Re-examining the business case for diversity

I have long believed in the business case for diversity - especially diversity of thought, or cognitive diversity. It seems intuitive that combining people with different perspectives, life experiences and ways of approaching issues will result in a better team than a homogeneous group, and one that will have less risk of groupthink.

I saw this in action too, as a fund manager working for Stewart Newton, founder of Newton Investment Management. I never heard Stewart utter the words ‘diversity’, ‘equity’ or ‘inclusion’ but he developed a team-based investment approach based on the principle that no one has a monopoly on good ideas. Time and again, robust debates between team members with very different perspectives, attitudes and experiences led us closer to the right answer.

Influential studies from prestigious organisations including McKinsey have long seemed to corroborate the ‘business case’, although by looking at easier-to-spot demographic characteristics like ethnicity or gender, rather than cognitive diversity. Over the past decade, McKinsey’s series of ‘Diversity Matters’ studies consistently suggested that businesses with greater ethnic and gender diversity in their leadership teams and boards have higher financial returns – and that therefore, ‘diversity wins’.?

But last year, academics Jeremiah Green (Texas University) and John R. Hand (University of North Carolina) revisited those studies, re-running the data specifically looking at ethnic diversity. In contrast to McKinsey, Green and Hand found ‘no statistically significant difference’ in the financial performance of S&P 500 firms based on executives’ racial/ethnic diversity. The authors noted in their conclusion that this does not mean there is no benefit from ethnic diversity - for example, a social or moral benefit - and urged for more research on the subject.?

As we entered 2024, the Diversity Project decided to face into the mounting criticism of ‘DEI’. Some efforts under the DEI banner have certainly been counter-productive, seeming to allow only one viewpoint about complex issues or to exclude certain groups - white straight middle-class men, for example. The opposite, in other words, of true diversity and inclusion. The Diversity Project has always taken a very different approach, looking to create better workplace cultures and greater opportunity for all, but we accept and understand why many are sceptical.? This was the background to our decision to commission new research into the benefits - or disadvantages - of cognitive diversity for the performance of investment teams. Not only could this help settle the issue around whether there is a business case at all, but there is very little, if any, rigorous academic work relating to investment team performance and cognitive diversity.

We wrote a briefing for academics to submit proposals to conduct the research and explicitly asked them NOT to work back from any conclusion they might assume we want to see. The field of submissions was very strong, with proposals from academics from top institutions around the world.

We are delighted to announce that we have selected Professor Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit?and?May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases – And What We Can Do About It.?Alex's seminal papers “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”, and “The Link Between Job Satisfaction and Firm Value, With Implications for Corporate Social Responsibility”?documented?a?significant link between?employee satisfaction?and?long-term shareholder returns, and his?recent paper “(Diversity) Equity and Inclusion” goes beyond demographic diversity.?Alex has also worked with a number of?investment management firms on culture?and talent management.?

Professor Edmans will conduct?structured?interviews with?both senior and junior?fund managers to?identify those?aspects of?team?decision-making processes that?lead to?either?strong?or weak performance, and?the?situations which lend themselves best to cognitive diversity. (If you want to get involved please get in touch via?[email protected] ) Having identified these factors,?Professor Edmans and the Diversity Project will publish both?a report and practical suggestions to help firms and managers improve their approach to hiring, assembling teams and creating cultures where opinions are heard.?

We know that many people are keen to understand more precisely how cognitive diversity influences the performance of an investment team. The judging panel* was extremely impressed by Alex’s nuanced approach to identifying the drivers of a teams success – or failure. This?initiative?has already?garnered worldwide attention and we hope that its findings will?benefit?firms?and their clients?globally and potentially have broad applicability.

If you would like to hear more from Professor Edmans about how he will carry out the research, please sign up to the Diversity Project’s?‘Maximising Team Performance’ seminary on 29th November https://diversityproject.com/event/maximise-team-performance/

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?*The Diversity Project is grateful to the judging panel: David Thompson, Chief Investment Officer Zurich Insurance Company Ltd, Paras Anand, Chief Investment Officer Artemis, Julia Hobart, Partner Emeritus Insurance and Asset Management Practice Oliver Wyman, James Whiteman, Head of Strategic and Content Marketing UBS and co-lead of the Diversity Project’s Social Mobility workstream, Arun Kelshiker, former head of asset allocation and portfolio strategy at Standard Chartered and country CIO at Allianz Global Investors, Linda Russheim, board member Diversity Project, Chloe Duncan, DEI Business Partner at the Institute and Faculty of Actuaries, Baroness Helena Morrissey, Chair Diversity Project