Why Diversity is Great for Business
By Russell Ray
Greater diversity in representation has been the storyline behind many recent city, state and national elections.
That is a welcome trend, especially in a city “where 60% of our children are nonwhite,” Oklahoma City Mayor David Holt tweeted recently in support of immigrants living in OKC.
Greater diversity at all levels of government 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 conclusion was clear and the differences were dramatic.
At VC firms with similar partners, investments performed well below those firms comprised 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 that 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 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.
Increasing diversity in city government appears to be a high priority for Mayor Holt. At the time Holt became Mayor in 2018, about 90% of the city’s boards were composed of white members, while the city’s population was 45% non-white, according to the U.S. Census Bureau.
Since then, the gender and ethnic makeup of some city boards is more diverse. What’s more, the city recently announced plans to hire the city’s first-ever diversity officer. Not only will these efforts help city government reflect the city’s demographic makeup, it will yield better results through a byproduct of more creative and strategic thinking.
Given that homogeneity leads to financial costs and diversity produces financial gains, it would be a crime against common sense for businesses – both big and small – to not follow suit.