Skip to content
877-588-3295  |  Course Login
Apply Now

Diversity in Management Can Help Businesses Reap Financial Rewards

While workplace diversity is commonly considered a sound business management choice, a company’s quest to achieve racial, gender and ethnic balance can provide economic benefits as well.

A McKinsey study suggests a link between company profitability and workplace diversity. According to the research, firms in the top 25 percent for gender or racial and ethnic diversity are more likely to reap higher than median earnings nationwide. Conversely, firms in the lowest 25 percent of diversity are less likely to bring in above-average earnings.

It’s important to understand that a diverse workforce does not guarantee higher economic returns. Other factors also play a role in a company’s profitability. However, McKinsey researchers suggest that diverse companies have a distinct advantage over other, less diverse firms.

Businesses that practice diversity tend to have more success in attracting top talent to their workforces and have higher-than-average levels of employee satisfaction, which in turn improves decision-making and customer satisfaction. This, researchers said, lends itself to increased returns.

The report also suggests that other kinds of diversity, such as experience, age and sexual orientation, can help bring some level of competitive advantage to companies that attract and retain a more varied workforce. Those who earn a Master of Business Administration degree will likely learn more about the importance of diversity in the course of their studies, and the presence of managers with advanced degrees may in itself bring needed diversity to a company.

Data Shows Diversity’s Rewards

McKinsey’s research examined data for 366 public companies in a variety of industries in the United States, Canada, Latin America, and the United Kingdom and reported the following findings:

  • Firms with the highest levels of racial and ethnic diversity are 35 percent more likely to reap financial rewards higher than industry medians.
  • Businesses that maintain the highest levels of gender diversity are 15 percent more likely to see monetary returns higher than industry medians.
  • U.S. companies saw an increase in earnings of 0.8 percent for each 10 percent increase in racial and ethnic diversity on the senior-executive team.

Apart from possible economic advantages, diversity in the workplace can have a positive effect on corporate culture. Firms whose executives are all one gender and from the same ethnic background may find that their leaders tend to all have the same blind spots.

That may be the case in a recent scandal involving Japanese auto parts maker Takata. The company faces a $1 billion fine for covering up defects in auto air bags the firm manufactures. At least 17 deaths worldwide trace back to the defective airbags.

A review of the company showed that executives pressured workers to falsify data. Poor decisions were likely the result of the same blind spots from a lack of diversity at the top: Every member of Takata’s board of directors is a Japanese man.

When Culture Influences Behavior

Cultural researcher Geert Hofstede says that we are programmed by the society of our formative years to think and behave in certain ways. According to researchers Tzu-hsiang Yu and Wei-Chun Wen, Confucian tradition — which came to Japan in sixth century from China — teaches that unnecessary communication can lead to unnecessary risk. In other words, it is better to remain silent rather than offer information that could create additional problems.

With that belief ingrained in the culture, it can be difficult to persuade executives to be forthcoming with information. The Takata scandal may have been in part a result of a cultural tendency to avoid offering insights that challenge the status quo.

The conclusion is not that Confucianism has a negative influence on cultures where the philosophy is present, but that organizations led by only those from any single cultural background may be at a disadvantage. With Takata, lack of diversity among executives may have led to unsound decisions born of groupthink.

Culturally determined thought and behavior usually become ingrained over many years, so reversing negative trends won’t likely occur immediately. It’s also logical to assume that implementing diversified leadership won’t necessarily prevent all missteps in corporate management.

However, workplace diversity deserves consideration, given its positive effect on corporate entities that foster it.

Learn about the Texas A&M University — Corpus Christi online MBA program.


Sources:

McKinsey & Company: Why Diversity Matters

Bloomberg: The Takata Scandal and the Value of Diversity

Asian Journal of Communication: Crisis Communication in Chinese Culture: A Case Study in Taiwan


Have a question or concern about this article? Please contact us.

Request Information
*All fields required.
Apply Now