How Inclusion Improves Diversity And Company Performance

 How Inclusion Improves Diversity And Company Performance

Paolo Gaudiano

Although the words “diversity” and “inclusion” have become nearly inseparable in our collective jargon, when it comes to measuring impact or creating initiatives, the vast majority of our attention falls upon diversity.

The main reason for this, as I have argued in an earlier blog, is that diversity is very easy to measure and quantify, whereas inclusion is difficult to define, let alone measure. My colleagues and I have developed a way of defining inclusion that makes it measurable, and we have argued that focusing on inclusion overcomes some of the negative aspects of focusing on diversity.

What I want to emphasize in this blog is that, although diversity is clearly linked to company performance, inclusion in some ways is more fundamental, as it can increase both the level diversity and the performance of a company.

Intuitively, it makes sense that inclusion would influence diversity. We can make a stronger statement, namely, that inclusion is a requirement to establish or grow diversity: if a company fails to be inclusive toward employees, especially those whose characteristics differ from the characteristics of majority employees, the company will find it hard both to recruit and to retain a diverse workforce. On the other hand, if a company has a strong reputation of being inclusive, it’s more likely that someone from a different background will be willing to start working there, even if the company is fairly homogeneous.

Of course, regardless of how inclusive a company may be, increasing its level of diversity is unlikely to happen if the company is completely homogeneous and if it does not actively recruit candidates from outside of its own network. Also, if a company is completely homogeneous, it is less likely that its leaders and employees will be truly inclusive to everyone.

The situation with diversity is different. As the previous sentence would suggest, having some diversity seems like an important ingredient to foster an inclusive culture. However, simply increasing diversity by recruiting candidates from a range of backgrounds will not, by itself, guarantee an increase in the level of inclusion. This is especially true when organizations “hire for diversity” primarily at entry level, because in almost every organization, the overall attitude toward inclusion is set from the top. In fact, what many companies have found out is that trying to increase diversity by hiring for diversity at the entry level often backfires, leading to internal strife and high churn rates, as the new employees face incidents that cause them to leave.

Hiring for diversity is much more likely to have impact if it is done at senior levels, and if it’s done systematically and on a broad scale: it needs to be done at senior levels because leaders who themselves understand what it’s like to feel excluded in a company will be able to guide their peers toward creating a more inclusive culture that will benefit all employees; and it needs to be done on a broad scale, because hiring only one or two non-majority individuals into a predominantly white and male leadership will unavoidably place enormous stress on these people, and is less likely to generate the level of consensus that will drive real change. It is for this reason, for example, that the D&I company Diversity Lab established the Mansfield Rule, which suggests that law firms consider at least 30 percent women, attorneys of color, LGBTQ+ and lawyers with disabilities for senior positions.

Hence we see the asymmetry between diversity and inclusion: hiring for diversity without first creating an inclusive environment is much less likely to succeed than fostering a culture of inclusion before hiring for diversity.

There is also an asymmetry in the way that diversity and inclusion impact the performance of a company. Before explaining this, I need to make a clarification. There is ample data that, on a statistical level, companies with greater diversity outperform companies with less diversity. For instance, Lorenzo and Reeves found that companies with above-average diversity also have higher innovation revenues, while McKinsey found that executive gender and ethnic diversity correlate with profitability. However, a statistical correlation does not imply causality. Put in plain language, the fact that two variables – in this case, the level of diversity and the financial performance of the company – are correlated, does not mean that one caused the other. The correlation could go in the other direction (i.e., it could be argued that having greater revenues or greater profitability encourages companies to hire more diverse teams), or there could be a third variable that is causing an increase in both variables. In this case, I believe that inclusion is that third variable.

There is in fact evidence of situations in which diversity by itself does not correlate with increased performance, and that, in some cases, greater diversity correlates with performance decrements. For instance, a 1991 study of 93 banks, in which the authors looked for correlations between the level of diversity and various performance indicators, found that the only statistically significant correlation linked greater diversity to higher turnover rates – not a good thing for D&I supporters. However, the authors also noted that interpersonal behaviors, i.e., factors such as inclusion, could be used to explain this seemingly disappointing result. In other words, being more diverse does not guarantee performance improvements, unless the experiences of individuals are positive.

But even without data, a simple though experiment can illustrate why it makes sense that inclusion drives performance. Imagine a team in which each individual performs at their peak, and the individuals collaborate perfectly. Let’s call this the 100% team – performance cannot get any better. Suppose now that one team member feels excluded and becomes dissatisfied. Their productivity will drop, and cause ripple effects as other team members have to deal with the disruption. Clearly, overall team performance will decrease. To provide more tangible support for this idea, my colleague Chibin Zhang and I recently authored a paper in which we used a computer simulation to show systematically that inclusion influences both the diversity and the performance of a company.

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Originally posted on Forbes

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