Why is diversity in business important?

The objections to proactively pursuing a diversity in business usually follow a pattern: “I am all in favour of diversity, but…” and then some formulation of the sentiment that actively pursuing a diverse workforce could, or does, lead to a drop in standards. In other words, political or moral goals (quotas or positive discrimination) are interfering with getting the best people for the job

If the charge was broadly true, then it would be a serious one. It would then follow that that the vast majority of top performing businesses like Google, Amazon, Goldman Sachs and McKinsey, are now deliberately not hiring the best people due to either personal idealism or extreme external pressure.

If this was actually the case then that would be controversial; however, it’s not. Ethics and expediency are aligned and the evidence is fairly overwhelming.

What’s the evidence?

This year McKinsey reported that the most gender-diverse quarter of companies were 20% more likely than the least diverse to have above average financial performance. Conversely, those with the lowest proportion of both female and ethnic minority executives were 29% more likely to financially underperform than their peers.[1]

This holds true for small companies as well with a study of more than 900,000 private limited UK concluding those that included female directors had a lower risk of insolvency  (even after controlling for industry and size).[2]

It’s not just about leadership or broad company performance, but individuals and teams. In 2016 BHP Billiton, a multibillion-dollar mining corporation announced it would be instigating ‘Gender Balance’ by 2025, despite at the time having an 83% male workforce.[3] This came about because Billiton realised that diverse teams actually performed better, with total recordable injuries frequency (TRIF) reduced by 68% and more productive by 15%.

There are countless more case studies evidencing the correlations between commercial performance and diversity; hence why diversity has become a board and investor level concern.

What is perhaps more interesting is why diversity is so beneficial across every industry and company size. The below is not exhaustive, but just a few of the ideas knocking around.

1) Overlapping temperaments and points of view

A successful team requires different ideas, customer understanding, and perspectives. If everyone you are hiring has similar interests, backgrounds and life experiences, you will be paying for a lot of intellectual overlap, and are more likely to encounter groupthink.

Harvard did a great study on how diversity drives innovation. Rocio Lorenzo, the management Consultant through Munich Technical College found that of 171 businesses surveyed that innovation revenue (money making ideas, not just ideas) was 5% higher in companies with a diverse makeup (check out the TED talk here)

It’s not just useful creatively, a clash of differing intuitive perspectives forces people to return to the facts and reevaluate their default positions. In a series of experiments, scientists put financially literate people in simulated markets and asked them to price stocks. The individuals who were part of ethnically diverse teams were 58% more likely to price stocks correctly, whereas those in homogenous groups were more prone to pricing errors.[4]

Beyond the data, it should intuitively resonate that, in a world where 70-80% of purchasing decisions are made by women and where nearly 30% of the UK population will be comprised of ethnic minorities by 2050 [11], having these perspectives in your business is fairly important.

2) Productivity

This point is not so much around having a diverse workforce as having an inclusive one which makes people feel at ease and often is part and parcel with acquiring and retaining different sorts of people.

A 2 years self-study by Google, which analyzed 250 attributes across 1,800 teams, found that the most important single factor in high performing teams was a sense of psychological safety.[5]

This actually improves for everyone in diverse environments, but is particularly improved for those among the minority.[6] Stephen Frost, previously of KMPG and now an expert advisor for the Civil Service, in his book The Inclusion Imperative he estimates that “When gay people remain in the closet, they are 10% less productive than when they feel able to be themselves.”  Yet 41% of American LGBT workers remain closeted at work.

Nearly every business has women, but women in positions of leadership are likely to reduce sexual harassment which has been found to negatively impact job involvement, job satisfaction, and organizational commitment, even from witnesses who have not even necessary suffered personally.[7] This can result in tardiness and absenteeism, sick leave and health compensation claims, alongside retention.[8],[9],[10] The effects of racism are similar; worryingly, in a large UK study of 24,457 people, 28% of the respondents reported that they “directly experienced or witnessed racial harassment or bullying from their manager” over a period of five years.

3) Unconscious bias is leading to poor hiring decisions

There is an apocryphal story of someone from Oxford University looking for a pupilage (a law internship required to be a barrister in the UK). They are incredibly competitive and many top candidates eventually have to give up or apply over multiple years.

The particular candidate said he would wear his Oxford University college tie, and sit in a bar in Temple (place in London where lawyers hang out) until he got one. On his first evening, a gentleman turned to him and said something along the lines of “ah that’s my old college! Got a pupilage yet? No!? Ahh well let me introduce to…” you will know the rest of the story.

This is a particularly extreme example of not even particularly unconscious bias, but it illustrates how we are naturally drawn to people like us. There is nothing wrong with that, it is entirely human, but it does mean if everyone is left on autopilot they will, on overall average, tend towards hiring in their own image. Often it is subtle and we don’t even realize it’s happening, but it has a knock-on effect across workplace populations.

One of most well-quoted examples of unconscious bias is that you have to send 70% more identical CV’s if you have a name with ethnic associations as opposed to a white British name in Britain for the same amount of interview callbacks; a harsh but very true fact. Another famous example shows how women did twice as well in orchestra auditions when blind testing was introduced.

We are not as objective as we think. Platforms like Applied which double-blind applications so they are completely anonymous have seen large upticks in diversity results and improved hiring and retention rates. When we take steps to stop us hiring according to our biases the side effects are both more diversity and inadvertently more objective hiring decisions. For a cheat sheet of other unconscious biases’ that can affect hiring check out this list.

Diversity is good

These are just three reasons it makes a big difference to have diverse and inclusive businesses. Overall, we know that when diverse environments are properly managed (it’s not a silver bullet)  it will on average lead to better businesses outcomes. If you need any more reasons just remember making a business equally welcome to all is also the right thing to do, and generally makes work a more pleasant place to be.

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References to specific articles upon request.

[1] https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity

[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932107

[3] https://www.ft.com/content/ab96677a-95d6-11e6-a80e-bcd69f323a8b

[4] https://hbr.org/2016/11/why-diverse-teams-are-smarter

[5] https://www.coursera.org/learn/diverse-teams/lecture/wZkFf/high-performance-on-diverse-teams

[6] http://newsroom.ucla.edu/releases/students-feel-safer-in-ethnically-diverse-middle-schools-ucla-researchers-report

[7] https://www.cnbc.com/2018/01/09/more-female-leaders-may-lead-to-fewer-harassment-cases-microsoft-exec.html

[8] absenteeism (Baba et al. 1998; Jacobsen et al. 1996)

[9] (Cartwright and Cooper 1997)

[10] (Baba et al. 1998; Shaffer et al. 2000)

[11] https://www.bbc.co.uk/news/uk-politics-27295412