What’s the economic benefit of diversity?

While the moral and societal benefits of widening participation in the workplace are widely accepted, accurately quantifying its effect on the bottom line is a relatively new phenomenon.

Now, researchers from Harvard Business School have zoomed in on one male-dominated industry – venture capital – and their findings show just how powerful hiring more women can be.

“The difference is dramatic,” HBS’s Paul Gompers and Silpa Kovvali wrote. “Along all dimensions measured, the more similar the investment partners, the lower their investments’ performance.”

Venture capital firms that increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits, according to the research.

A separate study by McKinsey also links diversity to profit.
Image: McKinsey

The success rate of acquisitions and IPOs was 11.5% lower, on average, for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity reduced an investment’s comparative success by 26.4% to 32.2%.

And that’s partly down to homogeneity of thinking, which is self perpetuating, since people tend to hire other people like them.

The HBS research is important because it underscores what’s long been suspected: that improving diversity results in better financial performance. While equality campaigners have focused on the broad benefits, concrete evidence has sometimes seemed scant at company level.

Through its Global Gender Gap Report, the World Economic Forum quantifies gender disparities by country, focusing on four key areas: health, education, economy and politics. It has consistently highlighted the strong correlation between a country’s gender gap and its economic performance.

Such themes are also echoed in McKinsey’s “Delivering through diversity” report. That research showed companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profitability than companies in the fourth quartile.

McKinsey analyzed gender diversity at the executive level.
Image: McKinsey

The report, which concluded that top-team ethnic and cultural diversity is correlated with profitability, noted that progress has been slow and companies are often uncertain about the best way forward. Companies with leadership that invest in diversity and cascade the messages to management are among the most successful, it said.

“Awareness of the business case for inclusion and diversity is on the rise,” the authors of the report say. “While social justice typically is the initial impetus behind these efforts, companies have increasingly begun to regard inclusion and diversity as a source of competitive advantage, and specifically as a key enabler of growth.”