By Chris Wedding
In his latest article, Dr. Wedding, one of Carofin’s investment bankers, speaks to a principle that I have espoused throughout my career. Diversity in the workplace (and our country) is not only the right thing to do… it’s the most intelligent way to run any business. As you’ll see below, the world’s leading consulting firms are of the same mind.
– Bruce Roberts – CEO, Carofin
We have a diversity problem in most businesses.
When you hear that, you may rightfully suggest this is the understatement of the year.
But 2020 has been quite a [insert your favorite expletive] year so far.
As examples of the lack of diversity in business leadership, consider these statistics:
- Just 20% of S&P 500 directors are minorities, as compared to the 40%+ non-white U.S. population. (Spencer Stuart, U.S. Census Bureau)
- Black Americans comprise 10% of U.S. graduates but hold only 4% of senior-executive positions, Hispanics and Latinos comprise 8% of graduates versus 4% of executives, and, for Asian-Americans, the numbers are 7% and 5% of executives. (McKinsey & Company)
- As company examples, only 8% and 3% of leadership at Amazon and Apple, respectively, are Black. (CNBC)
As for my perspective, I don’t have much ground to stand on: I’m a privileged white guy, raised in a middle-class family, with private Catholic schooling.
But I’ve spent about four years overseas and am lucky to be married for nearly 20 years to a West African immigrant to the U.S.
I’ve learned a few things about what it means to be a minority. But I’ve got a lot more to learn. And recent racial equity tension has brought this front and center.
As one response, I’m launching a climate CEO mastermind — executive coaching, investor intel, peer advisory, and leadership development — via Entrepreneurs for Impact, and, since last year, I’ve known that I wanted to build a diverse cohort of business leaders.
But, to be honest, given the focus on growth-stage entrepreneurs with $5M to $50M in capital raised or revenue, it’s a challenge to find these diverse CEOs and CXOs. With historical diversity lacking within climate sectors (energy, transportation, agriculture, carbon, infrastructure, natural resources), maybe it’s a chicken and egg phenomenon.
So, what now?
In this article, I’ll cover highlights from research about the business benefits of diversity within the leadership team and then note a few ways that leadership diversity can be improved.
What you’ll see here are just snippets, but the links provided include excellent graphs and far more research findings if you want to dig deeper.
As it turns out, it’s not just the right thing to do. But it’s also good for business.
What does the diversity research say?
McKinsey & Company (2020): “Diversity wins: How inclusion matters”
By Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince (link)
- “Companies in the top quartile for gender diversity on executive teams were 25% more likely to have an above-average profitability than companies in the fourth quartile — up from 15% in 2014.”
- For top-quartile companies in terms of ethnic and cultural diversity, this profitability outperformance was 36%.
- “Hiring diverse talent isn’t enough — it’s the workplace experience that shapes whether people remain and thrive.”
Fast Company (2019): “Why diversity can supercharge your business.”
By Teddy Brown (link)
- “In an analysis of the 3,000 largest public companies, North Carolina State University researchers found that more heterogeneous firms were more innovative and got more products to market than less diverse ones.”
- “As companies become more diverse, their opportunities to gain footholds in new markets increase. Work by the Center for Talent Innovation showed that, if a team member and a client share an ethnicity, they are 152% more likely to understand client needs.”
- “You need people to challenge your thinking. If you’re focused on delivering based solely on your experience, then you run into tunnel vision quickly.” – Nellie Borrero, Accenture
- “More diverse companies were 45% more likely to report annual market-share growth and 70% more likely to enter a new market.” – Harvard Business Review (Sylvia Ann Hewlett, Melinda Marshall and Laura Sherbin)
- “According to a 2018 survey of nearly 3.000 Millennial employees, 86% would take a cut in pay in order to work at a place that reflects their values.“ – LinkedIn’s latest Workplace Culture report
McKinsey & Company (2018): “Delivering through Diversity”
By Vivian Hunt, Lareina Yee, Sara Prince, and Sundiatu Dixon-Fyle (link)
- “We found a positive correlation between gender diversity on executive teams and both our measures of financial performance: top-quartile industry peers on executive-level gender diversity worldwide had a 21% likelihood of outperforming their fourth-quartile industry peers on EBIT margin, and they also had a 27% likelihood of outperforming fourth-quartile peers on longer-term value creation, as measured using an economic-profit (EP) margin.”
