Diversity Pays Dividends

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Diverse teams are measurably smarter, more innovative, and better at making decisions.

Diverse teams are measurably smarter, more innovative, and better at making decisions.

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"It is hardly possible to overrate the value ... of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. ... Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress." —John Stuart Mill

"It is hardly possible to overrate the value ... of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. ... Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress." —John Stuart Mill

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There's no longer any doubt: Diversity is good for business. Studies consistently show that diverse companies outperform and out-innovate the competition because diversity makes teams smarter. A 2015 report by McKinsey & Co., for instance, surveyed 366 public companies and found that those with more ethnic and racial diversity among managers enjoyed better financial returns. Compared with the least diverse companies, the study found, the top 25 percent most diverse companies reaped a 53 percent higher return on equity. And a 2009 study found that racial and gender diversity correlate with higher sales revenue, more customers, and more profit.

There's no longer any doubt: Diversity is good for business. Studies consistently show that diverse companies outperform and out-innovate the competition because diversity makes teams smarter. A 2015 report by McKinsey & Co., for instance, surveyed 366 public companies and found that those with more ethnic and racial diversity among managers enjoyed better financial returns. Compared with the least diverse companies, the study found, the top 25 percent most diverse companies reaped a 53 percent higher return on equity. And a 2009 study found that racial and gender diversity correlate with higher sales revenue, more customers, and more profit.

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Gender diversity also offers demonstrable benefits to businesses. In a study published in Innovation: Management, Policy & Practice, researchers examined research and development teams from 4,000 companies in Spain. The presence of women on a research and development team, they found, fosters group dynamics that lead to more novel solutions and more radical innovations. Another study, which surveyed more than 20,000 global companies in 91 countries, found that the ones with more female executives were more profitable. A firm at which 30 percent of leaders are women, they calculated, can expect to add 3 percent more net profit margin than a firm with no female leaders.

Gender diversity also offers demonstrable benefits to businesses. In a study published in Innovation: Management, Policy & Practice, researchers examined research and development teams from 4,000 companies in Spain. The presence of women on a research and development team, they found, fosters group dynamics that lead to more novel solutions and more radical innovations. Another study, which surveyed more than 20,000 global companies in 91 countries, found that the ones with more female executives were more profitable. A firm at which 30 percent of leaders are women, they calculated, can expect to add 3 percent more net profit margin than a firm with no female leaders.

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The benefits of gender diversity on a company's bottom line can be seen not only in surveys of real-world companies, but also in empirical studies. In a study published in 2013 in Management Science, researchers conducted a field experiment to examine the impact of gender diversity on business performance. Researchers collaborated with an entrepreneurship program that assigned graduate students to go out in teams of 10 or 12 and start a business as part of their degree.

The benefits of gender diversity on a company's bottom line can be seen not only in surveys of real-world companies, but also in empirical studies. In a study published in 2013 in Management Science, researchers conducted a field experiment to examine the impact of gender diversity on business performance. Researchers collaborated with an entrepreneurship program that assigned graduate students to go out in teams of 10 or 12 and start a business as part of their degree.

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Unbeknownst to the students, researchers systematically varied the gender composition of the teams. Some teams had just one woman, others were all women, and the rest were somewhere in between. The study found that gender-diverse teams had more sales, higher profits, and higher earnings per share. But their superior success wasn't because women are simply better at business: Gender-mixed teams outperformed male-dominated teams, and they also outperformed female-dominated teams. Performance peaked, the study found, when the proportion of women on a team was around 55 percent.

Unbeknownst to the students, researchers systematically varied the gender composition of the teams. Some teams had just one woman, others were all women, and the rest were somewhere in between. The study found that gender-diverse teams had more sales, higher profits, and higher earnings per share. But their superior success wasn't because women are simply better at business: Gender-mixed teams outperformed male-dominated teams, and they also outperformed female-dominated teams. Performance peaked, the study found, when the proportion of women on a team was around 55 percent.

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Diverse companies outperform the competition for one simple reason: Diverse teams are smarter, more innovative, and better at solving problems and making decisions.

Diverse companies outperform the competition for one simple reason: Diverse teams are smarter, more innovative, and better at solving problems and making decisions.

Diversity matters

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First, diverse teams think more accurately and make fewer errors. A study published in the Journal of Personality and Social Psychology examined how the ethnic composition of mock juries affects how they evaluate evidence. The study found that compared to all-white juries, ethnically diverse juries consider a wider range of information and make fewer factual errors when discussing evidence.

First, diverse teams think more accurately and make fewer errors. A study published in the Journal of Personality and Social Psychology examined how the ethnic composition of mock juries affects how they evaluate evidence. The study found that compared to all-white juries, ethnically diverse juries consider a wider range of information and make fewer factual errors when discussing evidence.

