Diversity’s Business Case Doesn’t Add Up

By Fay Hansen

Apr. 2, 2003

Step right up, ladies and gentlemen, for the latest in diversity goods. Howabout a game of Diversity Bingo, or perhaps a camp shirt with a diversity logo?Consider buying a box of diversity lapel pins as a reminder to employees tospend time “honoring differences” or experiencing an “inclusionbreakthrough.” Be prepared to break out a Diversity Tool Kit–“a completetraining-program-in-a-box”–or perhaps a corporate fable such as A Peacock inthe Land of Penguins, or a copy of the video From Sex to Religion … andEverything in Between.

    The multibillion-dollar diversity industry is thriving in corporate America.But before you spend another dime on your diversity program, carefully considerthis conclusion reached by Thomas A. Kochan, one of the most respected humanresources management scholars in the country: “The diversity industry is builton sand,” he declares. “The business case rhetoric for diversity is simplynaïve and overdone. There are no strong positive or negative effects of genderor racial diversity on business performance.”

    Kochan, a professor of management at MIT’s Sloan School of Management,bases his conclusions on a recently completed five-year study of the impact ofdiversity on business results. The investigation involved a detailed examinationof large firms with well-deserved reputations for their long-standing commitmentto building a diverse workforce and managing diversity effectively. It built ona growing body of research that raises painful questions for companies that pourmoney into diversity programs, and for the diversity industry that supplies themwith a dazzling array of diversity products.

    At a time when charges of racial harassment are way up, and racialdiscrimination class-action lawsuits are enjoying a renaissance, diversityprograms are flourishing. Organizations appoint diversity officers. They hirediversity consultants, coaches, and trainers. They adopt diversity scorecards,benchmarks, and best practices, and send executives to diversity conferences andleadership academies. But despite the astonishing number of products andservices–ranging from the worthy to the banal–one item is in very shortsupply: hard metrics for measuring performance results or the return ondiversity spending.

    For years, the industry has claimed that diversity programs yield higherperformance and greater productivity, but the evidence offered is largelyanecdotal or based on limited data collected through questionable methods. Thelink to the bottom line, an entrenched part of diversity rhetoric, remainslargely undocumented. Of the 20 large corporations with well-establisheddiversity programs that Kochan initially contacted for his study, none had everconducted a systematic examination of the effects of their diversity efforts onbottom-line performance measures.

    “Some companies have completed limited studies at a divisional level, butthere are no formal reports with valid and scientifically determined numbers,”says Michael C. Hyter, president and CEO of J. Howard & Associates, a largediversity consultancy in Boston. “Organizations like having the flexibility ofnot being put in a box about whether this does or doesn’t work. Too often,they are given a lot of credit for their efforts anyway.”

“Diversity can enhance business performance, but only if the proper training is in place and the climate and culture support it.”

    If there is little evidence on performance results, there’s even lessindication of effectiveness in the aggregate compliance data. Although mostdiversity programs trace their roots to compliance efforts and, in some cases,the struggle against racism, the number of job-discrimination charges filed withthe Equal Employment Opportunity Commission, including race-based charges, hit aseven-year high in 2002. The recent increase in charges can be linked to therecession–work-related lawsuits typically rise during economic downturns–butthere was no evidence of improved compliance before the recession hit. Many companies that are routinely praised for their diversityprograms–including Coca-Cola and Ford Motor Company–still find themselves incourt fighting epic racial-discrimination lawsuits. Wal-Mart, ranked number oneon Fortune’s prestigious “America’s Most Admired Companies” list for2003, is facing the largest sex-discrimination lawsuit in U.S. history, with asmany as 500,000 plaintiffs. Charges of racial harassment filed with the EEOChave increased fivefold in the past decade.

    The diversity industry and its corporate clients continue to promotediversity programs as a “strategic imperative” that boosts performance byunleashing the creative power of diverse groups. As Xerox Corporation chairmanand CEO Anne M. Mulcahy observes, “Somehow, diversity breeds creativity.”Unfortunately, the “creativity” that some Xerox employees demonstrated wasclearly not what Mulcahy had intended. They fashioned a workplace display ofAfrican-American dolls with nooses around their necks, igniting a lawsuitagainst the company in 2002. EEOC charges against the company in the same yearincluded racial discrimination in promotions and compensation and systematicretaliation.

    Xerox launched its first workplace equality efforts almost 40 years ago. Thecompany draws 30 percent of its workforce from racial minorities and winsnumerous awards for its diversity program. Yet it still faces multiplediscrimination lawsuits. The number of racial-harassment cases involving hangman’snooses has exploded in recent years, according to the EEOC, with incidentsreported at dozens of leading companies, including Home Depot, Lockheed Martin,Boeing, Texaco, and Northwest Airlines.

