Contrary to popular belief, diversity is a profit-generator not something that's merely "socially responsible."  According to numerous studies by McKinsey and other research firms and published in journals like Scientific American, diverse companies simply perform better than companies that are less diverse.

This is no secret in the corporate world. "Companies with the highest rate of racial diversity brought in nearly 15 times more sales revenue on average than those with the lowest levels," explains Anka Wittenberg, the Chief Diversity & Inclusion Officer for the software giant SAP.

However, despite the overwhelming evidence that diversity translates into higher profits, the corporate world remains surprisingly homogenous. For example, only four (4) Fortune 500 CEOs are black, which is less than 1% of the total, even though African Americans comprise 14.2% of the US population.

Similarly, blacks are vastly under-represented even among companies that position themselves as progressive. For example, only a measly 2% of Google employees are black.  Other firms have such a small percentage of black employees that they bundle the number in with other minorities to avoid PR embarrassment.

The disconnect here is profound.

Since diversity has vast financial value, boards of directors and investors, not mention top managers, should be scrambling to make their companies more diverse, just to create more profit and competitive advantage.  But that's not happening. And that's very strange.

To illustrate how strange, consider the following thought experiment:

Suppose that over a period of decades, numerous studies showed that automating your supply chain radically increases profits. But despite that, after all those decades, less than 1% of the Fortune 500 had automated their supply chain.

If that were the case, you might conclude that the Fortune 500 are run by idiot Luddites. If you were savvy about corporate culture, though, you'd conclude there were institutional barriers to automation too ingrained to be overcome by mere financial interest.

And that appears to be the case here. The reason blacks are under-represented in both top management and within the corporate ranks is that institutional racism is so ingrained into corporate culture that even the financial benefits of racial diversity can't overcome it.

This is not to say that companies don't have diversity programs! Quite the contrary, corporations frequently announce their intention to become more diverse.  

Rather than creating diversity, however, such programs appear to be having the opposite effect. The number of black Fortune 500 CEOs shrank by 2/3 (from 12 to 4) in the decades since diversity programs became popular.

So here's the surprising truth about diversity programs: they are the part of the problem not the solution.

Diversity programs are classic manifestations of the "Law of Inverse Relevance" -- "the less you plan on doing something, the more you must talk about it."  Diversity programs provide the illusion of action along with plausible deniability.

Once these diversity initiatives in place, companies can point to their "mentoring program" or "Chief Diversity Office" and say: "Look, we're serious about this! What more could we do?"

The answer is "plenty" but none of it falls into the general "diversity" bailiwick.  Here's my recipe for how companies could actually unleash the long-delayed diversity dividend:

1. Make recruiting racially blind.

Numerous studies have shown that resumes with names that sound African American (e.g. DeShawn, Shanice) are selected for interviews less often than the identical resumes with WASPy names (e.g. Tanner, Kaitlyn).

To correct for this, companies should strip names off the resumes so that race can't be determined during the initial screening process.  This alone will guarantee that more minorities are interviewed for open job positions.

Bias also crops up during the interview process.  Hiring managers and even HR professionals often make snap judgments based upon stereotypes and unexamined prejudice.

To overcome this, companies should conduct initial interviews using avatars rather than meeting with the candidate in-person.  There are already companies that provide this service, but the practice is far from common.

2. Pay minorities more than whites.

Since diversity has financial value, it only makes sense to reflect that fact in the compensation of the employees who are, by their mere presence, creating that diversity. 

While this seems radical, it's exactly the same as paying a talented engineer more than a mediocre one. Consider: the reason a talented engineer is worth more is that his or her talent creates more financial value.

Similarly, if there's financial value in diversity, the person who creates the diversity should command greater compensation. 

Once it becomes known that a company pays minorities (particularly blacks) more than majority whites, they'll naturally see an uptick in minority job applicants.  

Combine that uptick with racially-blind recruiting (to correct for hiring bias) and the number of minorities inside a company will naturally increase, creating greater diversity and therefore greater profit.

3. Compensate CEOs on diversity-driven profit.

Finally, boards of directors should set top management quotas for financial improvements tied to increased diversity.  This would drive the process from the top down rather than depending upon the limited vision of (biased) underlings. 

In other words, the CEO doesn't get that huge stock bonus unless he raises profits by 5% in a way that can be statistically tied to increased diversity.  This would force companies to their money where their mouths have been.

Published on: Jul 15, 2016
Like this column? Sign up to subscribe to email alerts and you'll never miss a post.
The opinions expressed here by columnists are their own, not those of