As part of our recent “A diverse leadership yields higher earnings” research, we concluded that companies with diverse leadership perform better financially. But why is that? And how does diversity in the workplace create value for customers and shareholders?
The impact of diversity in the workplace has been researched several times. By far the majority of these studies have not been validated, and their individual conclusions can therefore be contested.
However, taken as a whole and supported by case studies from and by organisations that embraces diversity in the workplace, we believe that the overall picture is very compelling.
For the sake of explaining why companies must embrace diversity in the workplace we have adapted the traditional Service-Profit Chain model to what we call the Diversity Profit Chain. A model that focuses on how diversity in leadership, based on the relevant studies, influences the key organisational factors such as leadership, employees and customers.
According to the 2004 study, How knowledge heterogeneity influences managerial performance and innovativeness, a management with a high degree of knowledge-based diversity generally achieve higher management team performance. Similar dynamics have been found in the 2009 meta study, demonstrating that diverse teams are more innovative and come in on-budget and on-time. Even though this study investigated teams generally, there are not any doubts that the same dynamics can be applied to management teams.
The variation of ethnicity and culture within a management team has proved also to have positive impacts on the outcomes. This 2011 study showed that management teams possessing high cultural intelligence gained through ethnic and national diversity are higher achievers.
Diversity within leadership, and the organisation as a whole, results in higher employee satisfaction, a Gallup study shows. In their survey, 60% of staff working for companies with a high level of diversity responded that they are engaged in their work. This is strongly contrasting to the responses of employees, working for companies with a low degree of diversity. Here, only 11% of the employees felt engaged with their work.
In context with business profitability and customer satisfaction, employee engagement is immensely important because it results in many positive, valuable and demonstrable achievements for organisations, while being one of the aspects that diverse leadership affects directly.
In our recent study, Service Management 3.0: Linking Employee and Customer Engagement, which is one of the largest-scale and most comprehensive studies of its kind, we also documented the strong correlation between employee engagement, customer satisfaction and profit. Similarly, it has been documented that engaged employees are more productive, and that organisations with high engagement generate higher profits.
This led Aon Hewitt to conclude that organisations in the USA with high levels of engagement posted shareholder returns 22% higher than the average. Additionally, a 2012 study concluded that companies with high levels of engagement are 4.2 times as likely to generate profit as their competitors.
So the fact that diverse leadership results in higher levels of engagement makes it a powerful measure in terms of achieving a multitude of commercial benefits.
Sickness absences and retention
Strong evidence also shows that diversely composed teams display a greater retention rate and reduced sickness absence rate. This results in increased stability, promotes interpersonal relations and results in better-perceived services among customers. In this context, our study Diversity in Outsourcing uncovered that the sickness absence rate and the turnover rate among management was twice as high among those born in Denmark as opposed to those not born in Denmark. Generally, we saw that the retention rate was higher in teams with diverse composition.
Diversity in the workplace is also attracting talents. A danish Stepstone study from 2013 found that 60% of new generation candidates are attracted by companies with a diverse profile. For these candidates it was “very important” or at least “important” that their workplace is inclusive of everyone regardless nationality, religion, sexual orientation, gender and disability.
Harvard Business Review published a study showing how diversity in leadership both unlocks innovation and drives market growth. Other studies also demonstrate that the more diverse organisations are, the greater their prospects are of taking out new patents, resolving complex problems and realising innovations.
Services & Customers
As noted earlier, diversity yields brighter ideas, more perspectives and deeper insights into the market which allow good services to be adjusted to the target audience. In return, better insight into the market results in higher earnings. In a study of 800 business units within two large service enterprises, conducted by Gallup in 2014, the diverse units earned 19% more than non-diverse units. Once again, this also confirmed that a diversely composed management results in a more customer-oriented organisation.
Diversity leaves impacts throughout the whole organisation. The employees feel more engaged in diverse working environments, diversity increases the employee retention rates while on the other hand reduces sickness absence, the talent attractiveness tends to improve and companies with diversity in the workplace manage to leverage better services and customer experiences.
While diversity in no respects should be considered as a one-way track to better financial performance, the results are undeniable: Diverse leadership influences the organisation’s financial performance in a positive direction.
To learn more about diversity management and how it positively can influence your company's bottom line, please download our newly released White Paper: Diversity Management provides higher earnings.
To extend your knowledge about how service employee engagement drivers higher customer satisfaction, please download our Whitepaper: Linking Customer Experience with Service Employee Engagement.
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