Why diversity is good for company growth and profitability

Despite years of discussion, diversity is still a hot topic as ethnic minorities and women continue to demand more representation in executive teams as well as equality of pay and opportunity in the workplace. Businesses need to understand that virtue signalling isn’t enough: there is a business case for promoting diversity at senior management levels of all organisations. The numbers back it up and psychologists promote cogent explanations for it. The more diverse your top level of staff, the more productive and profitable your organisation will be.

In January 2018, McKinsey produced a report titled ‘Delivering Through Diversity’ which collected data from 1,007 companies across the world, detailing the gender and ethnic composition of their senior management teams, then correlating it with their financial results. Here are some of their findings:

• Companies in the top quartile for gender diversity on their executive teams were 21% more likely to bring in above-average profits, compared to those in the bottom quartile.
• Companies in the top quartile as above were 27% more likely to outperform on long-term value creation, compared to those in the bottom quartile.

Compared to a 2015 study, also by McKinsey, these margins are growing, so the business case for diversity at executive level becomes even more compelling.

We know that diversity amongst company leaders leads to growth and profitability, but why?

When you mix up the gender and ethnic composition of a team, the decision-making process and results change. People with differing backgrounds, cultural and life experiences think and solve problems in different ways. Diversity leads to challenges, different ways of thinking and more effective performance.

In 2017, performance coach David Rock wrote an article for Psychology Today attempting to explain more. He put forward three ideas about why diversity works at executive level.

• Diverse teams focus on facts: When there are disagreements between diverse teams, they’re more likely to go back and examine the facts and figures, rather than rely on gut instinct or received wisdom. Over time, diverse teams become more objective and less unsure about questioning other points of view.

• They think more carefully: When there is less of a connection in background between people making decisions, people will put forward ideas based on different perspectives. This leads to the group processing the information and ideas a lot more carefully, leading to more effective results.
   
• Diverse teams innovate: While it’s comforting to work alongside people like yourself, people from different backgrounds bring their own ideas into the mix. They bring you out of your comfort zone. This means they are more likely to come up with new ideas and question the status quo.

Considering all the evidence we have that diversity is good for company growth and profitability, you would think organisations would be falling over themselves to make their executive teams more diverse. Unfortunately, that is far from the case.

The Cranfield FTSE Board Report on Female Representation 2018 spelt out how much work there is still to do in the UK to achieve diversity at executive level. 

• Amongst FTSE 100 companies the proportion of women in executive roles is only 9.7%. This number has not changed significantly over the past four years.
   
• For FTSE 250 companies, the number of female executive directorships dropped from 38 to 30, between October 2017 and June 2018.

As for diversity of Black and Minority Ethnic people (BAME) in executive roles McKinsey found that whilst they comprise 22% of university graduates in the UK, only 8% of executive roles were held by members of this group.

To outsiders, it may be baffling why companies are reluctant to take advantage of the extra margins of performance that diversity can bring. Progress can be achieved, but it will take much more effort from organisations to ensure that diversity is not just a buzzword. In the meantime, it’s the companies that are already making this effort who will reap the rewards.

At Hampleton Partners, we’re proud of our international team, made up of 13 nationalities, speaking just as many languages. And in key areas, we have achieved gender balance. Our London office is made up of 50:50 men and women, with a female Managing Director, Jo Goodson, a highly-experienced female tech entrepreneur, with M&A at her core, leading the team.

If you’d like to talk to one our talented and experienced team and get their perspective on your business strategy, M&A or corporate finance needs, contact us today via our contact form or call us on +44 (0)20 3728 6910.