Why Diversity

There have been several great studies and related articles recently about the improved business results that come from diversity.  According to Credit Suisse Research Institute, over the past six years, companies with at least some female board representation outperformed those with no women on the board in terms of share price performance.  According to a recent study by Dow Jones Venture Source having, a higher proportion of female executives at a venture-backed start-up improves the company’s chances for success.  Specifically:

  • “In comparing successful versus unsuccessful companies, the overall median proportion of female executives is 7.1% and 3.1%, respectively, demonstrating the value that having more females can potentially bring to a management team.
  • We also see that a company’s odds for success (versus unsuccess) increase with more female executives at the VP and director levels.”

The study, based on a very large database of companies (n=20,194) contains a wealth of other interesting data, in particular the fact that companies grow their percentage of female executives over time.  I encourage those with an interest in this topic to read the entire study.

So this is great news and hopefully the publicity about this news will cause people to examine their companies, investments and open more doors.  I’ve always assumed that diversity led to improved results and am thrilled to see such compelling data.  The question still remains though as to why.  I can think of three possible explanations.

My first thought is that perhaps the dramatic absence of diversity at the unsuccessful companies reflects a management team and board that is almost by definition (complete absence of women when there is available talent) horribly biased and closed minded.  This parochialism then impairs their business judgement leading to poorer outcomes.

Another theory assumes significant bias for women during their careers and that those who make it to the executive ranks are higher performing than their peers.  This reminds me of the time (December 1987) our family took a vacation in Israel and Egypt.  One of the highlights was the sightseeing we did in Cairo before heading south for a Nile river cruise.  Before we left a friend gave me a tip to ask for a female tour guide.  She explained to me that competition for the government licensed tour guide positions and discrimination against women was so fierce that any woman who managed to get a position would be particularly well qualified.

Both of these theories don’t ring true to me.  I’m sure the first one exists (hopefully not in large quantity) but there could be other explanations for the absence of women.  Regarding the second idea – it is not clear to me that the biases against women are so strong before the executive level that this would lead to such a positive selection bias.

I believe the truth must lie somewhere in the dynamics of the diverse team itself.  I started researching this topic and came across this Cornell study. Why Differences Make a Difference: A Field Study of Diversity, Conflict, and  Performance in Workgroups.  First off it is interesting the lack of recent studies – this one dates from the 90’s.  I found this study and several of those that predated and led to it to be fascinating.  They break down diversity into 3 components,  informational diversity, social category diversity and value diversity.

Not surprisingly, informational diversity (diversity of, for instance, functional, job and practical experiences) is positively correlated with performance.  Value diversity, due to heightened conflict is negatively correlated with performance.  Social category (e.g. age, gender, race) diversity was less clear.  Counter-intuitively their study showed positive correlation between morale and social category diversity.  Perhaps social category diversity itself is positively correlated with informational diversity which leads to improved performance.

I believe strongly in the benefits of informational and social category diversity.  Avoiding hiring a large percentage of team members from a particular company (though it is a natural tendency) is critical.  I believe that social category diversity helps insure some extra informational diversity plus make day-to-day life in the company more socially interesting.  It is not easy to achieve this – in fact it likely takes extra effort by the stakeholders, particularly to achieve this while ensuring similarity of values and goals, but the results are clearly worth it both in terms of the results and enjoyment along the way.

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