teams—where the bulk of strategic and operational decisions are made—play in the financial performance of a company. …

Top-team ethnic and cultural diversity is correlated with profitability. In our 2017 data set, we looked at racial and cultural diversity in six countries where the definition of ethnic diversity was consistent and our data were reliable. As in 2014, we found that companies with the most ethnically diverse executive teams—not only with respect to absolute representation but also of variety or mix of ethnicities—are 33 percent more likely to outperform their peers on profitability. That’s comparable to the 35 percent outperformance reported in 2014, with both figures being statistically significant.

The McKinsey report also finds that companies with low scores on gender and ethnic diversity tend to underperform their peers, suggesting that not only is D&I profitable, a lack of attention to it is costly. Unfortunately, the study also shows that ethnic and cultural diversity on executive teams in the US and UK remains low, with black women particularly underrepresented in line roles with a clear path toward the C-suite.

The third study, by the Boston Consulting Group, attempts to narrow down precisely where and how diversity drives innovation by looking at more than 1,700 companies of various sizes and industries in eight countries. BCG partners Rocio Lorenzo and Martin Reeves presented their findings at the Harvard Business Review:

Most important, we found that the most-diverse enterprises were also the most innovative, as measured by the freshness of their revenue mix. In fact, companies with above-average total diversity, measured as the average of six dimensions of diversity (migration, industry, career path, gender, education, age), had both 19% points higher innovation revenues and 9% points higher EBIT margins, on average. All six dimensions of diversity had statistically significant correlations with innovation, both individually and collectively, although industry, nation of origin, and gender had slightly larger effects. …

What is the potential impact of diversity for the average respondent company? We calculated, based on our survey data, that innovation revenues could increase by 1% by enriching the diversity of the management team, 1.5% with respect to national origin, 2% with respect to industry origin, 2.5% with respect to gender, and 3% with respect to managers with different career paths. With greater increases on more dimensions, the total uplift potential could therefore be even more significant.