New research: Companies with diverse leadership yield higher profits

18/01/2016 at 15:06 Leave a comment

Diversity

Let’s start with the good news: The conclusion. The companies in Denmark with the most diverse leadership earn on average 12.6 percentage points more than the companies with the least diverse leadership. Not only that, the study also concludes that companies with the most diverse leadership average an operating margin that is 5.7 percentage points higher than their competitors’. On the other hand, the ten companies with the lowest degree of diversity in leadership earn an average of 5 percentage points less than their competitors. The conclusion is clear; diverse leadership yields significantly bigger profits.

 Screen Shot 01-18-16 at 12.28 PMScreen Shot 01-18-16 at 12.28 PM 001

How did we arrive at this conclusion? In the survey, we collected information about 6.012 leaders across 321 large and medium-sized Danish companies in Denmark. We then ranked them by how diverse their leadership is according to four diversity parameters: 1) gender, 2) seniority (meaning length of service within a company), 3) ethnicity and 4) age. We then collected operating profit (EBITDA) data on all the companies.

We got the data from three data sources:

  1. LinkedIn, which was used for collecting diversity data on managers within Danish companies. Almost 1.8 million Danish profiles are registered on LinkedIn, and large and medium-sized enterprises accounted for an exceedingly large share of those profiles. For each company, up to 30 profiles were obtained across management tiers categorized as ‘manager’, ‘director’, ‘VP’, ‘CXO’ and ‘Board’. Companies with fewer than nine profiles were excluded in order to guarantee a statistically valid basis.
  2. Bisnode, which collects a large volumes of business information from official sources such as the Danish register of companies, the Danish Business Authority and Danmarks Statistik.
  3. Annual reports. Finally, we collected financial data and other information from the companies’ own annual reports. 

We have developed a model – Diversity Profit Chain (a modified version of the Service Profit Chain) – which is a robust explanatory model, which demonstrates how internal processes affect employees, customers
and the company bottom line. We have adapted the model so that the focus is on how
diversity in leadership influences these specific factors. The model is shown below. This is important because as you know, correlation is not the same as causality. We have linked other published studies to the model as a way to validate the conclusion of our investigation. Diversity Profit Chain can be used as the basis for any business case for diversity.

Screen Shot 01-18-16 at 12.29 PM

Source: proacteur, 2015

Basically, the measurable and value-creating impact is achieved in two ways:

1) diverse leadership results in a more diverse organisation, which in turn creates a number of positive outcomes for the organisation, customers and shareholders.

2) the management as a group works more innovatively, is more dynamic in its decision-making, more productive and stable if its composition is diverse. In short, leadership decisions and the effect of leadership are better.

As stated earlier, diversity impacts the entire organisation, but not only positively. In general, companies should expect more conflicts in diverse organisations and teams. Diversity is in no respect a one-way track to better financial performance, but the results are undeniable: diverse leadership influences the organisation’s financial performance in a positive direction.

We have always believed that diversity is good for business. Now we have measured and documented that the value added in terms of money actually even bigger than expected.

Download the full report: “A diverse leadership yields higher earnings” here:

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