Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 303

The business case for diversity and inclusion

In March 2019, the Thinking Ahead Institute conducted its first public seminars in Sydney and Melbourne. We polled the audience of investment professionals on the current pace of action in the industry on inclusion and diversity. Delegates voted on five options and the overwhelming response in both cities shows us there is a lot of scope to improve.

Improved diversity is the new corporate zeitgeist. We need more women, we need more ethnic minorities, we need more, well ... just anyone that doesn’t look like ‘us’. And sorry, did I forget to mention we need it fast?

The investment industry is struggling to catch up. Why? Because for too long both structural and unconscious bias have limited opportunities for non-white, non-male, non-private school educated individuals. The workforce is so visibly homogenous that it has almost become embarrassing.

There have been signs of progress. The light shone on gender pay gaps, the recently proposed crackdown in the UK on ethnic pay gaps, and the increasing challenge against companies who have exercised discriminatory policies have dragged many companies into the limelight.

Wanted: quick fixes please! But wait … why exactly are we doing this diversity thing anyway?

As with most things in life, anything worth doing is hard and quick fixes are elusive. While many organisations have accepted the virtue of more diverse teams, it’s worth spending a little more time exploring why. Is this about compliance or commercials? Is this about performance or is this about culture? And by the way, will more women help my team make better decisions?

Digging deeper: the business case for diversity

The benefits of diversity have already long been noted. In a speech to Stanford Business School in 1998, Lewis Platt, then-CEO of Hewlett Packard noted:

I see three main points to make the business case for diversity:

- A talent shortage that requires us to seek out and use the full capabilities of all our employees
- The need to be like our customers, including the need to understand and communicate with them in terms that reflects their concerns
- Diverse teams produce better results.

This last point is not as easy to sell as the first two - especially to engineers who want the data. What I need is the data, evidence that diverse groups do better.”

Therein lies the problem. While it is generally accepted that diversity has many benefits, the arguments quickly meld into answering the question “does having more diverse teams improve business performance?” The often-cited McKinsey publication, Diversity Matters, found that companies in the top quartile of gender and ethnic diversity were 15% and 35% respectively more likely to have experienced financial returns above their national industry median. They found the reverse for companies in the bottom quartile. But, as the study notes, correlation is not causation; greater gender and ethnic diversity in corporate leadership does not automatically translate into more profit.

Building collective intelligence: is it diversity or is it cognitive diversity?

So how do you improve the collective intelligence within teams? Improved cognitive diversity goes a long way. Business school professors, Alison Reynolds and David Lewis, define cognitive diversity as “differences in perspective or information processing styles.” In their research published in Harvard Business Review, they noted a “significant correlation between high cognitive diversity and high [team] performance” when executing new, uncertain and complex tasks.

Brilliant. We have a link between cognitive diversity and performance. Unfortunately, the bad news is, unlike demographics, cognitive diversity does not come with a shiny label. It is hard to detect at face value. The worse news, from Reynolds and Lewis, is that:

“ ... having run the execution exercise around the world more than 100 times over the last 12 years, we have found no correlation between this type of [surface-level] diversity and performance”.

And to add insult to injury, Wharton management professor, Katherine Klein, notes that “board gender diversity either has a very weak relationship with board performance or no relationship at all”.

Some readers will be torn between wanting to have more diversity in the workplace and some hard-line academics who say that merely putting a bunch of women on your board won’t necessarily improve performance (which of course needs to be balanced with the heavily caveated studies which say that they will).

There is, however, some further evidence. Anita Woolley, Associate Professor at Carnegie Mellon University, has devoted much of her research to systematically examining the collective intelligence of teams. In the search for a collective intelligence factor (the c-factor), Woolley and her co-authors argue that there are three factors which correlate significantly to a team’s collective intelligence:

  • the average social sensitivity of group members
  • the equality in distribution of conversational turn-taking, and
  • the proportion of females in the group.

But the latter two factors did not remain statistically significant after controlling for social sensitivity. In Klein’s work she postulates that the weak relationship between surface-level diversity and team performance could be due to the fact that the women named to corporate boards may not in fact “differ very much in their values, experiences, and knowledge from men”. Even if these women were different from men, “they may not speak up in board conversations and they may lack the influence to change the board’s decisions”. Her research points to the idea that outliers to a group often self-censor and even when these individuals speak up, majority group members may discount their views, not taking “full advantage of their own cognitive variety”.

Diversity: the not-so-hard facts

We need to tread carefully here. This is not a hard science. Greater surface-level diversity is not the magic bullet for solving your team’s decision-making issues. But, on the other hand, there are quite a few reasons why greater diversity is of benefit to your organisation.

Improved diversity of people from different socio-economic, educational and cultural backgrounds is a useful path to improved cognitive diversity, especially if all of your team currently comes from a limited range of backgrounds. We also know that good diversity policies (a) ensure that there are clear signals to your employees that there are no glass ceilings and everyone has fair access to opportunities, (b) allow organisations to access the best and widest pool of talent available, (c) ensure that your organisation is reflective of a global client base and a changing global landscape and (d) align with UN’s sustainable development goals.

So where does this leave us?

To truly leverage the benefits of diversity requires organisations to put in effort – diversity requires integration for it to work well. James Surowiecki in his 2004 book, The Wisdom of Crowds, argues that groups can make better decisions than individuals but only if three conditions apply: diversity, independence and an effective means of aggregating views. His last point on aggregation is critical. There’s no point in having a diverse team if nobody listens to what anybody else is saying. And there’s no point having a diverse team if people feel excluded and believe they don’t have a voice.

Organisations need a sustained, systematic and long-term commitment to diversity and inclusion. While the theory around diversity is important, it’s the practice that really matters.

We explore this point further in our paper, How to choose? A primer on decision-making in institutional investing.

 

Marisa Hall, MSc, FIA, is a Director in the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute.

 


 

Leave a Comment:

     

RELATED ARTICLES

Why gender diversity matters for investors

Why investment stewardship matters for long-term investors

Julie Bishop on leaders, life, Liberals and libertines

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.