More diversity brings increased profitability

2006

Companies with more racially diverse workforces are often better and more profitable performers than those with a more homogeneous makeup.

A study by Cedric Herring, professor of sociology at the University of Illinois at Chicago, suggests that diversity produces tangible benefits for a business.

Herring's study, "Does Diversity Pay?: Racial Composition of Firms and the Business Case for Diversity," found that businesses with greater racial diversity reported higher sales revenues, more customers, larger market shares, and greater relative profits than those with more homogeneous workforces.

The study, presented at the American Sociological Association annual meeting in Montreal, analysed data from a national sample of firms across the U.S.

"These results suggest that not only is having a diverse workforce a good and socially responsible thing for companies to do, but in addition, organizations that broaden their pool of qualified workers also reap material economic benefits from doing so," Herring said.

He added that racial diversity improved performance even after controlling for such factors as a firm's legal form of organization, gender composition, size, age, type of work and region.

According to his analysis, average sales revenues of organizations with low racial diversity were approximately $3.1 million, compared with $3.9 million for those with medium diversity and $5.7 million for those with high diversity.

Similarly, the average number of customers for businesses with high racial diversity was 45,525, versus 38,254 for firms with medium diversity and 23,415 for companies with low diversity.

Companies with high racial diversity were also more likely to report higher-than-average market share (72 per cent) and profitability (72 per cent), compared to companies with medium diversity (66 per cent and 61 per cent, respectively) and low diversity (54 per cent and 52 per cent).

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Older Comments

So why isn't this consistent with more profitable firms being able to afford diversity?

Greg

Correlation does not prove causation. It's more likely that a highly profitable firm would be able to afford the luxury of hiring 'diverse' candidates.

Han Xu

This is an excellent and timely piece of research, adding weight to the growing business case for diversity. The next step in the process is to get people and organisations thinking beyond 'visible' diversity (including race and gender). Diversity is about difference, and the value of diversity is about the power of collective difference. That value isn't just about the visible side of diversity: rather, it's about harnessing difference of ideas, approaches and backgrounds, which goes beyond race (and gender.) If a board were composed of people from different races and genders who had exactly the same educational background, for example, I would anticipate the value of that 'diversity' would be minimal. The War For Diverse Talent, due out shortly, provides a further insight into the power of collective difference, looking beyond visible diversity, and exploring mathematical and theoretical proofs for the power of diversity.

Raj Tulsiani