Diversity clearly makes a difference

Diversity remains a sensitive issue even in an urbanised and globalised world. Though there is growing acceptance of the inevitability, even desirability, of social diversity, leadership continues to be the preserve of those from privileged groups and the privileged gender.

Notwithstanding the commonly accepted correctness of equal opportunity and meritocracy, diversity does not come easy. People are hardwired to herd with those who look, speak and behave like themselves or belong to the same gender, region, religion, class or caste. But no country or company has prospered through homogeneity. It has always been profitable to gain from the intellectual, commercial and technological capital of the different and the outsider.

The lack of diversity in companies, especially at the decision-making level, remains a major issue everywhere in the world. According to a multi-continent study by McKinsey in 2014, women were only 16 per cent of the senior executive teams in the US, 12 per cent in the UK, and a mere 6 per cent in Brazil. Also, only six CEOs of the Fortune 500 companies in the US were African-Americans in 2015. In India, the concentration of business ownership and top management positions among a few social groups is only too obvious. Also, men occupy more than 90 per cent of the board positions in India’s listed companies.

Such homogeneity is bad for business in globalised economies, particularly during low growth periods. At a time when companies could use new markets and radically new ideas and innovations, homogenous boards continue to recycle the same old thinking. The fraternity-based boards have low capacity for disruptive thinking because of the similar beliefs and experiences of their members. Diverse boards prevent sterile consensus and they tend to drive companies to renew themselves.

Globally, many studies have established a correlation between diversity and corporate performance. The management diversity study by McKinsey in 2014 concluded that diversity was a competitive differentiator and shifted market share towards more diverse companies. The study showed that the US companies with higher gender, ethnic and racial diversity in top management and boards earned 1.1 per cent higher EBIT and the UK companies with greater diversity had 5.8 per cent higher EBIT. In the US, for every 10 per cent increase in ethnic diversity in executive leadership, the EBIT improved by 0.8 per cent, the study revealed.

Gender diversity also has a significant bearing on corporate performance. According to a Grant Thornton study on relative performance of companies with women on board and those without, the NSE CNX 200 companies with women directors did better in 2014-15. The companies with men-only boards suffered $14 billion in opportunity cost, the report said. A Korn Ferry study of the 100 largest listed companies in 10 Asia-Pacific countries, including India, concluded that in 2015 the companies with more women on their boards were more profitable — the companies with at least 10 per cent women directors delivered 14.9 per cent return on equity while the companies without women directors delivered only 12.6 per cent ROE.

Diversity of the board is critical to see beyond the familiar, do things differently and also look for new things to do.  Directors with  diverse backgrounds and affiliations bring fresh knowledge and perspective to the decision-making table. For example, women directors can provide a very different perspective of the market and work dynamics, and directors from different regions or expertise can open windows to new opportunities and different ways of doing things.

Importantly, diversity does not allow casual consensus and ensures greater scrutiny of strategies and performance. Having women directors is particularly helpful in preventing adventurism, as women tend to care more about preserving the company. According to a study by Leeds University Business School, the chances of a company going bust are reduced by one-fifth if there are women on the board. In global companies, only diverse boards can appreciate nuances of different markets and avoid the costly one-size-fits-all strategies.

However, diversity is easier desired than done. Merely appointing the odd woman or people from different backgrounds or experts from other fields does not do it. Tokenism can be counterproductive, as diversity without meaningful empowerment may just maintain status quo while rendering decision-making more tedious. Also, appointing friends and acquaintances to achieve diversity tends to produce sub-optimal results, as the obligated members would avoid challenging their benefactors. Therefore, Diversity makes sense only if the incumbents show courage and imagination in diversifying the board and the top management.

The new business realities do not tolerate clubby or tribal decision-making. The smart companies realise that they will lose to the more diverse competitors and they are spicing up their boards with more variety.

The writer is director-general of the All India Management Association  

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