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Diversity is an essential aspect to any business. It creates new voices that have different opinions that can help create a more well-rounded, innovative approach to tackle business problems, deal with clients, and understand a changing market. Investing in diversity is no exception and including diversity in your firm’s investment thesis can have great benefits. Here are three reasons why investing in diversity should be on your company’s priority list.
1. Diversity is Proven to Improve Financials
First, increases in diversity are positively correlated with better financial returns. According to the Harvard Business Review, “Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people—a tendency academics call homophily—can bring social benefits to those who exhibit it…it can also lead investors and firms to leave a lot of money on the table.”
In fact, shared ethnicity in companies decreased success rate of IPOs and acquisitions by 32.2%, confirming the idea that cultural diversity is a key factor in financial success. Furthermore, according to a McKinsey report, companies with a higher proportion of gender diversity were 21% more likely to outperform on EBIT margins and companies with a higher proportion of cultural and ethnic diversity were 33% more likely to outperform.
According to data from the Kauffman Fellows Research Center, “Startups with ethnically diverse founders are eventually able to raise more operating cash and return more capital to investors than those formed by all-white executives.” In fact, companies with diverse founders outperform others by 30% when they go public or are acquired. So, while diverse firms may have less access to capital in the early stages, in the long run they tend to be more financially successful.
There is also data that shows that more women in leadership positions leads to better financial performance and more women on the board can increase overall returns. According to a Morgan Stanley report, “High gender diversity companies have delivered slightly better returns, with lower volatility, compared with their low diversity or sector peers, and they have moderately outperformed on average in the past five years.”
Furthermore, companies with higher percentages of gender diversity enjoy a one-year return on equity that is 1.1% higher than companies with a lower percentage of female representation. All this data points to the fact that diversity is an important driver of financial success and investing in diversity yields profitable outcomes.
2. Diversity Brings Diverse Ideas to the Table
Diversity is important as it leads to a more varied and more in tune array of opinions and ideas. Inherent in diversity lies more diverse perspectives, more well-rounded ideas, and more creative approaches to business solutions. “…employing a diverse workforce also contributes to increased understanding of the customer/client base; more creative thinking and innovation; enhanced employee engagement and reduced churn; and a healthier ability to anticipate market shifts and future customer needs, among other value drivers.”
Diversity allows different opinions and ideas to come to light and promises the advantage of varied perspectives. Diversity offers the ability to see a problem from all different sides and provides the opportunity to tackle that problem from all different viewpoints. It allows for more varied potential solutions and more creative ideas for advancement.
And this creativity does not exist in a vacuum but has tangible financial results. According to Forbes, “Companies that have more diverse management teams have 19% higher revenue due to innovation.” This shows “that diversity is not just a metric to be strived for, it is actually an integral part of a successful revenue generating business.” And that makes sense because diversity means more diverse perspectives to come up with optimal solutions for better business practices.
Research from a Harvard Business Review study quantified this idea and “provides compelling evidence that diversity unlocks innovation and drives market growth.” The study found “that companies with…diversity out-innovate and outperform others,” and “Employees at these companies are 45% likelier to report that their firm’s market share grew over the previous year and 70% likelier to report that the firm captured a new market.”
Diversity promises creativity and innovation that leads to better business performance, makes room for opinions that can lead to untapped business opportunities, and helps promote diverse approaches and ideas which can help drive your business forward.
3. Diversity Attracts Diverse Job Candidates
Lastly, internal diversity leads to more diverse job candidates. According to Glassdoor, 67% of job seekers use diversity as an important factor when considering companies and job offers. And 61% of women look at the gender diversity in the company’s leadership positions when making decisions about where to work.
We’ve already seen the financial and creative advantages of diversity, so it behooves a company to capitalize on those advantage by attracting a more diverse and well-rounded workforce. The presence of diversity will attract that workforce directly to you. Show your diversity with pictures and videos on social media and marketing tools, this will increase the likelihood that more diverse job candidates will consider your company and want to be a part of it. Diversity attracts diversity so it’s in your own benefit to invest in diversity to impact more diverse hires.
Diversity For the Win
From increased financial returns to more creative ideas, diversity is a key component to any successful business model. Over the past decade, there has been a global increase in environmental, social, and governance (ESG) values. Part of those values includes the importance of diversity and inclusion in investment thesis and strategy. At first, companies may have been slow on the uptake, but the financial sector responds to hard data and the numbers are in: diversity positively impacts financial performance, drives creativity, an attracts more diverse job candidates. These three advantages are three reasons why investing in diversity is a necessary and important action.
The Other Diversity Dividend, https://hbr.org/2018/07/the-other-diversity-dividend
Diverse Startups Raise More Cash, Return More to Investors, https://www.bloomberg.com/news/articles/2020-02-05/diverse-startups-raise-more-cash-and-return-more-to-investors
Why It Pays to Invest in Gender Diversity, https://www.morganstanley.com/ideas/gender-diversity-investment-framework
The Value of Diversity, https://www.privateequityinternational.com/opex2018-the-value-of-diversity/
A Study Finds that Diverse Companies Produce 19% More Revenue, https://www.forbes.com/sites/annapowers/2018/06/27/a-study-finds-that-diverse-companies-produce-19-more-revenue/#22f62bf2506f
How Diversity Can Drive Innovation, https://hbr.org/2013/12/how-diversity-can-drive-innovation