Diversity matters

Inclusive workforces are better, stronger and more sustainable, writes Becky Slack

A large multinational company was recently looking for a new chief financial officer. The brief provided to the headhunter was that this new recruit must be white, male, aged between 40 and 50 and “from our sector”.

When questioned as to why this was the case, it became clear that the CEO felt vulnerable in a volatile market and “wanted a man to stand shoulder to shoulder” with him. He felt that by having a peer who was “just like him”, he would receive the support he needed to navigate the company through a difficult period.

Putting the illegalities of this recruitment brief to one side (you can read more about the law and diversity on our website), this sorry story is a prime example of many of the attitudes that still prevail within many organisations – attitudes that contribute to inequality and a lack of opportunity for women and other under-represented groups.

We have a long way to go before diverse workforces are the norm.

The lack of women in top jobs is well-documented. But as we know, diversity isn’t a single issue. When it comes to race, 22 per cent of UK companies have senior leadership teams that reflect the demographic composition of the country’s labour force and population, according to McKinsey.

The public sector records slightly better results than the private sector. Within the health service, for example, two thirds (77 per cent) of employees are women and almost a fifth (18 per cent) are BAME. Meanwhile at the civil
service, 54.1 per cent are women and 10.6 per cent are BAME. Of its leaders, 41.6 per cent are women and 4.3 per cent are BAME (see page 15 for more on the civil service’s diversity strategy).

Even charities – a sector that has equality at its heart – fail to deliver when it comes to diversity of workforce. The latest Green Park report says that within the top 20 organisations, 41.3 per cent are women leaders. But when you factor in how 65 per cent of its workforce are women, it would suggest that the glass ceiling is just as present here as it is elsewhere. There is also an embarrassing dearth of BAME staff and leaders: just 9 per cent and 5.8 per cent respectively.

Meanwhile, over at the BBC, it’s claim that “diversity is key to all of the BBC’s aims” feels somewhat disingenuous when you take into account the fact it doesn’t pay its female staff anywhere close to the salaries of its male employees. The lack of leaders from other groups is also notable.

As for disability, sexuality, class and age – with the exception of the public sector, few organisations appear to record this information and there is limited public information available. What we do know tends to be anecdotal and as to be expected suggests that there is much work to be done.

However, it’s not all bad news. Reports such as the Women on Boards review by Lord Davies and its predecessor, the Hampton-Alexander Review, plus others such as Ruby McGregor Smith’s Race at Work Report have put diversity well and truly on the national agenda, while initiatives such as the Women in Finance charter and the 30% Club have made great strides in improving the statistics.

But, in many cases progress has stalled or stopped altogether. Why is this? When LEAD magazine posed this question to experts, responses varied. Some put it down to unconscious bias, others say that people feel they have “done enough” and that “diversity fatigue” has set in.

For many, though, creating an inclusive workforce is simply not on the agenda. A 2016 study by McKinsey of 233 companies across nine European countries reported that diversity is only a top three priority for a mere 7 per cent of companies, and of the 2,200 employees surveyed, some 88 per cent said they did not believe their firm was doing what it takes to improve the situation.

“Organisations are more likely to pay attention to diversity when they can see the impact it has on their bottom line,” says Andrew Hick, director of executive search and coaching at Cavendish Hawk and an expert in diversity.

So legal and moral imperatives to one side, what is the business case for diversity and equality?

Better financial returns
While greater diversity in corporate leadership doesn’t automatically translate into more profit, there are correlations that indicate that the more committed a company is to diverse leadership, the more successful they are.

So says McKinsey, whose research shows that companies in the top quartile for racial and ethnic diversity and gender diversity are 35 per cent and 15 per cent more likely to perform better than their national industry medians respectively. Equally, its research has also shown that companies in the bottom quartile both for diversity are “lagging [in performance] rather than merely not leading”.

Indeed, in its 2015 report, The power of parity: How advancing women’s equality can add $12 trillion to global growth, McKinsey said the world could add 11 per cent or $12trn to annual gross domestic product in 2025 if it narrowed the gender gap. For the UK, every 10 percent increase in gender diversity sees an increase in EBIT (Earnings before Interest and Taxes) of 3.5 per cent – growth not to be sniffed at.

