Commentary: Why diversity matters despite the recession

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While the business case for developing corporate diversity strategies has been well documented, many companies find in the midst of a global recession that professional development, recruitment and retention programs are some of the first aspects of their budgets to be cut.

Recent remarks by economists and leaders as varied as Nicholas Kristof and Bill Gates, attendees at the World Economic Forum in Davos, Switzerland, and the Journal of Economic Theory have brought an increased focus to the need to develop more robust initiatives to develop diverse corporate leadership.

Mr. Kristof wrote in the New York Times, "At the recent World Economic Forum in Davos ... discussions revolved around whether we would be in the same mess today if Lehman Brothers had been Lehman Sisters. The consensus ... is that the optimal bank would have been Lehman Brothers and Sisters."

He continued, "Wall Street is one of the most male-dominated bastions in the business world; ... Aside from issues of fairness, there's evidence that the result is second-rate decision-making."

A recent study on group problem-solving methodology, published in the Journal of Economic Theory by Lu Hong and Scott Page, found that groups consisting of more diverse individuals perform better than groups of homogenous individuals.

Thomson West estimates U.S. law firms are spending roughly $1 billion each year on training and professional development for their attorneys. By conservative estimates, it costs a firm $200,000 to replace a second-year associate.

While women have comprised 40 percent or more of law school graduates for the past two decades, only 17 percent of law firm partners are women.

Bar associations, consultants and researchers have found that inhospitable work environments, unexamined bias in evaluations, misplaced assumptions and unequal access to networks and other career enhancing resources prevent women from achieving parity with their male counterparts.

The two major reasons cited for women leaving law firms is that their careers are stalled and they don't see themselves getting ahead.

"No well-run business would do anything to limit its attractiveness to half of the talent pool [but that's exactly what law firms do]," said James Sandman, then-managing partner for Arnold & Porter.

The ability to provide the highest quality of service depends on winning the talent war. In 1991, Deloitte and Touche realized that too many of its talented women were walking out the door and they were not leaving to stay home and have children.

Despite the fact that women often earned higher performance ratings then men in their first years, the percentage of women decreased with each step up the career ladder, representing a major lost opportunity for the firm.

With senior management front and center, Deloitte made an airtight business case for cultural change, which included accountability, dialogues to examine gender-based assumptions in mentoring and client assignments, and the realization that work-life balance concerned both men and women.

With this renewed focus and the introduction of systemic initiatives to retain diverse talent, the firm's annual turnover rate fell significantly and the number of women partners and directors increased. The firm saved $250 million in hiring and training costs as it grew faster than any other large professional services firm at the time.

Similarly, IBM's Lou Gerstner made diversity a market-based issue. He recognized that a diverse workplace provided deeper insights into major markets, thereby helping IBM attract a more diverse customer base.

In terms of diversity, numbers do matter. A 2006 study of Fortune 1000 companies by the Richard Ivey School of Business found that a critical mass of three or more women on a corporate board caused a fundamental change in boardroom governance and enhanced corporate performance.

A similar study by the Conference Board of Canada found a direct correlation between the number of women on a board and the focus of that board on corporate governance and accountability. Both of these areas of focus resulted in increased corporate earnings and performance.

The Ivey study argued that women were high-performing board members and corporate executives because they bring a collaborative leadership style that benefits boardroom dynamics and they also are more comfortable approaching controversial issues and asking detailed and challenging questions of management.

Further, a 2007 Catalyst study found boards with the most women on them outperformed boards with the least women by 53 percent in return on equity and 66 percent in return on invested capital.

And with women representing the majority of the emerging college, business and law school graduates, consultants, business owners, investors and private wealth consumers, they are a powerful market of talent and customers that corporations cannot afford to underutilize.

Industries who consider diversity initiatives to be a discretionary line item are wise to measure what attrition of talented women is costing them. The experiences of Deloitte and IBM give some insights as to the long-term advantages of becoming the employer of choice for talented women.

As they say, "Change happens when the pain of staying where you are is greater then the pain of changing."

Perhaps, as discussed at Davos, one of the strongest arguments for the need for increased corporate diversity is the current economic crisis itself.

Most recently, a 2008 article in the Evolution of Human Behavior by Elsa Ermer, et al., outlined findings regarding men's risky decision making behavior in regard to resource allocation.

"Across two experiments, men who thought others of equal status were viewing and evaluating their decisions were more likely to favor a high-risk/high-gain means of recouping a monetary loss over a no-risk/low-gain means with equal expected value."

As we find ourselves navigating our way through this economic recession, we must ask not just how we can design ways for our companies to survive the current economic crisis but rather how we design our companies and market conditions differently so that this crisis and the catalytic mistakes that caused it do not occur again.

It is within this framework that companies would benefit from sustaining and increasing investments in corporate diversity initiatives, which will result in more robust group decision making and ultimately improved long-term corporate performance.

Heather Arnet is the executive director of The Women and Girls Foundation and can be reached at . M.J. Tocci is president of Fulcrum Advisors and can be reached at .


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