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Ethnically diverse juries, in other words, think better than all-white juries. But diverse juries' superiority wasn't solely due to the contributions of black jurors, the study found. On the contrary, when black jurors were present, white jurors deliberated more effectively, citing more case facts and making fewer errors. Both black and white jurors reasoned better and more accurately simply because of each other's presence in the room.

Ethnically diverse juries, in other words, think better than all-white juries. But diverse juries' superiority wasn't solely due to the contributions of black jurors, the study found. On the contrary, when black jurors were present, white jurors deliberated more effectively, citing more case facts and making fewer errors. Both black and white jurors reasoned better and more accurately simply because of each other's presence in the room.

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The notion that diversity makes teams smarter makes intuitive sense. Introducing novel knowledge, opinions, and ways of thinking forces people to consider differing perspectives, which triggers deeper thought and ultimately boosts group decision making. That is especially true for tasks that benefit from the collision of opposing perspectives, such as creativity and innovation.

The notion that diversity makes teams smarter makes intuitive sense. Introducing novel knowledge, opinions, and ways of thinking forces people to consider differing perspectives, which triggers deeper thought and ultimately boosts group decision making. That is especially true for tasks that benefit from the collision of opposing perspectives, such as creativity and innovation.

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But diversity has another, less obvious benefit. Research shows that the presence of outsiders in a group changes the behavior of people in the social majority. In a homogeneous group, perspectives get overlooked because of the conformity pressures that arise when a group has a strong sense of shared social identity. When everyone seems the same, people go with the flow and don't tend to call upon their critical faculties. Adding an outsider to such a group, studies show, helps uncover incongruent perspectives that wouldn't otherwise be voiced in group discussion.

But diversity has another, less obvious benefit. Research shows that the presence of outsiders in a group changes the behavior of people in the social majority. In a homogeneous group, perspectives get overlooked because of the conformity pressures that arise when a group has a strong sense of shared social identity. When everyone seems the same, people go with the flow and don't tend to call upon their critical faculties. Adding an outsider to such a group, studies show, helps uncover incongruent perspectives that wouldn't otherwise be voiced in group discussion.

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Ironically, adding an outsider to a homogeneous group can cause friction. People don't understand each other quite as well, and discussions may have more conflict. But although it might feel less comfortable, the presence of outsiders helps keep groups from lapsing into mindless conformity and ultimately leads to better decisions. In a study published in Group Processes and Intergroup Relations, for instance, participants were asked to solve a murder mystery—a problem-solving task with one right answer. Adding an outsider to a homogeneous group, the study found, doubled its odds of arriving at the correct solution.

Ironically, adding an outsider to a homogeneous group can cause friction. People don't understand each other quite as well, and discussions may have more conflict. But although it might feel less comfortable, the presence of outsiders helps keep groups from lapsing into mindless conformity and ultimately leads to better decisions. In a study published in Group Processes and Intergroup Relations, for instance, participants were asked to solve a murder mystery—a problem-solving task with one right answer. Adding an outsider to a homogeneous group, the study found, doubled its odds of arriving at the correct solution.

Diversity and inclusion go hand in hand

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So diversity is good for business. But simply hiring a diverse workforce doesn't guarantee that employees will perform at the top of their game. Diversity carries the risk that some employees will feel excluded from the group. That feeling of social exclusion, studies show, is detrimental to teamwork and employee performance. To ensure that diverse teams do their best work, employers must create an environment of inclusion that makes everyone feel welcome.

So diversity is good for business. But simply hiring a diverse workforce doesn't guarantee that employees will perform at the top of their game. Diversity carries the risk that some employees will feel excluded from the group. That feeling of social exclusion, studies show, is detrimental to teamwork and employee performance. To ensure that diverse teams do their best work, employers must create an environment of inclusion that makes everyone feel welcome.

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The human brain is highly attuned to social information, and it's particularly sensitive to social threat—the possibility that members of our group may think negatively of us. Rejection hurts and, neurologically, social pain activates the brain in much the same way physical pain does. People don't perform at their best when they're in pain.

The human brain is highly attuned to social information, and it's particularly sensitive to social threat—the possibility that members of our group may think negatively of us. Rejection hurts and, neurologically, social pain activates the brain in much the same way physical pain does. People don't perform at their best when they're in pain.

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A large body of research has examined the effects of social exclusion on cognition. In these studies, feelings of social rejection are induced experimentally by having participants play a video game called Cyberball with two virtual players they think are fellow volunteers. At one point, the two other players suddenly cut the participant out of the game, throwing the ball only to each other. That reliably triggers strong feelings of social ostracism—and it is in that moment, while participants are suffering the pain of social rejection, that researchers study the effects those feelings have on thinking.

