Does Diversity Drive Performance, Or Does Performance Drive Diversity?

Author

Paolo Gaudiano and Ellen Hunt

January 18, 2017

There is a growing number of studies showing that companies with more women in senior decision-making roles are outperforming companies led by non-diversified leaders who are mostly male and white. Although the statistics are compelling, they fail to explain why this happens. Without knowing or understanding what causes this performance differential, companies are forced into a false choice of actions that don’t guarantee superior performance.

One of the challenges of interpreting these types of findings is that correlation does not imply causality. Put in plain terms, these studies typically show that certain factors tend to occur together, but they cannot tell if there is a causal link between the factors: it could be that the first factor causes the second, or vice versa, or perhaps the two factors are both driven by a third, unobserved factor.

As a relevant example, let’s consider corporate gender diversity. If a study finds a positive correlation between financial performance and the number of female senior executives, this does not necessarily mean that having more female senior executives actually causes the performance to be better – much as we may be inclined to believe that. An alternative, hypothetical interpretation could be that companies whose workplace policies are friendly to women, such as flex time, tend to have better performance simply because all employees are more satisfied. In this view, the larger number of women is just incidental to the company’s success.

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An equally plausible, but more cynical interpretation could be that the causality is in the other direction: somehow, companies that find themselves doing better decide that they can “afford” to have more women in top roles. We do not believe this to be a correct interpretation, but we want to stress the point that simply observing a correlation does not imply that a particular explanation must be true. Although many people believe that having more women in senior roles is better for a company, skeptics could be equally justified in believing that the converse is true, and no amount of statistics is likely to change their mind.

In fact, there is a way in which we agree that it is performance that drives diversity. Namely, we believe that focusing on performance is the best way for businesses to realize the value of diversity.

To explain this, it is important to define diversity carefully. The best way to think of workforce diversity is in terms of the blend of characteristics of a company’s talent. These characteristics can include demographics, but also experience, seniority, attitude, and so on.

Given this definition of diversity, it should be clear that, other things being equal, changing the blend of characteristics of a company’s talent will impact performance. We are not saying that having a more diverse blend will be better or worse: we are simply suggesting that two otherwise identical companies will have different performance levels if their blend of talent is different. For example, imagine a 100-person company where every employee has been the CEO of a startup, and an identical company where every employee just graduated from college – clearly, the performance of these companies will differ, as will the performance of any other company with a different talent mix.

The question, then, is: which particular blend of characteristics leads to the best performance for a given company? And it should be clear that the answer depends entirely on the company, its offerings and its clients. For instance, the ideal talent mix for a company that sells hair products for African American women should be quite different from the ideal talent mix for a company that sells golf clubs. And both of these hypothetical companies may perform better with fairly homogenous employees than, let’s say, a fast-food restaurant chain with a nation-wide footprint.

And this is where we see the link between performance and diversity: in order to determine the optimal talent mix for any company, there must be a systematic way of measuring and quantifying performance. More specifically, it is necessary to link the performance of individuals to the overall performance of the company.

Although this capability is virtually non-existent today, recent advances promise to bring analytical rigor to HR, not unlike what happened to marketing in the last decade. And just as quantitative approaches have catapulted marketing into a strategic role, we believe that ten years from now HR will be a key strategic function, driven by performance metrics and analytics.

Further, when you consider that human capital is the single largest budget line for most companies, and that human talent is a company’s most important asset, you can see why we are optimistic that HR will become the most important strategic function for any company.

Once companies embrace a quantitative, performance-driven methodology for talent management, we are confident that superficial traits like skin color, gender identity, physical abilities and ethnic background will become irrelevant, and tapping into a broader talent pool will become a clear competitive advantage. As a result, companies will be motivated to hire more diverse talent simply on the basis of performance.

Therefore, rather than trying to impose diversity in the hope that it will drive better performance, we believe that companies that want to remain competitive will have to embrace a performance-based approach to HR, which will inevitably drive greater diversity.

 

This article was written by Paolo Gaudiano and Ellen Hunt from Forbes and was legally licensed through the NewsCred publisher network.

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