Message to Old White Men – Companies with more diversity in their leadership teams make more money. That’s the bottom line, fellas.

This week saw the launch of Harvey Nash Engage program, which is aimed at broadening the diversity debate beyond gender to include a much wider issue of inclusiveness. In doing so it highlighted an evidence based reality often ignored by the chummy club of directors who share the board stipends with each other across the ASX 500.

A McKinsey and Company report in late 2014 looked into the issue and found a statistically significant relationship between a more diverse leadership and better financial performance. ” Such findings should not be surprising given; “we increasingly live in a global world that has become deeply interconnected,” the report said.

“We are now armed with the facts to back up what forward thinking executives, leaders and board members alike have believed for some time. Teams that are diverse and inclusive drive better results for the business and ultimately the bottom line. So not only is it the right thing to do, it also makes indisputable business sense,” Bridget Gray, Managing Director of Harvey Nash Australia, told Which-50.

The data used in the report was collected over three years and examined the composition of top management and boardrooms in the U.S, Canada, The U.K and Latin America.

According to the report; “The companies in the top quartile for gender diversity were 15 per cent more likely to have financial returns that were above their national industry median, and the companies in the top quartile for racial/ethnic diversity were 30 per cent more likely to have financial returns above their national industry median.”

While certainly significant, the relationship between diversity and financial performance is correlative rather than causal the report said. Meaning diversity in leadership is no guarantee of profit.

However, the report said the relationship; “indicates that companies that commit to diverse leadership are more successful. The existence of the relationship is statistically significant and consistently present in the data.”

Diversity and financial performance

The converse relationship is also present according to the report; “Companies in the bottom quartile for both gender and ethnicity/race were statistically less likely to achieve above-average financial returns than the average companies in the dataset (that is, they were not just not leading, they were lagging).”

The report said; “Moving the needle on diversity is harder than completing a typical transformation”. With different regions experiencing differing effects of diversity.

According to the report in the U.S, while there had been significant progress on gender diversity, the impact was not as pronounced as in the U.K and American organisations had given less attention to ethnic and racial diversity. The report found U.S companies that had achieved more racial diversity had better financial performance.

The stronger impact in the U.K equated to; “an increase of 3.5 per cent in EBIT for every 10 per cent increase in gender diversity in the senior executive team (and 1.4 per cent for the board),” according to the report.

The report found that more diverse companies performed better and incorporated previous research in an attempt to understand why. Finding diversity was an important factor driving; “advantages in recruiting the best talent, stronger customer orientation, increased employee satisfaction, and improved decision making.”

Becoming more diverse is challenging, with 70 per cent of change programs failing, the report said; “Most efforts stall because those involved—management and employees—do not believe in them or make them a priority.” The key to successful diversity is a program that involves clear objectives, leadership from the top and active involvement from the wider organisation, the report said.

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According to the report, no company in the U.K performed well in gender diversity and ethnic diversity. With the report identifying that gender, racial/ethnic and sexual orientation diversity require their own tailored programmes. Focusing on one category comes at the expense of others and the issue requires a holistic approach, the report said.

“The relationship between diversity and performance will become more pronounced throughout these markets, and not just in particular segments,” the report said, concluding that investing properly in diversity now puts organisations in an advantageous position; “With the rewards of diversity set to increase, investing now is the best plan. Winners will pull further ahead and laggards will fall further behind.”

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