New evidence on the business benefits of diverse leadership teams

Two new studies show the positive impact of managerial gender diversity on firm performance and on managerial diversity and operating profit margin respectively. In addition, they reveal more detail about the complex connections between D&I and the bottom line.

Positive effects start at 23% gender mix, peaking above 34%

“As long as firms move beyond token [gender] representation, the results of this study provide encouragement to initiate programs to develop and retain female managers”. This authors’ summary of a recent study of Portuguese companies, using the Blau index, points at two key results:

  •  The study confirms the curvilinear relationship between gender diversity and firm performance that has been found in several studies before. It examined the relationship between managerial gender diversity (MGD), measured through Blau’s index (the most popular index for measuring diversity), and firm performance, operationalised as the firm’s annual sales per employee.
  • However, it details previously existing insight regarding three different areas of gender diversity and their distinct effects on firm performance: For diversity values of less than 0.15 on the Blau index, which corresponds to a share of women (or men) of about 8%, a negative effect of increased diversity on firm performance is observed, compared to a situation with no gender diversity at all. From this point and until a Blau index value of 0.45 (corresponding to about 34% female (or male) managers), MGD tends to have a positive linear effect, indicating higher firm performance. The turning point, where firm performance is higher than in the situation with no gender diversity at all, is at a share of one gender of about 23%. Between a 34% and 50% share of women (or men), there is still a positive effect on firm performance, but benefits are diminishing. However, the highest sales per employee have been observed for companies with a Diversity Index of about 0.5, which corresponds to a 50/50 gender representation.

The companies analysed for this study are all located in Portugal and the study uses a data set collected by the Portuguese Ministry of Work and Social Solidarity, which contains human resource information for all firms that conducted business in Portugal from 1985 to 2000. The panel data set used for the analyses contained 1,564 annual observations from 243 firms. The MGD was measured for top managers, middle managers, and supervisors.

This study, conducted by Andreas Schwab et al., was published in the peer-reviewed journal „Group & Organization Management“ in February 2016.

 

Top quartile outperforms bottom quartile by 12.6% and competitors by 5.7% on profit

Another study was conducted based on PwC data, which contains information about more than 6,000 leaders in 321 large and medium-sized Danish companies in 12 different sectors. For the study, the observed companies were ranked according to the level of diversity of their management on four diversity criteria: gender, ethnicity, age-range and seniority.

The results show, that the top 25 companies with the most diverse leadership earn an average of 12.6% more than the bottom 25 companies with the lowest diversity in leadership. Furthermore, those top 25 diverse companies earn an average of 5.7% more than their competitors.

The authors highlight three additional details of their analyses: First, management teams with high levels of diversity achieve a significantly better bottom line. Second, Diversity turns out to be an effective means of achieving commercial success. Thirdly, they detect that there is still a huge untapped potential with regard to the business case in making Danish management teams more diverse. This third conclusion appears to be more of an interpretation or opinion as it is less evidence-based than the other observations that are derived from data.

Regarding comparisons between the diversity dimensions, the study observes that “gender and ethnicity continue to be the two parameters to be addressed, whereas age-range and seniority diversity are more in balance.” The data also show strong differences across industry sectors, with the pharmaceutical sector accounting for higher diversity in management while the building and construction sector or the car industry have less mixed management teams.

The study was conducted by ISS and proacteur and was published as an ISS white paper in January 2016. The ISS Group is a globally acting Facility Services company. Proacteur is a consultancy company, which focuses on change management, leadership and organisational development, project and programme management as well as process-driven support for IT implementation.