The power of diversity
Author: Kurt Bedell
Posted: May 27, 2018

The power of diversity

Research reveals that companies with a diverse workforce improve their bottom line.

AS THE BIGGEST bankruptcy and audit scandal of its time, the failure of the Enron Corporation in the early 2000s grabbed headlines around the world. The unraveling of this Texas-based energy company exposed a tangled web of offshore tax shelters, inflated stock values and questionable accounting practices orchestrated by its executives and board of directors.

What could have led to such systematic and widespread fraud in a major American corporation? And what can be done to prevent another Enron-like disaster from happening again in the U.S.? More regulation? Deeper government oversight?

Research by two Portland State faculty who study corporate governance suggest there may be a higher-level way to prevent the “groupthink” that may have contributed to Enron’s demise: instituting policies and practices that attract and retain a more diverse set of employees at all levels, from boardroom to factory floor.

Jing Zhao and Brian Bolton, who teach and do research in The School of Business at PSU, used big data in separate studies to show that companies that hire a more diverse workforce produce more innovative products and earn higher profits. And for local companies like Daimler Trucks North America, based in Portland, the benefits of a diverse workforce go far beyond the bottom line.

ZHAO worked with two colleagues from North Carolina State University to publish her results in a paper entitled “Do Pro-Diversity Policies Improve Corporate Innovation?” They scoured and analyzed data on publicly traded U.S. businesses, looking at new product introductions, patents and other company milestones. They found that companies that had pro-diversity hiring policies and practices produced more innovative products and services along with higher profits.

“With the extensive analysis we completed using publicly available data about U.S. corporations, we’ve been able to demonstrate that more diverse teams deliver more innovations in terms of new products, patents and citations, which in turn increases future firm value,” says Zhao, who teaches investment courses to both undergraduate and graduate students at PSU.

In other words, companies that promote a culture of inclusion, specifically attracting and retaining minorities, women, the disabled and LGBTQ employees, get a wider range of views, backgrounds, expertise and experiences that lead to more innovative problem-solving and more well-rounded business decisions.

“Top corporate leaders, academics and policy makers have long been wondering about the real economic benefits of corporate diversity policies,” Zhao says. “Many didn’t see how hiring a more diverse workforce positively affected shareholder value. Now we have strong evidence that creating a more diverse workplace today results in more innovative outcomes for companies tomorrow.”

Most surprising to Zhao in her research was to see that companies with diversity policies were helped the most during broad economic downturns.

“During the financial crisis of 2008 investors and consumers lacked trust in financial markets and corporations,” says Zhao. “My research shows that companies with diversity policies had an extra layer of protection that helped them weather the financial downturn far better than organizations that were less diverse.”

WHILE Zhao’s research focuses on new products, patents and citations as markers of innovation, her PSU colleague Brian Bolton looks at long-term investment performance. Like Zhao, Bolton uses enormous sets of data about U.S. corporations to draw causality relationships between diversity policies and positive business results. Bolton’s first book, Sustainable Financial Investments, looked at how corporate investments can be good both for a firm’s profitability and the environment, employees or community.

“Case studies or anecdotes are great for relaying specific examples, but the kind of work we do is based on thousands and thousands of observations,” says Bolton. “Our aim is to paint a picture of what’s happening through that large set of data rather than with one case at a time.”

Bolton’s big-picture study of companies looks for diversity of perspective among members of their boards of directors.

“Diversity of perspective leads to better outcomes,” says Bolton. “Period. It’s that simple.” Without it, tunnel vision can set in that can be very dangerous, he says. “Enron’s big downfall was its dominant culture, where aggressive risk taking—even if it resulted in failure—was rewarded. They suffered from a myopic vision of how performance and risk management happened that led to their eventual demise.”

DIVERSITY of perspective can be difficult to achieve. One potential solution is to set quotas for representation of certain populations on executive teams. Bolton points to Norway as an example of a country where legislated quotas enacted in 2003 forced the boards of companies in that country to hire more women.

“They went from 15 percent representation of women on corporate boards to 43 percent in just 10 years,” says Bolton. “The government didn’t care how they implemented it. They just wanted to see it done.”

Reception of the more diverse corporate boards has been on the whole positive. “Having a diverse board is now considered a ‘no brainer’ in Norway,” says Bolton.

One local company hasn’t needed any extra urging to incorporate diversity, equity and inclusion programs into how it conducts its business. As Portland’s third-largest employer, Daimler Trucks North America, formerly Freightliner Corporation, sees diversity in hiring as a strategic priority for its business.

“We think that a diverse organization provides a unique, intriguing and interesting work environment that’s rewarding for employees,” says David Carson, chief diversity officer at Daimler Trucks North America. “We aim to create a workplace where employees say, ‘I can bring my whole self. I feel welcomed. I feel included.’ For us, diversity is much more fundamental to our business than the benefit to our bottom line. It’s about creating a rewarding, challenging and stimulating environment for our people.”

Carson says Daimler has found that diverse teams collaborating on projects always creates a lot of different perspectives in the process of doing their work.

“It creates a lot more challenges for the teams to be able to harness all of those different perspectives,” says Carson. “But ultimately we get a better dialogue that results in better outcomes.

“The world is changing so quickly today,” he adds. “In businesses like Daimler’s the pace of change is faster than it’s ever been. Companies that are able to harness the collaborative power of a diverse group of employees are clearly a step ahead.”

Kurt Bedell is a staff member in the PSU Office of University Communications.