P Gompers and S Kovvali – Harvard Business Review – July/August 2018
Statistical data in a number of areas gives support to the view that harnessing the benefits of diverse thinking brings about positive real world results
While there are good grounds for believing that diverse organisations tend to generate a broader range of ideas, more innovative thinking and ultimately better outcomes, it is not always easy to find specific examples where increasing diversity in and of itself generates greater profits.
The authors of this article have fixed upon the venture capital (VC) industry for their field study assessment of the impact of diversity in decision-making teams on financial outcomes. Their reasoning is that small tightly-knit teams of venture capitalists work together in a non-hierarchical structure sharing the decision-making. It is relatively easy to track the results of decisions taken and to compare them to competing organisations.
Most VC teams are white-male dominated, but where diverse group members have found their way into such organisations their impact has been noticeable. The authors derived their data from publicly available information to determine the extent to which certain VCs were not homogeneous but included members with diverse traits based on gender and ethnicity as well as “acquired traits” such as schooling and work history.
The authors assert that a clear causal relationship was established: the higher the level of diversity in the team, the better the investment performance. Where all team members came from a similar school background the success rate of acquisitions was 11.5% lower and where all members were ethnically homogeneous the success rate was reduced by up to 32%.
An interesting observation is made by the authors as to the stage in the development of a new corporate acquisition when diverse thinking is most advantageous. The advantage becomes evident not when the choice of investment is made, but later when investors are called upon to shape strategy, recruitment and other efforts. In a highly competitive and uncertain commercial environment, diverse thinking comes into its own.
Despite all this, the authors note that the VC industry is still remarkably homogeneous with overwhelming numbers being white males coming from the same university – Harvard. As with other industries, they suggest that a concerted effort is required to break the mould of the typical venture capitalist.
Original article: The Other Diversity Dividend