A large body of research has examined the effects of social exclusion on cognition. In these studies, feelings of social rejection are induced experimentally by having participants play a video game called Cyberball with two virtual players they think are fellow volunteers. At one point, the two other players suddenly cut the participant out of the game, throwing the ball only to each other. That reliably triggers strong feelings of social ostracism—and it is in that moment, while participants are suffering the pain of social rejection, that researchers study the effects those feelings have on thinking.

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When people feel excluded, studies show, they become less intelligent. Exclusion impairs performance on standardized tests and measures of IQ. People who feel socially rejected also have more difficulty with tasks requiring logical reasoning.

When people feel excluded, studies show, they become less intelligent. Exclusion impairs performance on standardized tests and measures of IQ. People who feel socially rejected also have more difficulty with tasks requiring logical reasoning.

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It's not just that being rejected puts people in a sad mood; social exclusion has unique neural consequences. Those cognitive declines are not induced when participants are told, "You're likely to be accident-prone later in life." It is only when the brain is threatened with socially relevant misfortune ("You're the type who will end up alone later in life") that intellectual performance suffers.

It's not just that being rejected puts people in a sad mood; social exclusion has unique neural consequences. Those cognitive declines are not induced when participants are told, "You're likely to be accident-prone later in life." It is only when the brain is threatened with socially relevant misfortune ("You're the type who will end up alone later in life") that intellectual performance suffers.

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Feelings of exclusion, then, pose a real threat to a company's performance. The solution is to create an environment of inclusion in which everyone feels like they belong and that their voice is heard. Studies show that feelings of inclusion make people more generous, more cooperative, and more likely to exhibit prosocial behaviors such as helping a stranger who accidentally knocks over a cup of pencils. Other research has found that feeling included makes people better able to understand how others are feeling and boosts their ability to take into account the perspectives of others.

Feelings of exclusion, then, pose a real threat to a company's performance. The solution is to create an environment of inclusion in which everyone feels like they belong and that their voice is heard. Studies show that feelings of inclusion make people more generous, more cooperative, and more likely to exhibit prosocial behaviors such as helping a stranger who accidentally knocks over a cup of pencils. Other research has found that feeling included makes people better able to understand how others are feeling and boosts their ability to take into account the perspectives of others.

Activation, animation, automation

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Measurement itself is an important part of a diversity and inclusion learning initiative because it helps sustain behavior change over the long term. By cueing employees to reflect on their own insights and their engagement in new behaviors, measurement helps reactivate and embed key learning.

Measurement itself is an important part of a diversity and inclusion learning initiative because it helps sustain behavior change over the long term. By cueing employees to reflect on their own insights and their engagement in new behaviors, measurement helps reactivate and embed key learning.

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Assessing the success of a diversity and inclusion initiative means measuring three distinct aspects of learning: activation, animation, and automation. First, organizations must measure the activation of new knowledge. Do managers recall the key strategies for increasing diversity and inclusion? Did the learning lead to insight and inspire action?

Assessing the success of a diversity and inclusion initiative means measuring three distinct aspects of learning: activation, animation, and automation. First, organizations must measure the activation of new knowledge. Do managers recall the key strategies for increasing diversity and inclusion? Did the learning lead to insight and inspire action?

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Second is the animation of new behaviors. Are managers engaging in the behaviors associated with new habits? Organizations must measure the frequency of new behaviors across different contexts.

Second is the animation of new behaviors. Are managers engaging in the behaviors associated with new habits? Organizations must measure the frequency of new behaviors across different contexts.

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Finally, organizations must assess the automation of new habits through repetition and environmental supports. Are new behaviors becoming more automatic and less effortful? To what degree is the language of diversity and inclusion spreading across the organization? By measuring those three aspects of learning, the habits of diversity and inclusion can be created and sustained in managers and across the organization.

Finally, organizations must assess the automation of new habits through repetition and environmental supports. Are new behaviors becoming more automatic and less effortful? To what degree is the language of diversity and inclusion spreading across the organization? By measuring those three aspects of learning, the habits of diversity and inclusion can be created and sustained in managers and across the organization.

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Reaping the benefits of a diverse workforce is not easy or automatic. Creating a culture of inclusiveness in which ideas flourish requires thought, effort, and training. The good news is that when it comes to diversity and business success, it's not an either-or proposition. Hiring a diverse workforce and making everyone feel included isn't just the right thing to do. It's also the best way to build a smarter, more capable, and more successful company.

Reaping the benefits of a diverse workforce is not easy or automatic. Creating a culture of inclusiveness in which ideas flourish requires thought, effort, and training. The good news is that when it comes to diversity and business success, it's not an either-or proposition. Hiring a diverse workforce and making everyone feel included isn't just the right thing to do. It's also the best way to build a smarter, more capable, and more successful company.

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Read more from CTDO magazine : Essential talent development content for C-suite leaders.

Read more from CTDO magazine: Essential talent development content for C-suite leaders.