Diversity matters for businesses. Not just because it’s the right thing to do, but also because it’s the smart thing to do. Businesses with more diverse staffs excel at decision-making and outperform their peers financially.
To many, diversity seems good in theory but hard to implement. However, having a more diverse workforce is worth the effort. Here’s how diversity can help organizations in promoting a culture that enables better business decisions. We’ll also look at one ingredient that is critical to building diverse and high-performing teams.
The business case for diversity
According to McKinsey & Company research, businesses in the top quartile for gender diversity are 15% more likely to outperform their peers, and businesses in the top quartile for ethnic diversity are 35% more likely to outperform their peers.
While McKinsey researchers caution that correlation does not equal causation, they believe more diverse companies are better able to:
- Win top talent
- Improve customer orientation
- Improve employee satisfaction
- Enhance decision making
And better decision making is key to better financial returns. According to research conducted by Bain and Co., decision effectiveness and financial results are correlated at a 95% confidence level. Those companies most effective at making decisions have financial returns nearly 6% higher than those of other companies.
How diversity matters in making decisions
So what is it about diversity that enables businesses to make better decisions? A lot of research has been conducted in this area, and it appears that while homogeneity may lull people into thinking they are making better decisions (because everyone agrees with each other), viewpoints that challenge each other sharpen the performance of teams.
A Harvard Business Review article titled, “Diverse Teams Feel Less Comfortable – and That’s Why They Perform Better,” underscores this point. When discussing a study of decision-making in which participants had to solve a murder mystery, the authors write:
On a homogenous team, people readily understand each other and collaboration flows smoothly, giving the sensation of progress. Dealing with outsiders causes friction, which feels counterproductive.
But in this case their judgments were starkly wrong. Among groups where all three original members didn’t already know the correct answer, adding an outsider versus an insider actually doubled their chance of arriving at the correct solution, from 29% to 60%. The work felt harder, but the outcomes were better.
Another HBR article, “Why Diverse Teams Are Smarter,” gives some of the reasons why a diverse team produces better results. These reasons include:
- They focus more on facts. This is because they may more closely scrutinize each other’s actions. They become less entrenched in “group think,” which may blind them to key pieces of information.
- They process facts more carefully. This is because they are considering perspectives of people who think differently than they do.
- They are more innovative. This is because conformity discourages innovative thinking; diverse perspectives encourage new ways of looking at problems.
Moving from insight to action
While diversity has been shown to improve the quality of decision-making, diverse teams often struggle in their execution of those decisions. Moving from insight to action can be hard, simply because, as previously mentioned, less homogenous teams feel less comfortable. To actually execute on these decisions requires not just diversity, but also inclusion.
Inclusion: The secret ingredient to stimulate diverse teams
Inclusion is the catalyst that catapults good decisions into well-executed actions. In fact, one study by Cloverpop found that the most inclusive teams in both decision-making and execution outperformed average teams by 60%.
How does inclusion differ from diversity? According to Juliet Bourke and Andrea Espedido, who wrote, “Why Inclusive Leaders Are Good for Organizations, and How to Become One,” inclusive leadership is “leadership that assures that all team members feel they are treated respectfully and fairly, are valued and sense that they belong, and are confident and inspired.”
According to the authors’ research, inclusive leaders are:
- 17% more likely to report they are high performing
- 20% more likely to say they make high-quality decisions
- 29% more likely to report behaving collaboratively
They also found a 10% improvement in perceptions of inclusion at work increases employee attendance by almost one day each year.
What can your company do to make better decisions?
Making better decisions first requires a commitment to diversity. That requires building teams that are age, gender, ethnically, and geographically diverse. According to the Cloverpop study, teams that are diverse in all those areas make better business decisions 87% of the time.
Second, teams need inclusive leaders who, according to Bourke and Espedido, treat everyone fairly and respectfully, value their opinion, provide a sense of belonging, and make team members feel psychologically safe.
Third, team members need to listen and consider the opinions of others. When it comes to data and analytics, many people will say, “the numbers don’t lie,” and feel there is only one interpretation of the data. But are you looking at the numbers correctly? Have you considered the reasons for the numbers? Can you dig in further to find root causes? Strong data trust and governance can help immensely here, but it also helps to consider other points of view and come to a joint consensus on what the numbers are showing and how you should respond to what they are showing you.
Diversity matters. So does inclusion. These are critical for building a culture where employees feel valued and welcome, and that makes them more productive. It also helps enable better decisions, which, in turn, helps the financial performance of organizations.
Is diversity hard? Yes. Most business leaders will seek out and surround themselves with people who feel and act the way they do. It can be difficult to transition to new ways of finding and recruiting talent, as well as building internal teams. But is diversity worth it? From both a human and a financial standpoint, the answer is most definitely.
If you liked this article on diversity, read some of our other articles on company culture: