3 reasons why business leaders can’t afford to ignore diversity

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Laura Liswood, Secretary-General, Council of Women World Leaders

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Much has been written about the importance and value of diversity. Diversity provides multiple perspectives and experiences (gender, ethnicity, cultural background and various acquired skills are some ways in which diversity is manifested). Organizations such as Catalyst and McKinsey have looked at what happens with corporations that have three or more women on the board of directors or have more diverse workforces, particularly at the executive level. They find a connection between financial performance, value creation and the presence of women and other under-represented groups.

McKinsey has shown that companies in the top quartile for women’s representation on executive committees report an average return on investment of 22% versus average ROI of 15% for companies without that level of representation. Similarly, the World Economic Forum reports that helping women start their own business could immediately increase economic input by as much as $5 trillion.

Equity and social justice require that there be a fair and even playing field and that people feel included.

There is an ever-mounting number of reasons for why diversity and inclusion are competitive advantages, particularly in the face of demographic change: matching up client and customer; attracting and retaining talent; enhancing global strategies for growth; the urgent need for innovation, flexibility and creativity in a fast- changing world.

But there is another way to frame and articulate the value of diversity, that is, by looking at the disadvantages of not having diversity:

1. The risk of homogeneity. Homogeneity is driven by a strong human urge to belong, and yet it can drive out good decision-making and multiple and better solutions. Groupthink is the term commonly used. It can manifest itself in the strong desire for group consensus even in the face of opposition, critical analysis, countervailing facts, and learned experience. This risk is accompanied by the danger of exclusion, as opposed to the benefit of inclusion. Organizations can easily over-hear some and under-hear others. The unheard are excluded from asserting their opinions, facts and critical thinking. This danger of exclusion is precisely what enables homogeneous thought, with its accompanying risks.

2. The risk of overconfidence. Self-help books for women often decry women’s perceived lack of confidence. It is often referred to as the confidence gap, manifesting itself as a lack of self-assurance in women, and hesitancy over speaking up or asserting accomplishments. This framing has been debunked with studies that show that women have a sense of confidence equal to men but are socially penalized for demonstrating it.

We can, however, look at the danger of overconfidence, often seen in dominant group members whose high self-esteem can actually create demonstrated problems. Men have a tendency to overrate their performance, to speak without preparation, and to talk over others. A 2011 study on The Emergence of Male Leadership in Competitive Environments found that men have a natural tendency to overrate their past performance on math tasks by 30%. This overconfidence can lead to risky decisions and ill-prepared strategies.

Overconfidence has financial consequences, too. Jeffery Sommer of the New York Times has written that, “In a 2001 study titled, ‘Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment’, they analyzed the investing behavior of more than 35,000 households from a large discount brokerage firm. All else being equal, men traded stocks nearly 50 percent more often than women. This added trading drove up the men’s costs and lowered their returns.”

Women will ask more questions without the concern of the “facade of knowledge” and take fewer risks in their portfolios leading to few highs and lows in returns. For any organization’s decision-making, what might be of real value is to balance out those people who are overconfident in their choices, with those who are more apt to question decisions and to not be so over-sure of their answers.

3. Reputational risk and image management. Damage awards, class action suits that allege that companies are aware of misconduct and fail to act or disclose, activist and institutional investors, stock price drops, product and service boycotts are just some of the fallout from organizations that do not have strong diversity policies and programs. Approximately 55% of professional women surveyed by #MeToo at Work are less likely to apply for a job and 49% are less likely to buy products or stock from a company with a public #MeToo allegation.

Catalyst research has found that mixed gender boards have fewer instances of fraud, corruption, bribery and shareholder battles, while demonstrating more effective risk management practices when investing in research and development.

Pension managers such as CalPERS strongly urge companies to have women on their boards of directors and threaten to withhold votes against corporate members on companies without diverse boards. State legislatures now look to reduce the use of nondisclosure agreements and forced arbitration. California mandates at least one woman on a public company board and that number increases over time. Bad behaviour can ruin the reputation of a company and its leaders much more quickly than the slow buildup of a hard-earned positive reputation.

It is imperative to continue to emphasise the important benefits that diversity brings to an organization, to society and to individuals. That is the essential argument. Yet we should not overlook the risks that are inherent when we ignore diversity, or intentionally or unintentionally neglect it. These, too, are part of the business case for a more varied workforce.