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The Business Case for Diversity in the Workplace

The Business Case for Diversity in the Workplace

What is the impact of diversity in the workplace? Specifically, what impact does it have in a large corporation?

A decade ago the answer was found in the creation of the chief diversity officer. “The chief diversity officer’s task is inherently integrative,” wrote Damon Williams and Katrina Wade-Golden in their landmark 2008 study of the position. The role of the CDO, they argued, is “to help the institution become more active in increasing diversity, whether the goal is defined in terms of increasing access, building international relationships, improving learning, or any of a number of other ways.”

This early approach or view of diversity management, as it became known, resulted in a wide variety of positive additions to the corporate landscape, such as employee resource groups and pathways for new minority networks within the organization. The underlying sentiment of all of these programs was grounded in both legal and moral arguments. Legally, companies had to accommodate equal employment opportunity laws. Morally, embracing a diverse workplace was increasingly the “right thing to do”. “Traditionally CDOs have been organized under the umbrella of Human Resources,” a former CDO at one of the world’s largest financial institutions told me. “I think some may be missing out on a bigger opportunity for change within their organization. They should really be looking to leverage that diversity to increase the bottom line.”

The case of this bottom line was made in Frans Johansson’s 2004 book The Medici Effect, in which he argued, “There is little doubt that diverse teams…have a greater chance of coming up with unique ideas.” Recent academic research from two prestigious European institutions, the University of Aarhus and the University of Kiel, has shown that not only do diverse teams create unique ideas, but result in a more productive workplace.

The first paper, written by the University of Kiel’s Annekatrin Niebuhr, examined the impact of diversity on innovation. While controlling for R&D budgets and education, Niebuhr set about to explore if a more diverse workplace generated more innovation—measure by patent applications in Germany. The author used three standard indexes of diversity for her analysis: Herfindahl index (the probability that two randomly drawn individuals at a firm belong to a different ethnic group), Theil index (reflects the share and variety of foreign born population in the sample) and the Krugman index (measures cultural diversity of employment rates). The table below details the results.

data1

The result was unanimous. “The coefficient of cultural diversity,” Niebuhr wrote, “is positive and highly significant, irrespective of applied diversity measure.” In other words, diversity displayed a positive impact on the number of patent applications across each measure of diversity.  The author concluded, “The positive impact of diversity on innovation seems to outweigh negative effects.”

The second study titled, “Does Labor Diversity Affect Firm Productivity?”, examined the impact of a diverse workforce on over 24,000 Danish firms. The researchers combined worker demographic data from the Danish Government with the business accounts (value added, materials, capital stock) of firms. Thanks to the meticulous record keeping of the Danish authorities, the researchers were not only able to identify individuals by nationality, but by education level, labor market experience, age, and earnings. Their goal was to determine what impact each firm’s diversity had on the end result. Did a diverse team lead to more productivity?

The answer was mixed–and with a caveat. They found that diversity in education and skills showed a significant positive impact on productivity. In fact, a 1 standard deviation increase in skill diversity improved productivity by 1%. However, they found that ethnic diversity could have either a neutral or negative effect on overall productivity. The authors noted that the negative effects were largely attributed to communication and integration costs associated with language barriers. Previous research found that diverse teams outperformed homogenous teams after the integration cost was accounted for. The authors inserted one interesting caveat, “Interestingly,” they wrote, “we find that there are significant positive effects of ethnic diversity…(in) firms operating in industries, which are more open to trade.” This holds well for international firms.

These papers reveal an interesting proposition–that a firm should become diverse not only because it is the right thing to do, but also because it allows them to drive growth in an international marketplace. Diversity is a very real growth strategy. The chief diversity officer not only facilitates integration, but also drives innovation. On March 12, we’re hosting a special event, the Diversity Drives Innovation Summit, which will dig into the practical mechanisms behind this transition (i.e., enabling your executives to completely rethink the role diversity plays in driving innovation) but if you just can’t wait this blog post may shine some light as well.

In the meantime, ask yourself the following questions:

  • What role does the chief diversity officer play in your organization?
  • What type of diversity does your firm have?
  • How can you leverage that diversity?

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  1. The Chief Diversity Officer as a Rising Force of Innovation - [...] a decade ago. Over the years, countless others have followed with excellent articles, surveys and research making the business …

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