Stop asking if Diversity matters for business

In August 1920, Tennessee became the last US state to ratify the Nineteenth Amendment to the Constitution, making the presidential election that year the first in which women could vote in every state. Exactly one hundred years later, Goldman Sachs became the last of many firms to delve into the one big question about diversity: Is it good business? According to its analysis of nearly 500 funds, the answer is straightforward: all-women and mixed-gender teams have outperformed all-male teams this year.

Recently, Harvard studied venture capital industry performance to answer the same question about diversity and returns. VC firms are the perfect lab rat: they have flat structures made up mostly of graduates from the same universities with compensation that is highly dependent on results; and only 8% of firm’s partners are women and less than 1% Black. The study concluded something like Goldman Sachs’ findings: the more similar investment partners are, the more their investments underperform. For partners with top-tier university backgrounds, the success rate of acquisitions and IPOs was an average 11.5% lower than for partners who graduated from different schools.

The Harvard study found another surprising fact called ‘the daughter effect’. That is, when partners have daughters, they are 25% more likely to hire women. Even though this might suggest unconscious bias, it can have real financial repercussions. Venture capital firms that hired 10% more women were found to increase their fund returns by a 1.5% each year.

In finance, the intense scrutiny of performance has made this type of research more commonplace, and the economic case for diversity is quickly gathering strength beyond the finance sector. McKinsey’s report has been a benchmark for business diversity since its first edition back in 2015. This year, it has found a substantial performance differential of 48% between the most and least gender-diverse companies.

Of course, diversity is broader than just gender. It is also origin, education, race, class, age, religion, sexual orientation… and almost each and every characteristic of us as human beings. Leading customer-centric companies will necessarily have diverse teams to better understand equally diverse customers in a global world.

But if we have data to measure diversity’s worth, why is still a challenge for so many firms?

Diversity only adds up if we create the right environment. It is not just about policies and quotas, but rather a complete change of how companies operate, hire and promote their people in order to embed diversity in an organisation’s culture.

Culture change is not a bed of roses for firms. Results are not immediate, and it could bring about some cumbersome moments along the way. To many, working in homogenous teams seems to make everything flow more smoothly to achieve the best results since consensus appears to come more easily when everyone is alike — a mind-set psychologists call ‘the fluency heuristic’. However, nothing could be further from reality, as final outcomes of diverse teams are statistically better, even if they make work seem harder (see).

A team of people from different backgrounds focus on facts more carefully and keep sharp and vigilant. As several studies have shown, diversity of thought spurs creativity and innovation, and avoids groupthink.

We might need to distance ourselves in order to see the real progress made. And we still have a long way to go. But I’m confident we are past the point where the real benefits of having more diverse teams can be questioned.