The commercial case for diversity and inclusion

Building the commercial case for companies to become more diverse and inclusive which can help to deliver better financial performance and more positive social outcomes.

18 Feb 2021

At a glance

The world is experiencing a period of profound economic and social change. The so called ‘Fourth Industrial Revolution’ represents a period of structural change driven by technologies such as automation and robotics, artificial intelligence, and a proliferation of big data. The outcomes of this revolution – commercial, economic, environmental, and social – hinge on how people use these technologies.

In the Fourth Industrial Revolution, diversity and inclusion will become more important. In this piece we build the commercial case for companies to become more diverse and inclusive. We consider some of the misconceptions that hinder firms from becoming more diverse, particularly private firms that have fewer resources than large listed multinational companies . And we suggest practical steps or principles for firms of all sizes to become more diverse and inclusive, which can help to deliver better financial performance and more positive social outcomes.

How can diversity and inclusion drive better financial performance

We look at three channels for diversity and inclusion to impact financial outcomes: labor markets, innovation, and market access.

Labor markets

Labor markets

Structural changes in the Fourth Industrial Revolution are expected to have major implications for global labor markets. In a world where machines and humans increasingly work together, the benefit of having the right worker in the right place at the right time will likely increase. Having strategies to attract diverse workers to fill talent gaps —regardless of background—will become more important.

Companies that encourage gender diversity and inclusion have been shown to benefit commercially compared to peers. A 2020 McKinsey report concluded that firms with first-quartile gender diversity on their management teams had a 55% chance of delivering above-median EBIT margins (Fig. 1, compared to a 44% chance of outperformance for the bottom-quartile firms for gender-diverse executive boards)1.

The same study also found that firms with ethnically and culturally diverse leadership teams in the first quartile had a 59% chance of delivering above median EBIT margins, compared to a 43% chance for the bottom-quartile firms.

Fig. 1 – Gender diversity can drive higher chance of outperformance

Innovation

Innovation

In a world of rapid change, the benefit of having the right ideas for the right markets at the right time will likely increase. Crucially for business owners, entrepreneurs, and executives, the costs of not being innovative in a period of profound societal change will also likely rise.

Research concludes that diversity—whether of thinking, gender, demography, or other attributes—can enhance innovation. One study found diversity can boost innovation by 20% and reduce risks (which may be overlooked in “groupthink” or monocultures) by 30%2. In periods of structural change like the Fourth Industrial Revolution, new applications of technology can create previously unimagined risks. Diverse teams may bring a richer perspective that can identify such risks and manage them effectively. Less diverse teams may rely on their status quo thinking or be slower to change.

Diversity benefits businesses because it can bring together people to solve complex problems. These problems require different skills or approaches: analyzing evidence, weighing options, predicting and planning for outcomes, accounting for the impact on people; building of processes; and risk management. It is unlikely any person excels in each of these six fields. Collective intelligence of different abilities and a variety of social connections is therefore important. One study found that building demographically diverse teams can spur innovation, racial diversity can stimulate curiosity within the team (although the research did not distinguish between ethnicity and race), and gender balance can support greater turn-taking in conversing and sharing ideas3.

Diversity in management can also yield innovation benefits. A 2018 study from the Boston Consulting Group found a strong and statistically significant link between management team diversity and innovation revenues. Firms with above-average diversity delivered 45% of total revenues from innovation, compared to 26% for those firms with below-average diversity among leaders (Fig. 2)4.

Fig. 2 – Diversity of leadership can spur greater innovation

Market access

Market access

The new technologies of the Fourth Industrial Revolution— especially communication technologies—have increased the benefits of diversity and inclusion as a tool to access new markets. It is becoming more important to have the right people to appeal to diverse, values-driven customers looking for personalized goods and services. Intangible assets, such as brand value, constitute an increasing share of company value, as the Fourth Industrial Revolution favors capital-lite industries. Consumer experiences will increasingly shift to digital ones, raising the potential importance of brand value and reputation over convenience or the physical location of a store. The benefits of being a diverse and inclusive brand —and the costs of having a prejudiced brand—are rising.

Previously, many businesses catered their products and services to the majority to target the most profit for the least risk. This operating model could exclude minorities and fuel prejudice. Today’s businesses increasingly must include and serve a more diverse audience5. Today’s consumers increasingly demand personalized goods and services that match their needs or align with their values. The idea of a “one-size-fits-all” offering is becoming irrelevant. Technology has enabled platform companies to democratize content and enjoy economies of scale where the marginal costs may be close to zero. An example would be how visual entertainment has evolved. Gone are the days when the monopoly of studio-produced television catered to a Western, white, middle-class, male audience and was produced by Western, white, middle-class, males. Today, democratized content, produced by diverse groups and posted on video-sharing platforms at zero marginal cost, can be supported by crowdfunding and turned into a full series through a streaming platform.

Consumers are also prepared to pay for goods and services that reflect their values, such as a business's open commitment to diversity and inclusion. A 2015 survey from the Nielsen Company concluded that 68% of shoppers would be happy to pay a price premium for a sustainable product. This share is up from 50% two years earlier. And companies with a demonstrable commitment to sustainability topics experienced four times higher sales growth versus less socially conscious peers6.

