On October 26, 2012, Sheryl Axelrod addressed the crowd at the Pennsylvania Bar Association’s Annual Diversity Summit: “Diversity and Inclusion: Making it Work” in Pittsburgh, Pennsylvania. Sheryl was invited to do so as a result of her article, “The Dollars and Sense of Diversity,” about the profitability of diversity. The article was the cover story of The Pennsylvania Lawyer, the magazine for the Pennsylvania Bar Association and its 28,000 members. The piece was written in response to the Institute for Inclusion in the Legal Profession report, “The Business Case for Diversity: Reality or Wishful Thinking?” The authors of the IILP report concluded that the business case for diversity is at best weak and difficult to understand. At over 90 pages and packed with a stunning array of data, the report was widely viewed as the definitive text on the subject, but it does not directly speak to the business case for diversity. In less than 2,500 words in “The Dollars and Sense of Diversity,” Sheryl outlined the data showing that the business case for diversity is neither weak nor difficult to understand. It is clear and convincing. Some of the major studies discussed in the article are as follows.
What you find when you look at the data is that diversity pays.
A. More Women in Leadership, More Revenues and Customers
According to a research report in Catalyst, Inc. in 2011 by Nancy M. Carter and Harvey M. Wagner entitled “The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004-2008),” the financial returns of companies with three or more women on the board are striking. They outperform companies with all male board members by 60% in return on invested capital, 84% in return on sales, and 60% in return on equity.
An examination in Catalyst, Inc., “2010 Catalyst Census: Fortune 500 Women Executive Officers and Top Earners,” found that as you move from Fortune 100 companies to their slightly less successful Fortune 200 counterparts, the number of women on the board decreases from 18 percent to 16.7 percent. Fortune 300 companies have slightly fewer women on the board, 14.9 percent, and so on down to Fortune 500 companies. As the percentage of women on the boards of Fortune 100-500 companies drop, so does the success of the companies.
This squares with evidence that women make better leaders. “A study of more than 900 managers at top U.S. corporations found that women’s effectiveness as managers, leaders, and teammates outstrips the abilities of their male counterparts in 28 of 31 managerial skill areas — including the challenging areas of meeting deadlines, keeping productivity high, and generating new ideas,” Brian S. Moskal wrote in “Women Make Better Managers” in Industry Week in 1997.
B. More People of Color in Leadership, Increased Revenues and Customers
According to Cedric Herring’s research in “Does Diversity Pay?: Race, Gender, and the Business Case for Diversity” in the American Sociological Review, on average, the most racially diverse companies bring in nearly 15 times more revenues than the least racially diverse. In fact, Herring found that racial diversity is a better determinant of sales revenue and customer numbers than company size, age, or number of employees at a worksite.
C. Diversity: the Potential for Much Higher Law Firm Profits
A comprehensive study by Douglas E. Brayley and Eric S. Nguyen, authors of “Good Business: A Market-Based Argument for Law Firm Diversity” in The Journal of the Legal Profession in 2009, shows that these same metrics
apply to law firms. Looking at data from the 200 highest-grossing law firms (the AmLaw 200), highly diverse firms report, on average, higher profits per partner and revenue per lawyer than the rest of the AmLaw 200 firms.
Even controlling for hours, location and firm size, the study found that “differences in diversity are significantly correlated with differences in financial performance.” In fact, according to the study, “a firm ranked in the top quarter in the diversity rankings will generate more than $100,000 of additional profit per partner than a peer firm of the same size in the same city, with the same hours and leverage but a diversity ranking in the bottom quarter of firms.” These figures are based on the current state of the legal profession, in which AmLaw200 law firms could have far better diversity records. Consider how much more monies truly diverse and inclusive law firms could make. If law firms want to see their client base and revenues rise, law firms should not only recruit diverse talent, but retain it.
The reason diversity works is that when a company’s leadership becomes more diverse, far more changes than the fact the people in it become a melting pot microcosm of their community. The studies show the company performs better. According to Scott E. Page, author of the 2007 book The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies, on almost every measure, greater racially, ethnically, and culturally diverse workplace teams function more effectively than more homogenous teams.
D. Companies that Don’t Diversify Face Greater Exposure
Diversity not only holds great potential to increase law firm profitability; openness to candidates from diverse backgrounds — for employment, raises, bonuses, equity, etc. — is essential to minimizing a law firm’s exposure. In January 2010, the Equal Employment Opportunity Commission sued a New York law firm for alleged age discrimination. The case should be a wake-up call to law firms engaging in discriminatory practices. A great way companies can lower their exposure is by implementing practices to lessen the chance women and minorities will be passed over for opportunities they deserve or treated less favorably otherwise in the terms and conditions of their employment.