- “Companies in the fourth quartile on both gender and ethnic diversity are more likely to underperform their industry peers on profitability: 29% in our 2017 data set.”
Boston Consulting Group (2018): “How diverse leadership teams boost innovation”
By Rocio Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, and Katie Abouzahr (link)
- “Companies that reported above-average diversity on their management teams also reported innovation revenue that was 19% higher than that of companies with below-average leadership diversity — 45% of total revenue versus just 26%.
- “These organizations also reported better overall financial performance: EBIT margins that were 9% higher than those of companies with below-average diversity on their management teams.”
- “A passive approach [to increasing diversity] is guaranteed to fail. (In fact, even active efforts don’t always succeed.) BCG’s recent research on gender diversity shows that 91% of companies have a program in place, yet only 27% of women say they have actually benefited from it.”
McKinsey & Company (2015): “Why diversity matters”
By Vivian Hunt, Dennis Layton, and Sara Prince (link)
- “Companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.”
- “Companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians.”
- “In the United States, there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10% increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8%.“
- “Racial and ethnic diversity has a stronger impact on financial performance in the United States than gender diversity, perhaps because earlier efforts to increase women’s representation in the top levels of business have already yielded positive results.”
- “The unequal performance of companies in the same industry and the same country implies that diversity is a competitive differentiator shifting market share toward more diverse companies.”
What can we do to increase diversity among business leaders?
Well, the good news is that things are changing.
According to Spencer Stuart, 59% of new S&P 500 board appointees in 2019 were women and/or minorities, up from 50% in 2018.
But there’s a lot more work to do. Below are suggestions on how to improve diversity in business.
Entrepreneur (2019): “Why You Need Diversity on Your Team, and 8 Ways to Build It.”
By John Rampton (link)
- Consider all types of diversity — gender, race, religion, age, disability, language, personality, and sexual orientation.
- Improve your recruitment strategy — e.g., use a personality assessment diversity recruiting software, and partnerships such as the National Black MBA Association. Here is a step-by-step guide from Ideal.
- “Host events where employees can share their backgrounds and traditions.”
- “Employ a range of formal and informal professional development tools, such as mentoring, coaching, and education opportunities. And regularly evaluate internal talent to ensure that employees of color are in the leadership development pipeline. ” – Stanford Social Innovation Review (Molly Brennan, Koya Leadership Partners)
- “Take the time in your schedule to see what efforts worked and what didn’t. The easiest way to do this would be soliciting feedback from your team. Online surveys are an option.”
- “You should also be aware of the fact that diversity can lead to conflicts among your team, so you have to prepare for this eventuality. You can construct a more inclusive culture by implementing a zero-tolerance policy for harassment.”
Forbes (2019): “Why Your Lack of Diversity Is Hurting Your Business”
By Lisa Kurtis (link)
- Conduct an internal audit, perhaps run by a third party. This might mean a full-team, half-day workshop to allow for open conversations about how to better promote team diversity.
- Create a “Justice, Equity, Diversity and Inclusion Mission Statement and Goal” and put it on your website.
- Consider joining industry associations like the JEDI Collaborative (justice, equity, diversity and inclusion) which share best practices for promoting diversity in the natural foods sector.
- “By integrating JEDI into everything you do as a company, you can allow employees to be 100% themselves, 100% of the time, which adds to their productivity and the overall company success.”
Chris Wedding is an investment banker with Carolina Financial Securities, Managing Director at IronOak Energy Capital, Founder of Entrepreneurs for Impact (CEO roundtables for climate change executives), and faculty member at Duke University and UNC-Chapel Hill.
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