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Why diversity is great for business

Greater diversity has been a dominant issue in many recent city, state and national elections, and it will again be front and center in the 2020 election.

At all levels of government, greater diversity will lead to better outcomes and performance because study after study shows that diverse collaborations bear more fruit than homogeneous partnerships.

The same is true for business.

In the venture capital industry, the evidence shows diversity leads to sharply better financial performance, according to researchers at Harvard Business School. The vast majority of VC firms are overwhelmingly uniform, and after examining thousands of investments and decisions made by VC firms, the differences were dramatic and the conclusion was clear.

At VC firms with similar partners, investments performed well below those firms made up of partners with diverse ethnicities and educational backgrounds. According to HBS researchers, the success rate of acquisitions and IPOs was 11.5% lower for investments by partners with a shared educational background versus partners with different educational backgrounds. The difference in shared ethnicity was even greater, lowering an investment’s success rate by 26% to 32%.

Why do investments made by a homogeneous group of partners perform lower than those made by a diverse group of partners? The reason can be found in the level of creative thinking in crafting business strategy. Diverse groups were simply better at thinking creatively.

Only 8% of venture capital investors are women, about 2% are Hispanic and less than 1% are black, HBS researchers found.

Venture capitalists are more likely to partner with those who share their race, gender and educational background. The performance of homogeneous business partnerships, however, falls well below the performance of diverse groups.

When you ask why companies don’t have more women climbing the corporate ladder, the most common answer is that the pool of qualified women isn’t large enough. But this is an excuse not to hire women. The truth is companies with a woman in the CEO’s office almost always have large pools of women to choose from, and those companies have no problem getting more women to join the company, because women hire other women.

Another study, which looked at 1,700 companies in a range of industries, found that “increasing the diversity of leadership teams leads to more and better innovation and improved financial performance.”

The study found revenues produced by companies with more diverse management teams are 19% higher because of greater innovation. The lesson is that diversity is more than a well-intentioned goal. It is vital for successful revenue generation.

A diverse workforce will lead to a diversity of ideas and approaches, which leads to stronger and more well-rounded solutions.

Russell Ray is the editor of The Journal Record, a business newspaper based in Oklahoma. 

About Russell Ray