To overcome talent shortage challenges, many organisations are expanding their talent pool by hiring more diverse candidates. In addition to seeking diverse backgrounds, organisations also expect these candidates to bring a range of skills, knowledge, and experiences to enhance company innovation and performance.
However, if not managed properly, diversity could lead to undesirable conflicts among different parties. For instance, individuals from collectivistic cultural backgrounds may interpret decisions differently from those with individualistic cultural backgrounds, leading to misunderstandings during collaboration.
That is why we should also prioritise equity and inclusion to ensure the benefit of diversity can be effectively leveraged in the workplace.
In this article, we will touch upon the following topics:
- Diversity, equity and inclusion in the workplace
- Defining organisational performance
- Evidence of DEI’s impact on organisational performance
Diversity, Equity & Inclusion - What do they mean in the workplace?
Amidst the widespread discussion of DEI policies, do we truly grasp their implications within the workplace?
- Workplace diversity encompasses the variety of background characteristics within an organisation or team, emphasising heterogeneity in ethnicity, gender, age, skills, knowledge, interaction style, values, and beliefs (Peretz et al., 2015; Ferrary & Deo, 2023).
- Inclusion, on the other hand, refers to employees’ perception of being esteemed members of their work group (Shore et al., 2011). Specifically, it reflects their sense of involvement in organisational processes, including access to resources, participation in decision-making, and the opportunity to utilise their skills to the fullest (Adamson et al., 2021).
- Equity, the final component, reflects how employees perceive fair treatment, equal evaluation, and uniform respect regardless of their backgrounds in all organisational processes, such as recruitment, work opportunities, promotion, compensation, workload, and assigned responsibilities (Karakhan et al., 2021).
To harness the benefits of diversity, organisations must not only cultivate a diverse workforce but also foster an inclusive and equitable culture for their diverse talents. Such a culture eliminates barriers that hinder employees from feeling committed to the organisation, comfortable in expressing their opinions, and effectively utilising their talents, thereby enhancing organisational performance (Adamson et al.,2021).
Can a policy solely focused on ensuring diverse employees feel “fairly” treated and “included” make a significant impact on your organisation? Before we bring the evidence to the table, let’s first define organisational performance.
Defining organisational performance
Imagine yourself as part of the management team in a company. What does a truly successful company look like to you?
Some might define success based on high profitability, while others might view a strong human capital as a hallmark of success.
Let’s first look at the company having high profitability.
To achieve high profitability, a company might adopt a revenue expansion approach, a cost reduction approach or both (Rust et al., 2002). Simply put, revenue expansion aims to increase earnings, while cost reduction seeks to minimise operating expenses.
For instance, a company emphasising revenue expansion may focus on developing market-leading products that meet customer needs, prioritising the quality of external processes.
Conversely, a company prioritising cost reduction may implement standardised procedures to mitigate the risk of human error and associated costs, emphasising the quality of internal processes.
Key indicators for efficient revenue expansion include the sales figures (e.g., net margin, return on assets), market valuation (e.g., Tobin’s Q) and customer satisfaction/ retention rate. On the other hand, indicators for efficient cost reduction strategies include turnover rate, customer acquisition costs, productivity and more.
Most companies opt for a balanced approach, incorporating both strategies to maximise profits. Therefore, all indicators, regardless of the approach, are crucial for informing a company to make strategic decisions.
Then let’s explore the company having strong human capital.
Human capital refers to the knowledge, skills, and abilities that are embodied within employees that could not be documented in a company’s balance sheet (Crook et al., 2011). Despite being unquantifiable in hard numbers, it remains one of the most crucial factors contributing to a company’s excellent performance.
Let’s consider two same-sized companies that are in the same industry below (Figure 1) and determine which one has a better firm performance.
Figure 1
I assume it shouldn’t be too difficult for you to make a decision, right?
Without any additional sensitive information, such as product roadmap or operational costs, if you were asked to determine which company performs better, your instinct might lead you to choose the company with more highly skilled employees (Company B).
Why is this the case? Well, highly skilled employees possess a broader range of capabilities that can be utilised across various organisational functions. For example, while less-skilled employees in production lines may excel at standardised tasks, highly skilled employees in production lines could also contribute to product development in addition to performing standardised tasks.
As a result, companies can save on personnel operation costs while expanding revenue by strategically deploying employees’ unique talents, enabling them to excel in the industry. For instance, Crook and colleagues (2011) have demonstrated a strong positive relationship between human capital and firm performance, especially when employees possess skills or knowledge that are not readily tradable in the labour market.
In sum, besides analysing the numbers on a company’s financial reports, we should also consider the strength of its human capital to accurately assess its organisational performance.
