Monday, February 17, 2014

Diversity and the Boardroom 2014: Part I

In 2000, I published Diversity and the Boardroom and in 2001 I followed up with A General Theory of Cultural Diversity. Since then I have written about diversity repeatedly and I have closely followed developments in the best learning on diversity management and the potential of diversity in terms of group cognition and functioning. I consistently argued that the best means of interpreting the impact of the value of diversity in the boardroom was through the lens of diversity management as a general means of improving innovation and group cognition. In my view, there is simply incontrovertible evidence that diverse groups (meaning groups which include a wide array of perspectives and experiences) necessarily outperform homogenous groups in terms of inquiry and innovation.

Therefore, it is no surprise that yet another recent study found this exact benefit of diversity:
A growing body of research is making links between diversity and the economic performance of cities and regions. Most of the underlying mechanisms take place within firms, but only a handful of organization-level studies have been conducted. We contribute to this underexplored literature by using a unique sample of 7,600 firms to investigate links among cultural diversity, innovation, entrepreneurship, and sales strategies in London businesses between 2005 and 2007. London is one of the world's major cities, with a rich cultural diversity that is widely seen as a social and economic asset. Our data allowed us to distinguish owner/partner and wider workforce characteristics, identify migrant/minority-headed firms, and differentiate firms along multiple dimensions. The results, which are robust to most challenges, suggest a small but significant “diversity bonus” for all types of London firms. First, companies with diverse management are more likely to introduce new product innovations than are those with homogeneous “top teams.” Second, diversity is particularly important for reaching international markets and serving London's cosmopolitan population. Third, migrant status has positive links to entrepreneurship. Overall, the results provide some support for claims that diversity is an economic asset, as well as a social benefit.
Another recent study corroborates this finding by looking at diversity inside the firm and linking it to patents:
In this paper, we investigate the nexus between firm labor diversity and innovation by using data on patent applications filed by firms at the European Patent Office and a linked employer–employee database from Denmark. Exploiting the information retrieved from these comprehensive data sets and implementing proper instrumental variable strategies, we estimate the contribution of workers’ diversity in cultural background, education and demographic characteristics to valuable firm’s innovation activity. Specifically, we find evidence supporting the hypothesis that ethnic diversity may facilitate firms’ patenting activity in several ways by (a) increasing the propensity to (apply for a) patent, (b) increasing the overall number of patent applications, and (c) by enlarging the breadth of patenting technological fields, conditional on patenting. Several robustness checks corroborate the main findings.
Of course, as always, diversity must be well-managed which means, among other things, that managers must attend to goal orientation, as this recent study shows
As workforce diversity increases, knowledge of factors influencing whether cultural diversity results in team performance benefits is of growing importance. Complementing and extending earlier research, we develop and test theory about how achievement setting readily activates team member goal orientations that influence the diversity-performance relationship. In two studies, we identify goal orientation as a moderator of the performance benefits of cultural diversity and team information elaboration as the underlying process. Cultural diversity is more positive for team performance when team members' learning approach orientation is high and performance avoidance orientation is low. This effect is exerted via team information elaboration.
Certainly, not every study finds the benefits of diversity. That is not surprising. I have always maintained that diversity must be well-managed. Tokenism, hostile environments, and marginalization will not unlock the benefits of diversity.  Just throwing people from diverse backgrounds together will not alone lead to enhanced financial performance. Nevertheless, there is powerful evidence of the benefits of diversity (critical thinking, deeper inquiry, innovation, etc.) when diverse voices are empowered and incentivized to act in groups productively.

In my next post, I will review recent evidence on the value of diversity in the specific context of the boardroom.

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