18 Mar 21
18 Mar 21
Why diversity on the leadership team is more than just the ‘right thing to do’

In January, I wrote about the importance of listening deeply to customers as a great way to determine if you can solve their problem. I also mentioned the importance of listening to your team, since one person never has all the answers. 

I want to go a step further this month to argue that if all your leaders think the same way, listening to them will get you nowhere in the long run. Homogeneity of thought creates nothing but an echo chamber in which ideas reverberate back and forth, hiding all the blind spots that may exist. How can innovation result from that?

For true enlightenment leading to success, a company needs leadership teams with a diversity of backgrounds, experiences and viewpoints. This is not conjecture; it is proven.

In 2019, McKinsey released an analysis showing that companies in the top quartile for gender diversity on executive teams were 25% more likely to enjoy above-average profitability than companies in the fourth quartile. Those in the top quartile for ethnic and cultural diversity outperformed those in the fourth quartile by 36%.

At ELITE, we’re finding something quite similar. Based on our data for the 1,600 global companies in our network, the higher the percentage of female managers and directors, the higher the annual average return on equity (ROE). Over a three-year period, companies with 30% female managers and directors generate an ROE of 27% compared to 22% for companies with only 20% female managers and directors.

Why? For one thing, most companies don’t serve one gender or demographic, but many. A diverse leadership team inherently has more insights into the perspectives and behaviors of the buying public. These insights break apart the echo chamber and allow the kind of free flow of ideas and creativity that solves problems – and creates products that resonate.

There’s another very practical reason for diversifying executive teams and boards: Investors and potential investors are demanding it. 

In December, the Nasdaq asked the Securities and Exchange Commission for permission to require at least one woman and one underrepresented director on each company board in order to be listed on the stock exchange. 

Goldman Sachs has said it will now require companies it helps take public to have at least one diverse board member. 

And investors are increasingly considering diversity and inclusion initiatives as part of a company’s overall ESG (Environmental, Social and Governance) performance. 

Given the data and the clear trend that is being established, , , it’s difficult to understand why, even as corporate boards become more diverse, a majority of corporate leadership teams remain white and male.

Small and mid-sized companies may not have their sights set on Nasdaq (yet). They may not even be ready for an investor (yet). But just like a Fortune 500 company, they all are focused on solving problems, building products and meeting the expectations of a broad and diverse marketplace. 

A long time has passed since doing the right thing was the only reason for diversity, equity and inclusion within a company. Today, companies need to realize that success begins when all voices are brought to the table.

Tom Tyler, Head of ELITE Americas