Even before the economic crisis wrought by the Coronavirus, the economy is changing at a rapid pace. Companies in many sectors that have been pillars of the economy have fallen on hard times. Companies that were leaders in industrial America have seen their market cap fall by 2/3rds in the past year. Leaders in retail have closed hundreds of stores and laid off thousands of people. Even technology companies that started off strong in the past 10 years have suffered setbacks in the past year due to corporate governance issues.
As technology advances, the challenge for businesses to stay competitive becomes amplified. In the last 5 years, advances in robotics and AI (Artificial Intelligence) have significantly added to the bottom line of companies. That pace of change seems to be accelerating. But even as technology expands its importance, what will human workforce need to look like.
A recent Mckinsey & Company report titled Delivering Through Diversity reinforces the business case for diversity. “The statistically significant correlation between a more diverse leadership team and financial outperformance demonstrated three years ago continues to hold true on an updated, enlarged, and global data set.” (1)
Learning how to deal with this change is a crucial issue for businesses.
Recently the Harvard Business Review released a report titled, “How and Where Diversity Drives Financial Performance”. (2) In this study, researchers examined diversity within 1700 companies, in 8 countries and across a variety of industries. They looked at correlations between diversity, innovation, and revenue.
“We found that indeed there was a statistically significant relationship between diversity and innovation outcomes in all countries examined.”
“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.”
“The power of diversity still needs to be unlocked with enabling practices, like a non-hostile work environment, an inclusive culture, and a culture where diverse ideas resulting from a diversity of backgrounds are free to compete.”
Among some of the enabling conditions that can support diversity, include fair employment practices (such as equal pay), participative leadership, top management support for diversity, and open communication practices. By creating a safe environment for all, businesses can more easily adjust to changing conditions within an economy that is rapidly evolving.
By contrast, companies that do not support such safe environments tend to assign blame instead of seeking real solutions. In such an environment, companies are limited financially by the restrictions they place on diversity, worsening their overall financial situation.
What is the downside to not embracing diversity? According to Mckinsey, “Now, as previously, companies in the fourth quartile on both gender and ethnic diversity are more likely to underperform their industry peers financially. Specifically, they are 29% more likely than the other three quartiles to underperform on profitability.” (1)
“Women, minorities, veterans and the disabled, among others, have much to offer to the discussions and brainstorms that take place in offices every day. It would do business leaders well to embrace the different perspectives and insights that each of us brings, as opposed to seeking out those who think alike and are “good fits” for the team—if not for striving for a more equal, supportive workforce and society, as an imperative business practice.
After all, if everyone thought the same, we would always end up at the same solution to every problem.” (3)
“Failure to encourage fertility and flexibility in the formation of a hypotheses as frames of reference is closer to a death warrant… than any one thing.”
–John Dewey
With the economy struggling with a shortage of workers and rising wages it becomes even more imperative from a policy perspective to expand diversity in the ranks of corporate America.
To discuss the issue of corporate governance in more detail, as well as learn how diversity and ESG policies can help you reach your retirement goals, please email me at james_cox@glic.com
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2022-137449 exp 5/24
- https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Organization/Our%20Insights/Delivering%20through%20diversity/Delivering-through-diversity_full-report.ashx
- https://hbr.org/2018/01/how-and-where-diversity-drives-financial-performance
- https://www.forbes.com/sites/deanstoecker/2020/03/31/enriching-the-data-driving-business-value-with-diversity-and-inclusion/#3340f7db6e1b