State of the industry
    “Diversity has been promoted on thebasis of a very weak construction of the business case and on grounds ofsocial justice, but to be successful, programs must be built on scientificevidence,” Kochan says. Without this evidence, especially in the context ofbudget constraints forced by the economic downturn, diversity programs may comeunder the same scrutiny routinely turned on most business functions.

    Hyter believes that an industry shakeout is on the horizon. “Five or 10years from now, there are only going to be a few serious practitioners left–thosewho have demonstrated the ability to help organizations with measurable results,”he says. Kochan believes, however, that the change must begin in human resourcesmanagement. “Consultants sell what they are good at,” he says. “They willshift what they provide when human resources executives become moresophisticated in what they demand.”

    Kochan’s study builds on earlier academic research that questions theeffectiveness of diversity-management programs and notes the unwillingness ofmost companies to explore the issue of results. “Meaningful discussions andanalyses do not occur because companies are concerned about legal issues andbecause people simply want to believe that diversity works,” Kochan says. “Thereis a great deal of defensiveness. Even when diversity is managed well, theresults are still mixed. The best organizations can overcome the negativeconsequences of diversity, such as higher turnover and greater conflict in theworkplace, but that still does not mean that there are positive outcomes.”

    Luke Visconti, partner and cofounder of DiversityInc, which runs one of thelargest Web sites in the industry, dismisses Kochan’s conclusion. “It defiesgravity and flies in the face of logic,” he says. “I can’t even imaginehow someone could come up with that conclusion unless there was no diversityamong the people doing the study.” (Kochan’s team, in fact, is a diversegroup.) Visconti’s Web site includes extensive resources on diversity, butdoesn’t reference any of the studies that raise questions about results.

    Kochan’s team of researchers, supported by Business Opportunities forLeadership Diversity and the Society for Human Resource Management, struggled tofind companies willing to participate in its diversity study. “Althoughextensive academic studies show that there is little evidence to support thebusiness case for diversity, the business community has not embraced theliterature,” Kochan says. “Instead, there have been a lot of superficialanalyses of how diversity works in organizations.

    “There are estimates that companies spend $8 billion on diversity trainingannually,” he adds. “Much of this is wasted because it is spent on programsfor awareness and valuing diversity that do not give people the skills theyneed.” Kochan’s study, forthcoming in the Human Resource ManagementJournal,presents findings that have dramatic implications for the kind of diversitytraining that must be provided to achieve performance improvements. Trainingprograms aimed at “valuing diversity” and addressing subtle forms ofdiscrimination and exclusion do not lead to long-term changes in behaviors, thestudy notes. Instead, group members and leaders must be trained to deal withgroup process issues, with a focus on communicating and problem-solving indiverse teams.

    Hyter says the diversity industry includes “all types of people who professto be experts in this area and who have a stake in companies’ programs,” butthat no recognized set of credentials or professional certification exists forpractitioners. Diversity consultants are chasing what he estimates to be $400 to$600 million annually in consulting fees alone. Human resources executives oftendon’t demand documented results from outside consultants or in-house diversitystaff because “it’s easier to create activities and get credit for doingsomething than it is to create metrics and measures and hold people accountable,”he says.

Missing metrics
    Some companies measure diversity results with recruitment, promotion, orturnover rates, but few look beyond simple head counts to measure the fullfinancial or performance impact of their programs. The difficulty of creatingvalid measures is part of the problem. “There is a connection betweendiversity and financial success, but typical profit-and-loss systems don’tcapture the benefits that diversity creates,” says Laura Liswood, senioradviser to Goldman Sachs on diversity issues and a senior scholar at theUniversity of Maryland’s Academy of Leadership. “A lot of the benefits arenot quantifiable, but it’s also true that we have not devoted the same levelof resources to attempts to quantify diversity results.”

    The business community has not pursued the implications of the academicstudies, in part, Kochan says, “because of the traditional breach between thecorporate and academic realms.” Liswood retorts that “the academics might doa better job of marketing their work.”

    Kochan acknowledges that quantifying performance results is problematic. “Theneeded data cannot, in most cases, be culled from existing human resources data,”he says. “To create the needed data and analysis, human resources executivesmust run experiments within their organizations. They must invest in efforts totrain departments in group processes, and then follow their performance overtime, comparing the performance of groups that have been trained with that ofgroups that have not, using hard performance measurements based on the goals ofthe unit.” These measurements might be time-to-market, error rates, salesgrowth, or any number of other productivity measures.