McKinsey is not the only organisation to find that diversity generates better financial returns. Credit Suisee found that women on boards create a higher return on equity than those companies with all male boards. Analysis by the Department for Business, Energy and Industrial Strategy shows that full representation of BAME individuals across the labour market, through improved participation and progression, could generate an additional £24bn a year (1.3 % of GDP) for the British economy.

Meanwhile, an American Sociological Association study found that for every 1 per cent rise in the rate of gender diversity and ethnic diversity in a workforce there is a 3 and 9 per cent rise in sales revenue, respectively. Similar results have been recorded in Germany, Spain, Switzerland, India, Malaysia and Australia.

Increased diversity doesn’t just result in an improved bottom line, it can also lead to better run organisations. Various studies from around the world have shown that diverse organisations are less likely to go bust or be associated with fraud or financial restatement.

Enhanced reputation
Modern businesses understand that profitability is linked to reputation, and that this is another area that where diversity can give them the edge.

For instance, in 2010, the Fortune 500 companies that were ranked highly in corporate responsibility listings, such as Ethisphere Magazine’s “World’s Most Ethical Companies” were more likely to have multiple women on their boards and experience more stable stock values. Furthermore, stock prices of many companies have been found to rise following the appointment of women senior leaders.

Reputation also matters to customers, who are increasingly choosing to wield their influence proactively. For example, research by Witeck and Harris Interactive suggests that 78 per cent of the LGBT community, their friends and relatives would switch brands to companies known to be LGBT-friendly. With the pink pound being valued at around £6bn in the UK and $790bn in the US, this is significant spending that organisations will miss out on if they are perceived to be homophobic.

However, this is not just about income. The reputational benefits of embracing diversity and equality reverberate through an entire organisation, including those who deliver the work.

For instance, multiple studies have demonstrated how diversity increases employee satisfaction. This is because the presence of sufficient numbers of minority-group members boosts individuals’ confidence and self-esteem, while breaking down the prejudices that led to exclusion in the first place, points out McKinsey. This is true for women, LGBT people and people from different ethnic backgrounds. Importantly, where diversity recruitment is a token effort, psychological outcomes are poorer.

A global survey of more than 50,000 employees by the Corporate Leadership Council found that employees’ relationship with their managers was a critical factor in engagement, and that their manager’s commitment to diversity was top of the list of characteristics that had the most impact on that relationship. Elsewhere, inclusive leadership has been found to reduce turnover – not just for employees from diverse backgrounds but also for white men. With only 13 per cent of employees being actively engaged at work, diversity clearly has a role to play in improving both performance and loyalty, which in turn supports the bottom line.

Talent shortage

The need to recruit and retain quality staff becomes even more important when you factor in the skills gap that is already causing “significant problems in terms of cost, quality and time” and which is predicted to get worse. In Europe, the pool of skilled experts and leaders has not kept pace with demand, say McKinsey, which has predicted that if the employment rate for women remains constant, Europe can expect a shortfall of 24 million people in the active workforce by 2040. If the rate can be raised to the same level as for men, then the projected shortfall drops to three million.

As Dame Helen Alexander, deputy chair of the Hampton-Alexander Review, said: “We need to use all available talent, not just that of the male population.” When talent is so hard to come by, an organisation shutting itself off from 50 per cent of the workforce seems foolhardy.

And, as always, this is not just a gender issue. Green Park’s chief executive, Raj Tulsiani, points out that: “In light of the UK’s desire to increase trade with non-EU countries, the ongoing inability of our leading companies to attract and retain leaders from east Asian and African backgrounds should be a matter for serious concern.

“The UK’s aspiration to be outward-looking and open to business with the non-European world is hardly enhanced by the continued lack of challenge in the boards of our leading companies, still statistically and behaviourally dominated by men of similar cultural and educational backgrounds,” he says.

So, what is it about diversity that gives companies the edge?

One answer is that it improves productivity. Decreased productivity due to discrimination against women, LGBT and disabled people is estimated to cost $64bn a year in the US alone. “When gay people remain in the closet, they are 10 per cent less productive than when they feel able to be themselves,” wrote Stephen Frost, former head of diversity and inclusion at the London Olympics and now at KPMG, in his book, The Inclusion Imperative.

