Diverse Companies Out-Deliver on the Bottom Line

It should come as no surprise that racially-diverse companies are both more profitable and outperform their more homogeneous counterparts. According to research cited in a 2015 article by Josh Bersin entitled “Why Diversity and Inclusion Has Become a Business Priority,” high-performing companies consistently integrate high-impact inclusion and diversity programs into their culture, from the business’s vision and strategy to its talent management functions. These companies are committed to diversity with purpose and accountability. They set tangible goals and achieve them.

Diverse groups outperform homogeneous groups because greater diversity leads to better decision-making and more effective problem solving. Research conducted by Katherine W. Phillips, Katie A. Liljenquist, and Margaret A. Neale, as reported in “Better Decisions Through Diversity,” shows this and explains why. It shows that in addition to having the advantage of different perspectives, more diverse groups more carefully analyze information. Homogeneous groups, on the other hand, tend to suffer from “groupthink.” They get a false sense of confidence from their similar thinking. Internal disagreements are virtually stifled, allowing assumptions to persist without challenge. Groupthink can also diminish creative problem solving and dismiss unique ideas. 

Contributions from an out-of-group member can introduce new information and interrupt an environment of constant agreement. While that can create tension, it leads to more analytical problem solving. The dynamics created when a mix of people come together force each person “to prepare better, to anticipate alternative viewpoints and to expect that reaching a consensus will take effort.” See id.

When dissension is anticipated or an outsider shares a new perspective, it pushes group members to more deeply analyze their views. According to Scott E. Page, author of book The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies, this results in diverse teams being more effective at solving problems than teams made up of individuals chosen solely for their intellectual abilities.

This affects not only the morale of the employees but also a company’s bottom line. In fact, according to research cited in the 2009 study entitled “Does Diversity Pay?: Race, Gender, and the Business Case for Diversity” by Cedric Herring in the American Sociological Review, on average, more racially-diverse companies bring in nearly 15 times more revenue than their least racially-diverse counterparts. In fact, racial diversity is a better predictor of sales revenue and customer numbers than other seemingly important factors like company size, company age, and the number of employees at a worksite. According to Herring, even companies that only marginally increase their racial diversity gain an average of over 400 additional customers.

Diversity also leads to greater innovation. Companies with racially-mixed boardrooms and groups with multicultural competence are more creative. Researchers like Scott E. Page have found that the collective intelligence of a diverse group is greater than that of a group with uniform members. A study by Toyah Miller and Maria del Carmen Triana published in the Journal of Management Studies showed that racial diversity in the boardrooms of Fortune 500 companies brings new information, a broader range of ideas, and diverse resources outside the norm, which has a positive relationship to innovation. Research conducted by McKinsey and Company shows that companies with more culturally and ethnically diverse executives were 33 percent more likely to see better-than-average profits, while companies with more ethnically and culturally diverse boards were 43 percent more likely to see above-average profits. In 2003, Orlando Richard and his colleagues at the University of Texas at Dallas surveyed executives at 177 national banks in the United States about this. They compiled a database comparing financial performance, racial diversity, and the emphasis the bank presidents put on innovation. When it came to innovation-focused banks, there was a correlation between increases in racial diversity and enhanced financial performance.

Being around those similar to us leads us to believe we all hold the same information and share the same perspective. As discussed by Katherine W. Phillips in her 2014 article “How Diversity Makes Us Smarter,” the reason diversity tends to lead to greater levels of creativity and innovation is because it challenges this notion, given that diverse groups of people bring different information, opinions, and perspectives.

This is supported by research. For example, in 2006, Margaret Neale, Gregory Northcraft, and Katherine W. Phillips examined the impact of racial diversity on small decision-making groups that needed to share information to be successful. The racially-diverse groups significantly outperformed the groups with no racial diversity. Similarly, a 2004 study conducted by Anthony Lising Antonio and five of his colleagues found that when a Black person presented a dissenting perspective to a group of white people, the perspective was perceived as more novel. That, in turn, led to broader thinking and consideration of alternatives than when a White person introduced the same dissenting perspective.

In the legal sector, too, there are many advantages to having a diverse team. According to a study of the data of the Am Law 200, the 200 highest-grossing firms, conducted by Douglas E. Brayley and Eric S. Nguyen, authors of “Good Business: A Market-Based Argument for Law Firm Diversity” in the Journal of the Legal Profession in 2009, law firms with greater diversity, on average, report higher profits per partner and revenue per lawyer than the rest of the Am Law 200 firms. And the resulting difference in profits is no nominal amount. A firm ranked in the top 25 percent in diversity rankings will generate more than $100,000 more per partner than a firm that is the same size and located in the same city and that is ranked in the bottom 25 percent in the diversity rankings.

Having a diverse trial team can also benefit a law firm’s clients. As stated by Allison A. Jacobson in “The Advantages of a Diverse Trial Team,” published in a special issue of the Trial Evidence Committee’s newsletter in 2011, a diverse trial team can be extremely effective in evoking a common emotion that translates to an authentic experience and voice in the courtroom.

An environment of diversity and inclusion supports openness and new ideas, which are critical elements for innovation and effective problem solving. Businesses, including law firms, and other groups reap the benefits in greater productivity, which translates to better results both for a company and for those clients whom the company serves.