14 December, 2018

ICGN Yearbook 2018: Diversity: It's time to change the tune

Trevor Phillips argues that we need to transform our understanding of the relationship between diversity and productivity

Hardly any enterprise today would publicly dispute the claim that diversity in its leadership is likely to raise performance, and with it, turnover and profits. It almost goes without saying that difficult questions will be asked about firms with all-male or all-white boards; it has become axiomatic that they will underperform.

Unfortunately for the advocates of greater diversity, like me, this orthodoxy just isn’t true – or at least it’s not true enough to justify the billions of dollars currently being spent on fashionable diversity schemes. The Green Park Group, where I am Chairman, is talent partner to hundreds of firms, and our experience suggests that most of the current practice, though worthy, is simply failing to deliver.

Encouraging diversity might be compared to making sure that the list on the door for your birthday party includes men, women, people of both sexes and sexual preferences, plus friends with disabilities; the trickier task is ensuring that everyone gets the chance to dance – what, in the jargon, we now call inclusion. There are more kinds of people in the club, but the corporate dance floor isn’t looking all that different from twenty years ago. Not surprising; the playlist is still being set by white men baffled by the discovery that some people don’t want to rock to U2.

Studies routinely corroborate the “more diversity equals more profit” narrative. As a consequence, corporations all over the globe are spending sizeable sums of their shareholders’ money on programmes to bring more women and ethnic minority leaders into their top ranks. Spending has recently been boosted by events like the Harvey Weinstein affair, which sent shockwaves through every talent-based business; the realisation that the behaviour of a rainmaker could torpedo an entire enterprise has forced a new set of factors onto the risk register.

In addition, #metoo, #BlackLivesMatter and similar movements have thrown a harsh spotlight on the shortcomings of corporate leadership. In Silicon Valley women rarely get near the well-rewarded engineering and coding jobs, whilst to find any black or Hispanic employees you need to get hold of that needle-in-a-haystack app; this despite hundreds of millions of dollars a year being spent on scholarships, mentoring, awareness and unconscious bias training. In the UK we estimate that US$ 400-500 million goes on diversity staff, development programmes, awards ceremonies and the like.

But it isn’t working. Five years ago, a major global bank began a programme aimed at diversifying its leadership talent pool. Unusually, three years in, they decided to evaluate the programme. What they discovered shocked executives. Their expenditure – in the millions – had achieved precisely zero improvements overall; and in the area that they targeted most aggressively – gender – the numbers of women in their leadership pool had actually declined.

The international drive to add more women to boards has stalled. The number of women CEOs of listed companies in the USA and Europe is either flat or decreasing. In the USA, expert advisors are pointing to a fall-off in the number of African American men in corporate leadership. Last year, our own annual survey of the top 10,000 executives in the FTSE 100 Index showed a decline in minority leaders of around 10%. Most companies continue to resemble the Alps, Andes and the Rockies – darker and multi-coloured at the base, but progressively whiter as we reach the higher reaches of the organisation. We now talk of an organisational snowline alongside the glass ceiling.

It really shouldn’t be like this. The demographics of the working population – more women, more minorities, more openly LGBT and disabled people – together with the pressure being exerted by shareowners worried about reputational risk, should be squeezing out some incremental improvements. But they aren’t. In any other sphere of corporate life, an orthodoxy that was delivering such miserable results would long ago have been abandoned by company boards.

Unfortunately, few corporate leaders are encouraging that conversation. Nobody wants to be the first to suggest that the diversity emperor has lost his pants. The topic of difference – particularly the dimensions of race, religion and belief – scares most bosses witless. CEOs have seen talented colleagues flame out in mid-flight due to a single unguarded remark. Boards have sat paralysed as their executives wrestled with embarrassing gender pay gaps or headlines about the slighting of a minority or disabled customer.

This is where responsible shareowners have to step in. Board directors, non-executives in particular, will need to go beyond routine flag-waving about diversity and start asking their colleagues some hard questions. Let me suggest three.

First, do you have the data to demonstrate that more diversity in your business will lead to better performance? It isn’t always true. The Tamla Motown music label is probably the most successful black-led enterprise in US history. If its leadership had been racially integrated, would it have been as successful? (There is an answer, by the way. Based on a natural experiment, comparing Motown with a racially integrated label of the same era – the result isn’t the one most of us would like to hear).

Second, is your firm’s human capital best assessed individually or collectively? Andy Haldane, the Deputy Governor of the Bank of England, has recently posed a tricky dilemma, based on portfolio choice theory HE points out that most companies pick top talent in the way they pick stocks: they focus on a shared profile that has worked for them over time, perhaps leavening the mix with the odd risky purchase. That’s fair enough. But if we throw in an extra factor – say, volatility – what looks initially like the “best” performer may not be the share that adds the most value to the portfolio.

Similarly, in the talent acquisition business, faced with a team of nine brilliant people who all score 9 out of 10 in a test, and have served us well, why wouldn’t we buy one more of the same? But if the existing team all make the same error might it make more sense to hire somebody who only scores 3 out of 10 but always navigates the tripwire puzzle correctly? In the real world, should we give more weight to this kind of complementarity – and can we develop the tools to measure it?

Finally, are there gains to be made through a better understanding of the relationship between diversity and productivity? Factories, warehouses and building sites where workers carry out simple but repetitive tasks often tend to bundle workers from the same national origins together, whether by location or shift; communication becomes easier, people share the same jokes, and supervisors tend to understand the cultural needs and preferences of their workers better. Leaving aside the ugly prospect of social apartheid, it’s easy to see the commercial advantages of homogeneous groups.

On the other hand, research tells us that diverse groups produce more innovation; sectors like the media and scientific research should benefit from heterogeneous workforces. So what should the responsible employer prioritise – is it his or her first duty to create a socially diverse workplace or to maximise productivity? And how does a firm work out where on the spectrum it should lie?

Diversity of talent is the reality of the 21st-century corporation. But diversity can be a blessing – or it can be a burden. Realising the upside demands an informed and rigorous approach to inclusion. It won’t be enough merely to invite different people to your party; corporate leaders are going to have to learn how to dance with these new guests – and that might mean that everybody has to change their tune in ways we can’t yet imagine.

This article was published in the ICGN Yearbook 2018.

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