The competitive advantage of diversity

The word “diversity” — derived from the Old French diversité, meaning “unique” — has been part of the English language for almost 1,000 years. But over the last decade it has become a cause célèbre, grabbing global headlines more than 30 million times as we examine diversity — or the lack of it — in every aspect our lives.

We enjoy “diversion” in our pastimes, prefer “biodiversity” in our ecosystems and strive for “diversified” holdings in our portfolios, yet we unconsciously resist diversity in our social and professional communities. As it turns out, this natural tendency toward sameness has become a liability in today’s marketplace, costing companies talent, consumer goodwill and real money.

As early as 1985, Michael Porter, economist and professor at the Harvard Business School, popularized the importance of the relative competitive advantages of businesses, extending the concept to nations and other organizations. Looking out at the business landscape today, it’s clear that diversity increasingly is being used by companies to drive productivity and profits — and outperform the competition.

In service industries that are heavily dependent on their people — including tech and venture — and those that sell products to a broad population, having diversity in the organization and effectively taking advantage of it are not only critical to success, but may ultimately be critical to survival.

Looking at the low number of women, as well as low ethnic and racial diversity, in many of these businesses, I expect we will see a classic Porter-style competitive dynamic play out — firms that understand how to use diversity to their advantage will win, while those that do not will lose.

Why are these industries ripe for disruption? In the venture industry, where women represent only 4 percent of the partners in VC firms yet control 60 percent of assets (and increasing), there is a growing number of both female and male entrepreneurs looking to bring diverse perspectives onto the board.

And venture is not alone; only 5 percent of the S&P 500 index has a female CEO; 3 percent of U.S. senior leadership teams are racially diverse; 8 percent of law firm equity partners are individuals of color; and 18 percent of the largest nonprofits ($50 million+ budgets) are run by women, despite an overwhelmingly (75 percent) female employee base.

This seems like a great opportunity for organizations to leverage the unique qualities a diverse workforce brings to the table — new networks and different management styles and leadership perspectives — to better compete and win in their marketplace.

Why does this work? We are only just beginning to understand all of the unique ways in which diversity drives this advantage. Here is what we know so far:

• Diversity builds beneficial networks: A balanced and diverse leadership team brings new networks into a company that can be used to attract talent, build business relationships and sell products.
• Diverse leadership brings the right skills at the right time: Studies show differing leadership styles in an organization bring essential qualities that matter as a company grows — aggressive, action-oriented approaches tempered by collaboration, listening and tolerance, for example.
• Diversity provides insight into the customer: Most companies sell into an increasingly diverse customer base; mapping experiences, perspectives and networks internally to better mirror customers drives increased sales.

Early research reveals how significant this advantage can be. A 2015 McKinsey study found ethnically diverse companies were more than 35 percent more likely to outperform their industry counterparts. Even more significantly, each 10 percent increase in racial and ethnic diversity on the senior executive team yielded on average a rise of 0.8 percent in earnings before interest and taxes (EBIT).

Extensive research on the subject of homogeneity by teams from Columbia University, MIT and others (PNAS, Dec, 2014) found that any team or market dominated by one ethnicity tended to lead to worse decisions. Researchers found that diversity led to more scrutiny and challenging of decisions and ideas, less overconfidence and better outcomes.

Similarly for gender, a Credit Suisse study found that companies with higher female representation at the board level or in top management exhibit higher returns on equity, higher valuations and also higher payout ratios. Dow Jones studied more than 20,000 venture-backed companies over a five-year period and found that those companies with at least one woman executive were more likely to succeed than those with only men in leadership positions.

Investors are beginning to pay attention. Organizations managing more than $600 billion in assets look for diversity in the boardroom before considering an investment. What do they know that so many organizations are managing to ignore, or, worse, think they’ve got covered, but don’t? As it turns out, how you harness diversity in an organization matters.

Some organizations get this and are fully driving to build and empower a diverse employee base. Marc Benioff has pushed aggressively to hire more women and minorities at every level of the Salesforce organization, and recently raised the salaries of his underpaid female employees.

Twitter, which has come under fire for its lack of women and minorities, now has three female board members and acknowledges that adding more diversity to the organization is “a must.”

So what does all this mean for you? For both leaders of organizations as well as the rank and file, it’s okay to be a skeptic and sit on the sidelines on this issue. It is most likely, however, that the world will pass you by — your organization will be less successful and your team will have a narrower perspective on your customer and the potential of your business.

We all have an opportunity right now to embrace diversity as a competitive advantage, examine our own unconscious biases and proactively look for ways to bring different voices to our team and into our decisions.

I remember Sheryl Sandberg, the COO of Facebook and founder of Lean In, talking about how so many men were attending Lean In Circles and how smart they were for taking that step. Inviting diversity doesn’t mean you’ll always win. But stifling or dismissing the importance of those different perspectives could very easily lead a company, a team or you to lose.