In addition, diversity can lead to better decision-making. A study of 146 Swiss firms across 32 industries found that the nationality diversity of top management teams is significantly and positively associated with firm performance: differing views and experiences translates to more objections, a steady flow of alternative ideas and improved strategic decision-making and problem-solving.

Not only are leaders of different colour, gender, age and backgrounds likely to have a different perspective on the key issues, challenges and opportunities faced by a company, but their professional experiences will likely differ from their non-minority counterparts, even if they hold similar qualifications. Those perspectives and experiences are inherently valuable as companies deal with markets and stakeholders that are becoming increasingly more varied and diverse, not less.

As Andrew Hick says, “The average lifecycle of an organisation today is 15 years, when 20 years ago it was 65 years. For longevity, you need creativity, and you are not going to get that in a group-think environment. You need people who think differently.”

For this diversity of experience to be largely absent from the leadership teams of so many organisations – be they from the corporate, public or charity sector – it means that there is, at best, the potential for disconnect between the strategic ambitions of a company and the board’s ability to draw upon the range of skills, perspectives and experiences necessary to deliver those goals. At worse, there is the risk that sustained “group-think” will result in poor decision-making and weak corporate governance. Indeed, it already does, according to the Financial Reporting Council (FRC) which in its updated UK Corporate Governance Code in September 2014 wrote: “Essential to the effective functioning of any board is dialogue which is both constructive and challenging. The problems arising from ‘groupthink’ have been exposed in particular as a result of the financial crisis. One of the ways in which constructive debate can be encouraged is through having sufficient diversity on the board.”

Innovate to dominate
Diversity and inclusion have also been found to increase innovation.

Catalyst research, for example, shows that if an employee feels “included” by an organisation, they are more likely to suggest ideas and new ways of doing work, and would go above and beyond their job description to get the job done. In addition, an international team of researchers found that highly diverse teams performed better on highly complex tasks than homogeneous teams, while another study that sampled Fortune 500 corporate boards found that innovation was positively and significantly correlated with board racial diversity, and marginally significantly correlated with board gender diversity.

For those firms that are focused on innovation as their core business the same rings true. A US analysis of women’s participation in IT patents found that mixed-gender teams produced patents that were cited 26 to 42 per cent more frequently than the average. In Denmark, the more diverse a workforce, the more likely a company will apply for patents. And across Europe, skilled migrants had a positive impact on knowledge formation when measured by published article citations and patent applications.

Finally but no less significantly, improved diversity can lead to a much better quality of service; by mirroring the demographic makeup of a customer base a company will have a better understanding of their decision behaviour.

This is significant. In the UK, for example, 84 per cent of purchasing decisions are made by women – be it their own cash they are spending or their partners. By 2025, women are expected to own 60 percent of all personal wealth and control £400m more per week in expenditures than men. Meanwhile, in the United States, African Americans are expected to control $1.4tn by 2015.

When the U.S. retailing giant J.C. Penney tested whether this hypothesis be true, researchers found that having store employees who mirror the race and ethnic makeup of their communities positively affected productivity, customer satisfaction, and ultimately earnings. Touchstone, the subject of our case study on page 16, says the same.

Many companies are already taking steps to capitalise on this. At Coca-Cola, for example, 38 per cent of new US hires are people of colour, while Walmart encourages its stores in each country to create its own diversity and inclusion plan to reflect local needs.

Comparable findings have been recorded within the health service. The Francis Inquiry of 2013 highlighted how when staff are not cared for, poor care is delivered at the front line. Drawing on data from the annual NHS Staff Survey and other sources, the report shows how good management of NHS staff leads to higher quality of care, more satisfied patients and lower patient mortality. With 36 per cent of BAME staff reporting bullying and harassment, this has the potential to be very significant for patients. The only way to ensure patients receive high quality care is by caring for all staff at every level within an organisation.

Organisations of all shapes and sizes have always needed leaders who are good at recognising and responding to emerging challenges. In a world facing constant and mass disruption, that need is intensifying. Building and nurturing a talent base with a wide-ranging set of views, skills and experience is imperative, as too is accepting that stakeholders are increasingly seeking to align themselves with companies that reflect their own belies, values and priorities. Diversity and inclusiveness is no longer just a moral imperative, it’s a business one too.

This article first appeared in the launch issue of LEAD magazine. To get access to more articles like this one, hot off the presses, subscribe today. Next issue published on 18 Jan 2018.

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