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Why Diverse Teams Matter – A Look at the Bottom Line

by Hannah Stiff | Jun 24, 2020 3:51:35 PM

According to a report from the McKinsey company, diverse teams are good for business.

“Our latest research finds that companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians,” The McKinsey team said of its findings. “Companies in the bottom quartile in these dimensions are statistically less likely to achieve above-average returns. And diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time.”

So, you’re saying diverse teams are more profitable? That’s exactly what we’re saying. 

“More diverse companies, we believe, are better able to win top talent and improve their customer orientation, employee satisfaction, and decision making, and all that leads to a virtuous cycle of increasing returns,” McKinsey staff says.

And that makes sense. Last year, at the Innovate Symposium hosted in Butte, Mont., ClassPass CEO Fritz Lanman said the same thing. Having diverse talent attracts other diverse talent. Conversely, a white bubble often seems impenetrable and out of touch. Lanman said that his thriving Missoula, Mont., based company has lost top talent because of the discrimination his diverse employees faced in Montana. When asked what the biggest deterrent to growing the fitness pass empire, Lanman said it was unequivocally the lack of diversity and racism still present, even in progressive towns like Missoula.

So, what kind of numbers did McKinsey unearth in its report?

In a survey of 366 public companies, those in the top 25% for racial and ethnic diversity were more likely (35% more likely, in fact) to have financial returns (make more money) above the industry average. Companies in the bottom quartile both for gender and for ethnicity and race, McKinsey found, “are statistically less likely to achieve above-average financial returns than the average companies in the data set (that is, bottom-quartile companies are lagging rather than merely not leading).”

In the U.S., the relationship between racial and ethnic diversity goes like this: for every 10 percent increase in racial and ethnic diversity on the c-suite team (senior-level execs), earnings before interest and taxes (EBIT) rise 0.8 percent.

Harvard Business Review published more findings on the benefits of diversity in the workforce stating, “In recent years a body of research has revealed another, more nuanced benefit of workplace diversity: nonhomogeneous teams are simply smarter.”

Turns out, working with people different from you challenges your brain to overcome its patterned ways of thinking and create new channels to increase performance. 

Another study found that even diverse groups outside the office setting perform better. Scientists gathered financially literate people in Texas and Singapore and tasked them with price stocks in a simulated market. The test subjects were placed on one of two teams: ethnically diverse or homogenous.  As you may have predicted by now, the study’s scientists found that participants on team diversity were 58% more likely to price stocks correctly. The homogenous group? They committed more pricing errors and when their simulated markets burst, the crash was more severe.  

“The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making,” researchers state.

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