Diversity and the Bottom Line

Why CFOs Should Embrace Diversity, Equity, and Inclusion

In my conversations with many C-suite executives, I have observed that diversity, equity, and inclusion initiatives are often approached by organizations and the leaders within them as a “feel-good” initiative – the right thing to do. Diversity is so much more than that. The tenets of diversity and inclusion are a moral imperative for all of us. Deep organizational changes are usually required to begin to approach the goal of being a diverse and inclusive environment. This effort may seem daunting and, in some cases, may be difficult to get the buy-in to launch.

Fortunately, there are very real financial reasons to embrace diversity, as well bringing yet another reason to the table to support necessary organizational change and another measure for the results of investment in these initiatives.

As with any initiatives, leadership teams would be remiss if they did not question the impact of dollars and long-term results. Without a doubt, diversity drives dollars to the bottom line, increases shareholder value, and is a characteristic sought out by investors. Let’s examine just a few of the many data-driven reasons to focus on diversity, not only because it is the right thing to do for business, but because it is also the smart (and profitable) thing.

Diversity Improves Problem Solving and Decision Making

Companies that demonstrate diversity in the workplace can examine issues and decisions from multiple points of view and solve problems in different ways. As mentioned in the Harvard Business Review article “Why Diverse Teams Are Smarter,” diverse groups raise more facts in their problem solving processes than homogeneous teams, and when errors occur, they are corrected faster. In a PNAS study where financially-oriented participants were placed in either ethnically diverse or homogenous teams and asked to price stocks, the diverse teams were found to be 58% more likely to price stocks correctly. This is but one of countless examples of how diversity leads to better decisions and takes away blind spots that would otherwise be present but undetected. Further, reducing these blind spots also reduces an organization’s exposure to a variety of risks.

Diversity Increases Productivity

The Network for Business Sustainability cites research showing that “a 1% increase in racial diversity similarity between upper and lower management increases firm productivity by between $729 and $1590 per employee per year.” This evidence came first from studying tech organizations in a given period and showed even greater productivity gains in comparable diverse Fortune 500 organizations. Diversity improves productivity in part because of the widened perspectives previously highlighted. It instills the ability to examine tasks and strategies from multiple angles and allows organizations to pursue those that are the most advantageous. Productivity gains from diversity also stem from more effective communications and interactions when people see others like themselves in an organization, including presence on upper and lower management teams. Diverse teams empower more people to feel heard and allow leaders to tap into new approaches, interpretations, and perceptions that drive innovation at higher rates than homogeneous teams.

Diversity Expands Customer Base and Revenue Streams

Broader representation within an organization also permeates areas such as product design and marketing and fosters overall innovation. In short, wider collective inputs lead to insights that expand views on what is possible and what is wanted or needed from both current customers and groups not yet served or marketed to. The beauty industry provides a great example of diversity’s expansion power. When cosmetics companies used inputs to recognize that skin tones are not simply light, medium, or dark, new shades and products were formulated to individualize offerings and revenues soared. At the forefront of this was Fenty Beauty, which launched in 2017 and was lauded for its 40 shades of foundation and commitment to inclusion. The company generated $100 Million in its first 40 days, now generates more than $570 Million per year in revenue, and has an estimated worth of $12 Billion.

Diverse team members will often drive conversations that lead to expansion of products and services to address segments of the market that might have been otherwise ignored or missed. This is reflected in simple customizations leading to expanding SKUs; for example, when a manufacturer of leashes and accessories for dogs expands its products to address needs for service dogs based on input from the disability community. Customer experience is also taking the forefront as a brand differentiator, in many instances surpassing products and price. A diverse team will lead to better connections to and better communication with a broad customer base, playing a key factor in customer satisfaction and brand appeal. Some brands will focus on specific segments of the population, and that might be a great niche, but others might simply be missing out by not reaching other groups. That means leaving money on the table and not serving potential consumers.

Diversity Improves Employee Retention and Acquisition

Most companies are competing for the right talent. CFOs and CHROs must take a serious look at the cost of talent acquisition and, what we all hate to think about, the cost of a bad hire, which can be close to 30% of their annual salary, according to the U.S. Labor Department.

Employees in diverse companies report that they feel more at ease and that their contributions are both appreciated and recognized. These feelings lead to increased loyalty from employees that in turn leads to higher retention and longer tenures. Anything a company can do to retain their talented employees directly impacts the bottom line in a positive way, as it reduces the time and expense associated with having to find, hire, and onboard new employees. Improved retention also increases employee morale and productivity in general.

Diversity also improves talent acquisition by expanding the pool of candidates made available to an organization, reducing the time and related costs to fill positions. Individuals want to feel represented in an organization and see that there are opportunities for advancement based on merit, not on unspoken norms and discriminatory criteria. This includes adults with disabilities, a group that experiences the highest unemployment rate of all minority groups. Organizations who make accommodations and take actions to welcome disabled individuals and other underrepresented groups into their workforce gain an incredible opportunity to strengthen their business.

A Positive and Profitable Path

Diversity and inclusion must be more than a feel-good initiative that organizations casually pursue. Organizations need to approach diversity actively and with intent. It will not result from simply having “we-welcome-everyone” statements on employment applications or other communications and by just saying all the right things. It won’t happen just because you’ve had all staff participate in training. Legitimate, significant change must permeate all processes within an organization, impacting employees, customers, and markets alike. The rewards for companies that achieve this go well beyond knowing they have done the right thing.

CFOs must embrace diversity, equity, and inclusion initiatives…not only because it is the right thing to do, but because it will deliver profitability, long-term sustainability, and so much more for their businesses.