What does diversity mean? How does it work?
At its simplest, diversity means variety. For a business, having variety of experiences and perspectives makes it more adaptable to market changes.
Thanks for your patience on this post. I had been working to sell Jumbo, and finally closed the deal last week. Here’s the story: https://techcrunch.com/2023/07/12/cyber-insurance-startup-coalition-acquires-privacy-assistant-jumbo/
I’m taking August and September off to recharge for the next venture and spend some much needed time with family and friends in Asia. I’ll probably put this exploration on hold during this break, but I won’t make any promises 😉.
After my last post, two questions came up repeatedly: a) Isn’t diversity and equity an ethical / human rights obligation? And b) So diversity in teams is strongly correlated with financial outperformance, but how does it work? I’ll address the ethics question in my next post.
How does diversity lead to stronger financial performance?
Kenneth Chenault was the son of a dentist from Long Island, New York. After 20 years with American Express, in 2001 he took over as CEO and Chairman, becoming the third African American to serve at the helm of a Fortune 500 company.
Before Chenault, AmEx had spent 151 years focusing on affluent and corporate customers. Under Chenault’s leadership, it expanded its target market with cards for regular consumers with everyday expenses like gas and groceries. Over his 17 year tenure as CEO, AmEx’s stock returned nearly 2x the annual return of the financial sector over the same period.
Many factors determine a business’ decision to expand its target market. Yet it’s interesting that AmEx’s decision coincided with Chenault taking the helm. Similarly, Pepsi’s global expansion took off under Indra Nooyi, IBM became a dominant tech solutions and services provider under Ginni Rometty, Satya Nadella led Microsoft to dominate cloud and AI, and so on.
The theory
When you introduce diversity to a homogenous group, there are two things that happen:
The group gets new information and perspective. “People who are different from one another in race, gender and other dimensions bring unique information and experiences to bear on the task at hand.” (Scientific American, 2014)
New information and perspective, when cultivated and valued, disrupt group-think and tend to push teams to scrutinize facts and decisions more closely. “In a 2006 study of mock juries, for example, when black people were added to the jury, white jurors processed the case facts more carefully and deliberated more effectively.” (HBR, 2016)
The takeaways are that diverse teams make better decisions, and you need to build an out-of-the-box team if you want out-of-the-box thinking.
Survival of the fittest most adaptable (...and diverse?)
Chenault in 2005 told an audience at Wharton, “It’s not the strongest or the most intelligent who survive, but those most adaptive to change…With the politically tough environment of world affairs…It’s critical for a global company…to have people who understand different cultures and can act quickly in changing circumstances.”
Chenault’s Darwinism seems to have been prescient. In 2021, Bain & Company partners David Michels and Kevin Murphy published their effort to quantify a company’s capacity for change, i.e. its adaptability. They found that the higher a company’s “change power”, the stronger its performance, leadership and employee engagement tended to be.
Michels, Murphy and third Bain partner Karthik Venkataraman published their latest finding earlier in May: Change power is 80% higher among companies with the highest DE&I ratings (as measured by a company’s Glassdoor DE&I score).
The proxies may be imperfect, but the conclusion is clear: the most adaptable companies are the ones doing diversity, equity and inclusion well.
What do you think about the ideas and conclusions I’ve reached here? Do you have any stories to share of how diversity and/or adaptability have inspired innovation, growth, or better decision making in your experience? Reply and let me know or leave a comment!