ARTICLE
Posted: 3/25/2019

How a Diverse Workforce Can Help Company Performance

By Cheryl Strauss Einhorn

The Hyderabad Swabhimana Yatra (Pride Parade) drew close to 200 people, larger than in past years, according to the Indian Express. That might have been in part because one in every 10 participants were Salesforce (ticker: CRM) employees—some, the company says, were even jetted in from other offices to participate.

“The walk is just one example of how we are encouraging our employees to bring their authentic self to work and supporting them with employee resource groups,” says Molly Ford, the director of Salesforce’s office of equality.

Salesforce is not alone. A growing number of companies are working to build more inclusive and diverse workforces. The efforts are bolstered in part by an expanding body of research about the benefits of a diverse workforce.

And, while Catherine Corley, the senior vice president of global learning products and programs at Catalyst, which works with companies to improve workplaces for women, cautions that “we can show a correlation, but causation is hard,” companies seem to be motivated to make workforce changes because they think there may be causation.
“We believe that diversity and inclusion drive new business,” says HP Inc. ’s (HPQ) Lesley Slaton Brown, the company’s chief diversity officer.
Ford of Salesforce.com agrees. “We want to build inclusion,” she says, citing company research showing that not only does workplace equality influence employee engagement, but also that an inclusive culture increases productivity.

Here are some highlights from studies documenting a relationship between diversity and improved financial performance:

Credit Suisse studied 27,000 senior managers at more than 3,000 companies globally and found that companies where women hold 25% of decision-making roles generate 4% higher cash flow returns on investment than the overall MSCI All Country World Index (ACWI). When women make up half of the senior managers, the companies produced 10% higher cash flow returns on investment than the MSCI ACWI.
• McKinsey’s global study of more than 1,000 companies found that organizations with the most gender-diverse leadership teams were more likely to outperform on profitability (21%) and value creation (27%). Organizations in the top quartile for ethnic/cultural diversity were more likely to achieve above-average profitability—33% more likely for diverse executive teams and 43%, for diverse boards. At the other end of the spectrum, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to experience above-industry average profitability. Researchers measured profitability by using average earnings before interest and taxes, or Ebit, margins.
• BCG and the Technical University of Munich conducted a survey of diversity managers, human-resource executives, and managing directors at 171 companies across Austria, Germany, and Switzerland. The study found that higher levels of diversity in management positions contributes to increased revenue from new products and services. The research also showed that companies that establish favorable work conditions for employees have higher Ebit margins (17%) than those who do not (13%).

Backed by such studies, companies are forging ahead. But they are going about their decision-making in different ways. Here is what four companies are doing:

Sodexo (SW.France), the French food-services business, conducted a study in 2016 exploring the correlation between management teams that are gender balanced and organizational performance—financial and nonfinancial, including brand awareness, client retention, and employee engagement—as measured by internal “key performance indicators,” or KPIs.

The company found that groups that were almost evenly split between women and men in management had higher KPI results than other teams. “Specifically, these teams were more engaged (a four-point higher global engagement rate over nonbalanced teams); had higher brand awareness (five points higher); had better client retention (12% increase); and had more positive profit and growth over three consecutive years,” according to a Catalyst report of the Sodexo study.
Sodexo found that KPI results plateaued when teams had more than 60% women in management, implying that “it’s the mix of genders, not necessarily women themselves, that drives success,” the report says. Still the study’s results enabled the company to make a data-driven rationale to set a global target of 40% women in the top 1,200 managers by 2025 that Sodexo CEO Denis Machuel has linked to performance incentives for the top 200 executives at the company.
Since then, Lorna Donatone, CEO of Sodexo North America says, “We found that the gender-balanced teams have resulted in higher operating margins, client satisfaction, and employee retention, and even safety records.”

Salesforce Co-CEO Marc Benioff has gone further in using data related to inclusion to drive both internal change and professional development for his executive team.

Ford, the director of Salesforce’s office of equality, says that executives who report to Benioff (generally executives managing more than 500 employees) must keep a monthly score card that shows how sales are doing in their division as well as “how many women, people of color, or underrepresented minorities are in your organization, as well as their rate of promotion, attrition, and hires.”

Ford says that it’s important for “senior leaders to know their dashboard and their pipeline...so that executives can’t say they don’t know their people analytics.” From the results of that data collection “if they need, we can provide them with professional development.”

How does that work? Ford says that once a quarter, Benioff receives those score-card reports, and “if the numbers are low maybe the manager would be sent to a conference or given suggestions for how to improve recruitment.”

HP Inc. has begun asking external vendors in areas such as advertising and public relations to submit plans to increase the number of women and minorities in major creative and strategy roles. HP gave its ad agencies one year to make substantive changes, and the challenge to these vendors showed that what gets measured gets done; commercials produced by women for HP jumped from zero before the request to almost 60% of commercials being directed by women since.
HP says that “measuring the impact of HP ads created before and after its 2016 diversity initiative, Brand Monitor showed an impressive six-point increase” in consumers actually shopping for HP products in just one year, Brown says. “Marketing Mix Analysis, run by Nielsen, captured a 33% increase in revenue per impression.”

Brown says that HP has since expanded its external diversity and inclusion initiatives to business partners in other areas such as legal services and gone a step further, saying that it doesn’t just want to promote diversity but will also penalize partners who fail to comply. The “diversity holdback” requirement allows the legal team to withhold up to 10% of all amounts invoiced by HP’s law-firm partners—a threat that, despite partners making progress, the firm made good on, as it has “withheld in some cases.”

Northern Trust Asset Management’s president, Shundrawn Thomas, says his team focuses on the labor practices and policies of companies that are potential investment targets and demands diversity from their external partners.

Companies with better diversity measures, he says, tend to have less volatility in their share-price performance over a three- to five-year time period.

Thomas says that Northern Trust is not only evaluating potential investments in terms of diversity measures but also has a “sustainable program” internally for employees and outside to promote diverse partnerships of the bank. The company has $2.4 billion of its $972 billion with 25 minority and women investment managers and directs 10% of its trading to minority firms. “We’re finding that customers of the bank have prerequisites and requirements that we partner with some minority businesses,” he says.

Diversity data is also playing a role in Northern Trust’s proxy voting, since the company is the fifth-largest global index manager. “We are taking definitive steps” to support diversity, he says, and “withhold votes when representation is lacking.”

While Einstein once wrote that “not everything that counts may be counted,” companies are counting on diversity of talent being a central issue to drive financial performance in the future.

Cheryl Strauss Einhorn teaches at Columbia Business School and is the author of Problem Solved: A Powerful System for Making Complex Decisions With Confidence and Conviction and the upcoming book Investing in Financial Research.



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