Management team diversity linked to improved financial performance once more

Companies with above average management level diversity gain a 19% premium on innovation related revenue gain, a new report shows. The research found that diversity with a holistic approach is more likely to derive gains, with enabling factors, such as inclusive leadership, further improving the financial boost.

While much has been written of the business case for diversity, little has been said of it when relating directly to innovation. New technologies are opening up large tracts of possibility for current and new businesses, in terms of new products and business models alike. Innovation continues to be a way of differentiating offerings, improving cost profiles and surviving market disruptions. Being innovative, however, remains no easy feat – and while companies are expending considerable resources in everything from innovation centres to bolt-ons, winning strategies continue to involve talent, luck and determination.

While innovation is likely the result of a holistic approach to research and development, a number of enablers have been identified. A new report from The Boston Consulting Group, titled ‘How Diverse Leadership Teams Boost Diversity’, has considered how far diversity in innovation leadership can drive innovation outcomes. The survey involved 1,700 respondents from across 8 developed economies.

The research analysed diversity across six dimensions and innovation in terms of investment and outcomes and found that diversity is an increasingly prominent issue across the respondents. This was cited by 75%, while a strong correlation was noted between innovation outcomes and diversity in management teams – companies reporting above average diversity in their management teams, also reported a 19% premium on revenue derived from innovation when compared with companies with below average diversity in their management teams.

More diverse than average organisations were more broadly found to have improved financials compared to those less diverse, with EBIT margins around 9% higher on average. The firm further found that while each of the diversity categories is correlated with improved outcomes, being of another nation of origin background added most significantly to performance.

Hypothetical potential

To better understand the impact of diversity on outcomes, the firm created a fictional company with around 50,000 employees – around 1,500 of whom are at management level. The research then considered how changing the makeup of the management team would impact diversity outcomes.

Using the hypothetical company, analysts explored how changes to the makeup of the management team would affect innovation revenue (with a 1% target). The research shows that the hiring of 23 people of different nationalities would improve innovation revenue by 1%, with new 38 female managers producing a similar result. In addition, the research showed various additive effects, with various combinations of elements (for instance, female of other national background) giving rise to synergistic improvements in revenue improvement.

Aside from expanding the diversity of a company at the management level, a variety of additional management techniques also surfaced, which improved outcomes for more diverse businesses and unlocked the potential of diversity.

Factors cited as enabling factors include participative leadership, cited by 58% as important but present at 36% of companies. Strategic priority, whereby CEOs visibly support diversity, cited by 56% as an important factor and practiced by 35%. Frequent communication, cited by 47% as important and 35% as practiced. Openness to new ideas and fair employment practices came in at practiced by 35% and 38% of employers respectively.

Remarking on the results, Rocío Lorenzo, a partner at BCG and coauthor of the report, said, “Diversity offers organizations a wide range of benefits, and our analysis shows that having a more heterogeneous team can deliver measurable gains in innovation and financial performance. Multifaceted teams offer a robust range of perspectives, and this allows organizations to formulate strategic solutions that can help them efficiently accomplish their goals, overcome challenges, and bring new ideas to the table.”