   The lack of sophisticated metrics for measuring diversity results derives, inpart, from a broader problem. “Human resources metrics in general don’t havethe same analytical power as other business metrics,” Liswood says. Inaddition, diversity programs often center on training, a human resources fieldwhere metrics are particularly weak. According to the American Society forTraining and Development’s 2002 state of the training industry report, onlyone in 10 companies attempts to create results-based evaluations of its trainingprograms.

    The business case for diversity that dominates industry claims and corporategoals focuses on three related objectives: to allow organizations to tap talentpools and incorporate new ideas and perspectives from employees of differentbackgrounds; to expand market share; and to ensure legal compliance.

    The workplace objective may be simply a function of local labor marketrealities, or it may center on the ability to attract and retain female and minority candidates who will bring fresh viewpoints towork. Market-share objectives target the growing purchasing power of female andminority consumer groups, which many companies believe can be tapped onlythrough an employee population that matches the customer base. Complianceobjectives stress the need to avoid costly discrimination lawsuits and thedamage to reputation that occurs when companies are charged with illegalworkplace practices.

Trivializing racism
    One of the consequences of the nonanalytical approach adopted by thediversity industry and accepted by many companies is that the most seriousdiscrimination issues may be trivialized. “Lapel pins and slogans on the wallmay encourage people to think that diversity is just the special of the week,”says Liswood. “Diversity requires real mind-set and cultural change.”

    Trivialization also occurs as the number of groups covered by diversityinitiatives expands to include every conceivable cultural minority, far beyondhistorically underrepresented or oppressed groups. “There are practitioners inthis business who push a very broad definition of diversity because they aretrying to appeal to a larger audience to secure their own fate,” Hyter says.

    Microsoft’s diversity program, for example, now includes “employeerelations groups” for single parents, dads, Singaporean, Malaysian, Hellenic,and Brazilian employees, and one for those with attention deficit disorder. “Companiesrun a very high risk of allowing the broader definition of diversity to lead tothe neglect of certain groups,” Hyter says. “This hits a critical and rawnerve, and it’s a valid point.”

    Patricia Pope, CEO of Pope & Associates, a diversity-management firm inCincinnati, adds that “there’s been this desire to get away from race andgender issues because they are so uncomfortable. It’s often easier forcompanies to tackle other differences, such as diversity of thought or diversityof birth order.”

    Several studies, including Kochan’s, have found that companies generallyare more successful in managing diversity with respect to gender issues thanracial and ethnic issues. The empirical studies indicate that racial and ethnicdiversity may, in fact, have a negative impact on business performance unlessspecific forms of analysis, training, and monitoring are in place. If leftunattended or mismanaged, diversity is likely to produce miscommunication,unresolved conflict, higher turnover, and lower performance.

Truth or consequences
    The current economic downturn may prompt greater scrutiny of diversityspending and a growing demand for documented results. Hyter says that some ofhis clients are “becoming much more aggressive about measuring the return ontheir investment in diversity training and consulting.” He also believes thatin-house staffing for corporate diversity programs is changing. “You can tellby the number of people with P&L responsibilities who are being tapped tomanage diversity efforts, as opposed to people with just human resourcesbackgrounds.”

    With little evidence of improved business performance, financial results, oraccountability, there is much work to be done, Kochan says. “Diversity canenhance business performance, but only if the proper training is in place andthe climate and culture support it. If companies can’t do this, they will losethe opportunity that diversity represents. There could be backward movement, andthe negative consequences of diversity could predominate.”

    The industry’s singular focus on success stories, and corporate reluctanceto track and report results, makes it difficult to determine if diversity programs have fulfilledtheir objectives. Kochan’s research indicates that they haven’t. R.Roosevelt Thomas Jr., CEO of R. Thomas Consulting and Training, Inc., a largediversity consultancy in Decatur, Georgia, says that companies may succeed in”building a pipeline of people with all kinds of demographic characteristics”but then fail at dealing with different behaviors.

    Building diversity programs on bedrock instead of sand begins withrecognizing “that there is virtually no evidence to support the simpleassertion that diversity is inevitably good or bad for business,” Kochan says.

    “Unable to link HR practices to business performance, HR practitioners willbe limited in what they can learn about how to manage diversity effectively, andtheir claims for diversity as a strategic imperative warranting financialinvestment will be weakened accordingly,” Kochan says. The first step inlaying the new foundation, he says, is adopting “a far more analyticalapproach.” And dropping the hype. 

Workforce, April 2003, pp. 28-32Subscribe Now!

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