Profiting from diversity: Inclusivity offers boost to businesses’ bottom line

While increasing diversity in the corporate world is generally accepted as ‘the right thing to do’ a study has now confirmed that this strategy has clear business and financial advantages. US organisations with more diverse cultures are rewarded with greater efficiency in the way they innovate, which in turn boosts firm value.

There are a couple of reasons for this, explains the study Do Pro-Diversity Policies Improve Corporate Innovation? Workplaces focused on nurturing diversity and inclusivity through better treatment of women, disabled workers, minority groups and lesbian, gay, bisexual and transgender individuals have hiring policies that increase the potential pool from which a firm is able to recruit talented and creative people. The result is a workforce better equipped to tackle creative problem-solving and foster innovation.

Roger C Mayer and Richard S Warr, both of North Carolina State University, and Jing Zhao from Portland State University also found that pro-diversity polices enhance company value via the positive effect on innovative efficiency.

Their study evaluated information from Morgan Stanley Capital International environmental, social and governance (MSCI ESG) ratings, which provide diversity policy data on publicly traded US companies. They measured innovative efficiency using new product information spanning 2001-14 from the Capital IQ Key Developments database. They also collected patent and patent-citation data from the US patent office.

Their analysis found that diversity polices are positively related to the number of new product announcements per R&D dollar spent by a company. If the average firm makes significant improvements in its diversity level, it will see roughly two additional new product announcements over a 10-year period. “We find that pro-diversity policies enhance firm value (measured by Tobin’s Q) via their positive effect on innovative efficiency,” adds the study.

Other findings include:

• The positive effect of diversity on innovative efficiency is more pronounced in firms that are already innovative, value intangibles and human capital more highly, and have greater growth options, higher cash flow and stronger governance.

• The effect of diversity on innovative efficiency is stronger during recessions, including the downturn following the 2008 financial crisis, when investors, the financial markets and the economy at large suffer a severe crisis of trust.

This article was originally published in Work. magazine, Spring 2018.