Why Directors Should Champion Diversity: Research finds tapping diverse talents boosts profit, reduces ‘groupthink’

(As originally appeared in Director Journal, November 2010)

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By Fiona Macfarlane, Canadian Managing Partner, People, Ernst & Young LLP

In today’s increasingly global economy, diversity is no longer a feel-good best practice for companies, it’s a business imperative. In order to hone a global competitive advantage, it’s vital  that we build diverse, inclusive workplaces that attract and keep the most talented people.

In fact, leading companies show that inclusive ways of thinking result in visible benefits to the bottom line. A recent Harvard Business Review study on diversity and business found that organizations with a solid commitment to diversity and inclusiveness produced results that outperformed their competitors. The top 50 U.S. “diversity organizations” that incorporate these initiatives into their business strategy, enjoyed average net profit margins that exceeded those of their peers by 2.7%, along with median returns on equity that were 2.5% to 6% higher every year than those of their less diverse counterparts.

That’s why, as leaders we need to build more inclusive workplace environments where all our people feel they belong – where everyone is encouraged to bring their different perspectives and experiences to the table. When this happens, organizations can harness the talent and skills that each person brings to a particular project, an array of challenges or a discussion of future plans.

It’s the responsibility of directors to set the tone from the top and influence the culture of the organization to reap the full potential of diversity. More than ever, it’s essential that boards oversee the organization’s approach to diversity as it affects strategy, risk, and performance.

Additionally, managers who see that the board has made a serious commitment to increasing diversity at the highest levels of the company will be more likely to adopt and disseminate that focus throughout the organization.

Building Workplaces That Reflect Our Changing Population

Traditionally, “diversity” has been thought mainly to encompass terms of race and gender. Today it’s important to take a wider view. It’s not just about race and gender – it’s about age, culture, sexual orientation, education, personality, skills, ways of working and unique life experiences.

Integrating diversity will help employers manage an aging population, low birth rates and the increasing global competition for skilled workers. As Canadian demographics shift, companies need to draw on existing talent within their organizations. But in order for businesses to access the deepest pool of talent available, our workforces first need to reflect the character and makeup of our country. We are fortunate in Canada to have the advantage of one of the most ethnically diverse populations in the world. According to Statistics Canada, by 2031, over 14 million people in this country will be from what have been called visible minorities. And that’s only one facet of diversity. This means our businesses are in a unique position to harness our country’s rich diversity and bring teams of diverse people to the table who can spark innovation, develop powerful new ideas and inspire profound change.

As the Canadian population changes, so too does our workforce – and so too our competitors, suppliers, customers and clients. The economy is becoming increasingly global, which means employees with vast experience and diverse backgrounds can help companies better serve their clients from all cultures and languages around the world.

Diversity Raises The Bottom Line

When leadership teams challenge the status quo and promote expression of contrasting viewpoints, companies gain a better handle on potential risks and counter-strategies. At its core, this out-of-the-box thinking will help avoid “groupthink,” decision-making based on group pressures, which can inhibit fresh thinking and good judgement.

Groundbreakers, a 2009 EY diversity study, found that when groupthink exists in management consisting of people from similar backgrounds, executives are more likely to ignore alternatives, take excessive risks or fail to form contingency plans. Steering clear of groupthink through workplace diversity can constitute an effective contribution to risk management.

The financial crisis made us painfully aware of the missing voices in business leadership: those who could have questioned how things were being done, secondguessed decisions around risk, and helped boards and management avoid the groupthink that likely contributed to the sudden and severe downturn.

There’s a wealth of real-world examples that demonstrate how diverse organizations enjoy  quantifiable business benefits that homogeneous firms do not. Leading global companies have proven themselves adept at leveraging diversity to generate innovative products and services that deliver visible benefits to the bottom line. PepsiCo, for example, has attributed one percentage point of its 7.4% revenue growth in 2003, or about US$250 million, to new products inspired by diversity efforts. Seeking to expand into ethnically diverse markets, PepsiCo leveraged its diverse workforce to obtain unique insights into the needs of customers in those markets. PepsiCo products such as guacamole-flavoured Doritos chips, Gatorade Xtremo, and Mountain Dew Code Red were inspired by such diversity efforts.

Today, organizations urgently need the diversity of thought that an inclusive culture brings. More than ever, we need business leaders who bring forward different skills, ideas and perspectives, who think about familiar problems in new ways and drive innovation.

Diversity On Boards Is Key

The other key area in which directors should be cognizant of the importance of diversity is the board itself. Unfortunately, board diversity still presents a challenge for many organizations. A recent EY survey found that boards of directors seldom reflect the global reach of their businesses. Almost half of the companies operating in 25 or more countries admitted that they had at most only a few foreign nationals on their boards, yet they cited globally experienced staff as the most important cultural factor in conducting business around the world. Similarly, more than 40% of companies had no female directors.

Board diversity is receiving increasing interest from regulators and investors alike. The U.S. Securities and Exchange Commission (SEC) now requires companies to disclose whether and how the nominating committee “considers diversity in identifying nominees” for directors. In requiring companies to disclose such policies, it suggests there is a meaningful relationship between diverse boards and improved corporate financial performance.

Canadian Companies Are Lagging In Diverse Leadership

While corporate Canada has been working towards more diverse workforces, the majority of boards have yet to ensure that their companies build more diverse management teams. Diversity Briefing, a recent study published by the Canadian Institute of Chartered Accountants, shows that visible minorities currently occupy only 11.2% of all management roles and 5.2% of senior management positions. These statistics confirm that highly skilled immigrants remain over-skilled and under-employed, and exemplify how Canadian businesses are not capitalizing on this talent pool.

Similarly, women represent only 16.9% of corporate officers, according to the 2008 Catalyst Census of Women Corporate Officers and Top Earners of the FP500. In addition, the proportion of women in line roles – positions often necessary for promotion to top leadership – is even lower, at 11.4%. Unfortunately, this does not reflect women’s educational qualifications, with Canadian women earning 61.8% of bachelor degrees, 51.8% of master’s degrees and 44% of doctoral degrees – demonstrating how many organizations are clearly missing the mark on Canada’s educated professionals.

How To Build More Diverse Work Environments

Turning the conversation into action requires focusing on transformational leadership and nurturing the full spectrum of talent. Boards of directors can reap the benefits of diversity through ensuring they and management effect the following:

First, make a big impact at the top. Inclusiveness initiatives that are mirrored on boards will have a powerful trickle-down effect. What’s more, diversity at the leadership level will make an organization more effective in responding to a dynamic, changing economy.

Second, stir the pot. Diverse viewpoints generate lively debate that can boost creative thinking. Effective leaders look to these perspectives – and the conflict they may spark – to drive innovation.

Next, build teams that think outside the box. Research from Henley Business School at the University of Reading has proven that diverse groups tend to outperform homogeneous groups – even if the members of the homogeneous group appear more capable on paper. This means diversity can help businesses generate new products, find different ways to enter a marketplace or come up with new ways to manage risk.

Nurture a spectrum of talent and expect to find it in unexpected places. The biggest challenge for companies in the next decade will be to recruit and retain talent. Be open to new opportunities and take advantage of the flexibility that a diverse talent pool offers.

Finally, focus on getting the mindset. Provide training and coaching to help your leaders and managers develop the mindsets and habits needed to make diversity and inclusiveness part of how they lead their own teams.

It’s time for more of Canada’s boards and business leaders to embed diversity and inclusiveness into the core of their organizations and their own leadership styles. This is vital to the long-term success of our organizations – and to Canada’s global competitiveness.