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Aha! Pro-Diversity Cultures Spark Corporate Innovation

Pro-diversity policies in the workplace improve innovation and company value.

 ESB Professional/Shutterstock
Source: ESB Professional/Shutterstock

Taking steps to promote diversity in the workplace leads to more innovation, according to a new study. The paper, "Do Pro-Diversity Policies Improve Corporate Innovation?" was recently published in the journal Financial Management. This research was a collaborative effort between Roger Mayer and Richard Warr from the Poole College of Management at North Carolina State University and Jing Zhao of Portland State University.

For this study, the researchers conducted a detailed analysis of the "MSCI ESG STATS" dataset, which provides diversity policy data on the 3,000 largest publicly traded companies in the United States.

"We wanted to know whether companies with policies encouraging the promotion and retention of a diverse workforce—in terms of gender, race, and sexual orientation—also perform better at developing innovative products and services," co-author Richard Warr said in a statement. "The short answer is that they do. To be clear, we found that there is a causative link—it's not just a correlation. And the finding extends across a broad range of industry sectors."

The data analysis revealed that corporate policies that promote pro-diversity cultures enhance future innovative efficiency. As the authors write in the study abstract: "Pro-diversity policies also increase firm value via this stimulating effect on innovative efficiency. Our results suggest a channel through which workforce diversity may enhance firm value."

How Does Title VII Impact Pro-Diversity Policies?

On October 5, 2017, Attorney General Jeff Sessions reversed a Justice Department policy that protected transgender workers from discrimination under U.S. federal law. In his memo, Sessions argued that Title VII of the landmark Civil Rights Act of 1964 does not protect transgender people from workplace discrimination by private employers at the state and local level of government.

As a member of the LGBTQ community, being denied civil rights protection in the workplace makes me a second-class citizen. Therefore, I was curious to learn more about this new study by Mayer et al. because, after all, money talks. If discriminatory policies stifle innovation and decrease a firm's value, maybe the business-friendly Trump administration would shift their stance and decide to promote pro-diversity policies by upholding Title VII for all American citizens.

So, I emailed Richard Warr at NC State to learn more about his team’s research methods. “Our study looks at policies that companies use to promote diversity—gender, race, and sexual orientation. We develop a score for each company that can range from -5 to +9 depending on whether the firm has policies such as policies for LGBTQ people or having minorities on the board,” Warr wrote in our email correspondence. “We then take this score and use it to see if it predicts future innovations—such as patents and new products. We find that it does. To rule out reverse causality we run the model in the other direction—do patents predict the future diversity score. This time we find no relation. That's the basis of our paper.”

In our email correspondence, I asked Warr, “Why does diversity in the workplace boost corporate innovation?" Although his team’s study wasn’t focused on the “why,” Warr did offer three speculative answers. He wrote, “We think that there are three possible mechanisms:

1. Research shows diverse teams get better results, more interesting and creative solutions, faster.

2. Being openly pro-diversity attracts a wider pool of employees. If your competitors are not so pro-diversity, you will have a serious competitive advantage in getting better workers.

3. For many innovative firms, being seen as pro-diversity is very attractive to employees who are not necessarily in minority groups.

In a statement, Warr concluded, "The take-home message here is that a business which relies on innovation will benefit significantly from supporting diversity within its organization. It's really that simple."

References

Roger C. Mayer, Richard S. Warr, and Jing Zhao. "Do Pro‐Diversity Policies Improve Corporate Innovation?" (First published online: December 18, 2017) Financial Management DOI: 10.1111/fima.12205

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