Challenges to diversity and inclusion – and how to overcome them

The commercial benefits of being a diverse and inclusive business are not just theoretical. A large and growing body of literature presents the evidence for more diverse businesses being more profitable. This does not mean small and mid-sized private enterprises find building a diverse and inclusive business easy. Becoming more diverse and inclusive can, in practice, lead business owners and entrepreneurs to make well-intentioned mistakes. 

We discuss three types of diversity and inclusion challenge—or misconception —and suggest some alternative perspectives and potential solutions.

There's no "one size fits all" approach. Legal, political, and social conditions vary considerably across countries. Every business will therefore have a different strategy for diversity and inclusion.

Diversity and inclusion do not have equal commercial and societal impact across industries or sectors either. Diversity and inclusion yield greater benefits in the knowledge economy—in sectors such as the legal, financial, creative, or technology industries—and in high-value-added service sectors. Diversity and inclusion may yield fewer (commercial) benefits for businesses with homogeneous products or services or where a firm follows a consistent, repetitive process—the roles most ripe for automation in the Fourth Industrial Revolution.

Business owners and entrepreneurs should not underestimate the roles of middle managers, teams, and employees in driving diversity and inclusion.

Over-reliance on top managers and dedicated diversity and inclusion departments to drive change can be counter-productive. One 2013 study found that having a diversity department—mandated by top managers—may not drive grassroots organizational change. Employees may think diversity is not one of their objectives because someone else is managing it7.

A 2016 meta-study of 260 diversity training studies concluded that diversity training is most impactful when it is included with other practical diversity practices. And studies conclude that employees attending diversity training feel more motivated (and more willing to implement their learnings) if the company’s own managers deliver the training8.

Unconscious biases and prejudices can mean that certain groups of people are under-represented, overlooked, or discriminated against in hiring and promotion decisions. These biases can be reinforcing such that it requires cultural change to break the mold of a monoculture. Diverse and inclusive companies work to reduce these biases and prejudices by designing policies that promote equality of opportunity.

Positive or affirmative action programs—such as quotas for applicants from particular backgrounds—may help to boost equality of opportunity but with limitations. Certain types of affirmative action programs cannot reduce prejudice against invisible differences. A quota for hiring of LGBTQ+ employees in theory may be a quota for “out” LGBTQ+ employees in practice.

Affirmative action programs for a particular group also risk overlooking “intersectionality,” or the combination of different characteristics. Mandating for a fixed proportion of women in board or executive management teams may not be sufficient for diversity of thought if managers still all share the same ethnicity, educational background, or workplace experiences. Teams must be sufficiently inclusive and tolerant of difference to reduce the risk of peer pressure and conformity with the dominant group characteristics.

Ultimately, employees each have different talents and points of development. Diversity and inclusion maximize the chances that the right person gets a job independent of factors that are not relevant for job performance. Well-designed diversity and inclusion strategies help to overcome the unconscious biases and rules-of-thumb that all people have.

Three practical tips to promote diversity and inclusion in your business

There is no one-size-fits-all strategy for any business to become more commercially successful through diversity and inclusion. Nevertheless, we identify three practical tips for business owners, executives, and entrepreneurs to consider when designing a diversity and inclusion process for their firm. 

Interested to learn more? Start a conversation with us to find out how diversity and inclusion can help you deliver better financial performance and more positive social outcomes.

Get in touch

If you find this topic of interest and would like to learn more, we are here to help you. Contact a UBS advisor to start your conversation.

1Hunt, , Prince, Dixon-Fyle, and Dolan (2020). “Diversity wins. How inclusion matters.” McKinsey and Company [online], May 2020. Available from: https://www.mckinsey.com/featuredinsights/diversity-and-inclusion/diversity-wins-howinclusion-matters#

2Please see the UBS Chief Investment Office report The Future of humans for more on the longer-term investment implications of the Fourth Industrial Revolution. Available from: https://www.ubs.com/global/en/wealthmanagement/chief-investment-office/investmentopportunities/investing-in-the-future.html

3Bourke, J. (2016), op.cit.

4Lorenzo, Voigt, Tsusaka, Krentz, and Abouzahr (2018) “How Diverse Leadership Teams Boost Innovation”, BCG Henderson Institute [online], 23 January 2018. Accessible at: https://www.bcg.com/en-ch/publications/2018/howdiverse-leadership-teams-boost-innovation

5Donovan (2020). Profit and Prejudice: The Luddites of the Fourth Industrial Revolution, Routledge Group: London and New York.

6Kunkel, Carter, et al (2020) The Future of humans, UBS Chief Investment Office GWM, 16 September 2020. Available from: https://www.ubs.com/global/en/wealthmanagement/chief-investment-office/investmentopportunities/investing-in-the-future.html

7Kaiser, C. R., Major, B., Jurcevic, I., Dover, T. L., Brady, L. M., & Shapiro, J. R. (2013). Presumed fair: Ironic effects of organizational diversity structures. Journal of Personality and Social Psychology, 104(3), 504–519. https://doi.org/10.1037/a0030838  quoted in Kaplan (2020), op.cit.

8Kalinoski, Z. T., Steele-Johnson, D., Peyton, E. J., Leas, K. A., Steinke, J., & Bowling, N. A. (2013). A metaanalytic evaluation of diversity training outcomes. Journal of Organizational Behavior, 34, 1076–1104, quoted in van Knippenberg et al. (2020), op.cit.