Prioritizing Diversity Can Lead to Better Business Decisions — If Done Correctly

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Diversity goals and business goals are inextricably linked; diversity translates into better business results and more innovation. Yet, we have seen that increasing pressure to address diversity concerns from customers, employees, and the general public has resulted in executive teams responding quickly and acting out of fear, without a clear, comprehensible rationale rooted in the needs of the organization. Without this grounding, their efforts have been reactive and scattershot, and will likely lack the stickiness we know is necessary to enact long-term systemic change.

DE&I must be recast as a strategic lever aligned with business success

For changes in the employer-employee relationship to be adopted widely and to stick, a given effort must be symbiotic with both business and people strategy. Without that linkage, and in the absence of a clear business rationale, regulations have been the primary lever for improving key employment areas, such as minimum wage laws, OSHA regulations regarding working conditions, and anti-discrimination laws. Before these regulations, the broader business community failed to link such policies to a positive impact on earnings and productivity, and companies effectively waited to be regulated.

For this wave of critical work to be done in the absence of regulatory changes, CEOs must understand that diversity advocates are, in fact, business advocates, and that prioritizing business outcomes necessarily means prioritizing diversity.

Diversity improves decisions. Improved decisions build better businesses

Over time, success is a direct result of only two things: luck and the quality of the decisions that a business makes — decisions to enter or exit new markets; decisions about how to prioritize efforts when resources are constrained; decisions on who to hire and fire; and so on. The quality (or lack thereof) of those decisions compounds over time to yield varying business results. Jim Collins points out that even when a business encounters luck, it still needs to make decisions about how to take advantage of this luck.

Cognitive diversity is a significant contributor to decision quality. Research, such as that done by Amos Tversky and Nobel Laureate Daniel Kahnemann, and summarized in Kahneman’s Thinking, Fast and Slow, clearly demonstrates that diversity of experiences and diversity of perspectives helps groups to avoid myopia, to examine risk factors and unobserved opportunities; and to cast situations in new light.

In her research, the late Professor Katherine Phillips, most recently of Columbia University, shared myriad examples of racial and gender diversity driving more innovation, quantifiably higher quality work, and objectively better decision and outcomes across business and societal contexts. For example, a 14-year study of the S&P Composite 1500 index revealed that “female representation in top management leads to an increase of $42 million in firm value.” Additionally, in controlled studies of small groups in action, Professor Phillips, alongside Stanford professor Margaret Neale, found that racially diverse groups far outperformed racially homogenous groups in solving an exercise that involved exchange of information, creativity and decision making.

Clearly, diverse teams help to drive improved business performance.

The mechanics of diversity in action

In his research, Kahneman finds that groups tend to overestimate their strengths and underestimate their blind spots. They rely heavily on best-case scenarios, seeing the world through the lens of their own naturally narrow experiences. This leads to missed goals and other mistakes, a phenomenon particularly pernicious among groups that lack diversity, because team members are more likely to have overlapping experiences, limiting the breadth of the perspectives from which they can draw.

While the intuition is that more heads are better than one, teams that lack cognitive, racial and gender diversity run the risk of becoming many heads with a singular, unified perspective. Rather than producing higher quality solutions, a team with homogenous members runs the risk of increased confidence in their decisions without the concomitant increase in the quality of the decisions they produce, cementing decisions and beliefs about the world that would benefit from being challenged. In short, a homogenous team is often energized and excited by how much agreement they are experiencing, which is increasing the certainty of their (sometimes flawed and ill-informed) decisions.

Having smart people on your team doesn’t make this problem any better. The ability to spot this type of groupthink is not improved by knowing about groupthink, nor is it a result of higher intelligence. Psychologist Keith Stanovich has found that blind spot bias, a bias in which the individual believes that they are free from bias, is particularly insidious and is positively correlated with higher IQ and more quantitatively-skilled individuals.

Yale professor Dan Kahan has similarly found that smart people are more susceptible to motivated reasoning, a bias where people reason about information and data to support their beliefs rather than considering the information objectively. One hypothesis is that more intelligent people fall prey to these biases because they are so skilled at taking disparate information and crafting it into a credible narrative, not to fool or manipulate other people but to fool and manipulate themselves. Diverse voices in the room observing flaws in the logic of a decision can offer an antidote to cognitive bias.

A prescription for improving decision making by mitigating groupthink is to surface the outside view as much as possible, accessing what is true of the world independent of your own perspective and considering how others might view the situation at hand. The easiest way to get to the outside view is to get access to as many diverse perspectives as possible, expanding the differing models of the world that you are exposed to.

That is why actually having diverse perspectives on your team is so crucial to excellent decision making — those diverse perspectives give leaders access to new ideas, perspectives, solutions, and models that are outside of those they might naturally consider. Diversity is not only a socially just business strategy, it is the right thing to do to yield the best business decisions and the best business results.

This inextricable linkage between cognitive, racial and gender diversity; and business outcomes means that diversity is a strategic initiative for any business. As such, business leaders must position it that way in their organizations; incorporate it into annual and quarterly planning just as they would any other business goal; and build higher-performing diverse organizations.