How Diversity Drives Financial Performance
We recently undertook a large, cross-country study into the relationship between multiple aspects of managerial diversity, the presence of enabling conditions such as leadership support for diversity, and innovation outcomes.
We surveyed more than 1,700 companies across eight countries (the U.S., France, Germany, China, Brazil, India, Switzerland, and Austria) and a variety of industries and company sizes, examining diversity in management positions, measured with respect to gender, age, national origin, career path, industry background, and education. Partnering with the Technical University of Munich for the statistical analysis of the results, we examined the correlation of these variables both individually and collectively, with the percentage of revenues coming from products introduced in the last three years as a proxy for innovation impact. ‘Innovative companies’ were defined as those with fresher product portfolios, and unsurprisingly they turned out to be more profitable, too.
The result: We found a statistically significant relationship between diversity and innovation outcomes in all countries examined. Furthermore, the more dimensions of diversity were represented, the stronger the relationship was, although the precise patterns of diversity and performance were different across cultures.
Most important, we found that the most diverse enterprises were also the most innovative, as measured by the freshness of their revenue mix. In fact, companies with above-average total diversity, measured as the average of six dimensions of diversity (migration, industry, career path, gender, education, age), had both 19 per cent higher innovation revenues and nine per cent higher EBIT margins, on average. All six dimensions of diversity had statistically significant correlations with innovation, both individually and collectively, although industry, nation of origin, and gender had slightly larger effects. And the effects of different dimensions of diversity were mostly additive, with the exception of educational background/age and career path/ industry, which were somewhat correlated.
Based on these findings, a broad-based approach that values multiple aspects of diversity is therefore most beneficial.
When we looked at the enabling conditions for diversity, including fair employment practices (such as equal pay), participative leadership, top management support for diversity and open communication practices, less than 40 per cent of firms
employed them. And not surprisingly, firms that had such practices in place had better diversity scores, and as a result, better innovation performance. This strongly suggests that diversity represents a tangible missed opportunity and significant potential upside for most companies. In total, the presence of these enabling factors is worth up to 12.9 percentage points of innovation revenue.
What is the potential impact of diversity for the average respondent company? We calculated, based on our survey data, that innovation revenues could increase by one per cent by enriching the diversity of the management team; by 1.5% with respect to national origin; by two per cent with respect to industry origin; by 2.5% with respect to gender; and by three per cent with respect to managers with different career paths. With greater increases on more dimensions, the total uplift potential could therefore be even more significant.
Diversity has sometimes been critiqued as a culturally normative concept. But our results show that it is driving innovation performance from Germany to India. Moreover, they imply that it is doing so in a variety of ways.
The secret to making diversity work appears to be to apply the concept at multiple levels — to address diverse dimensions of diversity, and to be open to diverse routes to achieving success. Of course, the correlations we observed are not guarantees that diversity will drive innovation. The power of diversity still needs to be unlocked with enabling practices, like a non-hostile work environment, an inclusive culture, and a culture where diverse ideas resulting from a diversity of backgrounds are free to compete.
Rocio Lorenzo is a partner in The Boston Consulting Group’s Munich office. Martin Reeves is a Senior Partner, Managing Director and Director of the BCG Henderson Institute, based in New York City.