Evidence of DEI’s impact on organisational performance
You may wonder: what does it look like for a company that has both strong human capital and high profitability?
The secret lies in whether they have a DEI policy in place.
Having DEI policies helps you translate your strong human capital into high company profitability. It automatically conveys messages such as “Rest assured that you are treated fairly,” “We value the difference you bring to the workplace,” and “You have the full stage to perform your talent” to the employees on your behalf. When your employees are not concerned about external factors like discrimination and unfairness, they can feel psychologically safe, perform to their fullest, and eventually commit to the company (Farndale et al., 2015).
In 2020, companies worldwide spent an estimated $7.5 billion on DEI-related efforts, projected to increase to $15.4 billion by 2026 (Ellingrud et al., 2023). This indicates that companies are slowly recognising the importance of DEI and beginning to invest in DEI-related practices to enhance their performance.
Furthermore, researchers have invested significant effort in investigating the relationship between DEI-related practices and firm performance. Some topics they have covered include gender diversity, LGBTQ-friendly policies, age diversity practices, and human capital diversity (e.g., Ali & French, 2019; Rahman et al., 2023; Armstrong et al., 2010; Boehm, 2014). We have selected evidence for the relationship between DEI practices and firm performance from the following two aspects:
Gender Diversity
Gender diversity is built on the belief that genders possess different knowledge, experience, preferences, leadership style, cognitive frames and more (Ferrary & Deo, 2023). Such differences may bring impacts to daily workflows and group dynamics, which in turn, affects the firm performance.
Ali and colleagues (2011) investigated the relationship between gender diversity and firm performance in the service and manufacturing industries. The results showed that with every 0.05 point increase in workforce gender diversity (e.g., from 0.05 to 0.10 on Blau’s index*), employee productivity increased by an average of $38,824 in annual operating revenue per employee, controlling for all other variables studied. Particularly in the service industry, augmenting gender diversity at low to moderate levels of gender diversity (Blau’s index 0-0.4) has a more significant effect on employee productivity, compared to the manufacturing industry.
In addition, gender diversity at different hierarchical levels could have varying impacts on firm performance. Specifically, Ferrary and Deo (2023) found that there is no significant effect on profitability when measuring gender diversity at upper hierarchical levels (directors board and executive committee), but there is a significant impact on profitability when gender diversity is measured at lower hierarchical levels (middle management and staff). They concluded that balancing the men and women ratio from a ratio of 40-60 to 60-40 at lower hierarchical levels improves profitability and competitiveness by 50-60% (Figure 2).
*Blau’s index is an index measuring gender diversity, ranging from 0, representing homogeneity (0/100 gender proportions), to 0.5, representing maximum gender diversity (50/50 gender proportions).
Adapted from: Ferrary and Deo (2023)
LGBTQ-friendly Policy
LGBTQ-friendly policy is established to support sexual minorities’ rights and prevent potential discrimination in the workplace. Some examples of LGBTQ-friendly policy are: a) taking a firm stand in supporting same-sex marriages; b) creating comprehensive handbooks or providing training on how to be inclusive and c) providing equal benefits and protections.
Fatmy and colleagues (2022) investigated whether companies with LGBTQ-friendly policies impact firm performance. They demonstrated that companies with LGBTQ-friendly policies are more profitable and have higher stock market valuations. Specifically, a one standard deviation increase in Corporate Equality Index (CEI**) signifies an increase of approximately 7% in the firm’s market valuation and around 47-51 basis points in return on assets (ROA).
In a similar vein, Pichler and colleagues (2018) found that among companies with research and development (R&D) activities, companies with LGBT-supportive policies have a 21.1% higher firm value compared to those without. Moreover, having an LGBT-supportive policy may help companies increase employee productivity by 3.41% for companies involved in R&D activities. In terms of profitability, having such a policy indicates an increase of 12.5% for companies with R&D activities. This result also informs us that having an LGBT-supportive policy opens the door for companies to interact with more highly-skilled employees from all backgrounds, leading to enhanced firm performance.
**CEI is an index representing the firm-level LGBT friendliness. The higher the CEI scores, the greater the LGBT friendliness in terms of corporate policies and practices related to LGBT employees as well as public advocacy related to the rights of sexual minorities (Fatmy et al., 2022; Shan et al., 2017).
In conclusion
Diversity (D) involves employing people with different backgrounds and skills, while equity (E) and inclusion (I) are the means to harness the benefits of diversity to enhance firm performance. High profitability or strong human capital can both be indicators of excellent company performance. Implementing proper DEI policies helps translate strong human capital within your company into high profitability. Academic research has shown that implementing DEI practices can boost company performance. Good luck for being inclusive and equitable for your diverse employees! 🙂
References
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