HUMAN CAPITAL

Diversity is the best asset to literally diversify your portfolio

Duck duck goose.
Duck duck goose.
Image: AP Photo/Michael Sohn
We may earn a commission from links on this page.

Would you put all your retirement savings into bitcoin? Would you put all your advertising budget into TV ads? Would pick all quarterbacks for your fantasy-football team?

Then why would you make your company’s leadership all white and male?

If we think of a company as a collection of people, then it seems intuitive that a highly homogenous leadership is probably not the best configuration. But while we have portfolio management to help us diversify our financial assets and programmatic advertising to help us diversify our marketing assets, we do not have any tools that can help us diversify “human assets” to improve company performance.

Today, most companies see diversity as part of their corporate social responsibility (CSR) agenda. But making diversity part of the CSR mindset turns it into a “nice to have,” and one of the first things to get cut in difficult times. Instead, diversity should be seen as a business imperative and the most important element of a company’s return on investment.

The cost and value of human capital

Human capital is both a company’s greatest cost and its most valuable asset. On the cost side, a 2015 study by the US Department of Commerce found that annual payroll in the US costs employers $5.4 trillion—30 times more than the total advertising spend the same year. (And that does not include other labor costs, such as recruiting, training, and retention.) On the asset side, a recent study by Korn Ferry found that human capital is four times more valuable to the US economy than physical assets. In the words of Korn Ferry’s global managing director Jean-Marc Laouchez, “Although organizations often put technology in the spotlight in the future of work, it is human capital that holds the greatest value for organizations now and in the future.”

Given these observations, why do companies spend millions to optimize their supply chain, operations, inventory, and advertising, but are reluctant to invest in optimizing human resources?

This paradoxical behavior is due to the lack of tools that can quantify the true contribution of individual employees to the overall performance of the company; the only objective, measurable quantities are often how much someone costs and how long they have been at the company. Optimizing human capital with such limited data would be tantamount to optimizing an advertising campaign based only on how much ads cost and how many times you show them.

Even when companies collect other data, such as performance-review scores, the underlying methodologies are rooted in subjective, qualitative definitions of performance. You can measure how much revenue someone in sales generates—but how do you quantify the performance of a secretary, an accountant, or an IT manager? People in these roles can have a huge impact on a company in subtle, indirect ways that are not part of their job description, and that would be nearly impossible to quantify.

An additional complicating factor is that the performance of employees, unlike that of financial or advertising assets, depends heavily on the context in which they are placed. Consider two employees whose job-related skills are identical, and who have exactly the same personal traits: except that one is a man, the other is a woman. In theory, their gender has nothing to do with their ability to perform the required tasks. However, the woman is more likely to be interrupted during meetings, to be given less challenging assignments, and to be the subject of sexual harassment. Depending on the extent to which these sorts of incidents are allowed to occur in a company, the woman will have a worse experience than the man. Even if she is making additional contributions that fall outside her job description, she will likely have worse performance reviews, be paid less money, and be passed over for promotions. These negative experiences will impact her satisfaction, reduce her productivity, and ultimately lead her to leave the company prematurely.

Similar negative experiences are commonplace for employees who differ from the majority in terms of race, sexual orientation, physical ability, age, religion, or any other personal trait that, in principle, should have nothing to do with an employee’s ability to perform. Allowing these personal traits to interfere with the performance of women and members of underrepresented minorities leads to a high churn rate, which in turn has material, negative consequences on the company. It increases operating costs, because replacing an employee can exceed the annual compensation of the lost employee; it stifles employee engagement and decreases product quality; and it can reduce the company’s ability to attract more high-quality talent, raising the cost of recruiting and further stifling diversity.

This should motivate companies to become more inclusive and diverse, even in the absence of tools to quantify the impact on employee performance. Here are several suggestions for how companies can ensure they are improving employee experience while also increasing ROI:

Focus on inclusion: First, an inclusive workplace environment is a critical factor in the probability of employee success. In order to give every employee the opportunity to shine, companies should look inward and take steps to minimize the impact of personal and systemic biases that create an uneven playing field.

Look beyond hiring: Second, trying to “fix diversity” by hiring women or members of underrepresented minorities is a misguided approach, especially when hiring is limited to lower levels. Unless a company is highly inclusive, the new hires will feel unwelcome and are likely to churn. This will tarnish the company’s reputation and lead management to conclude, “We tried, but these people just couldn’t cut it.”

Commit to diversity at all levels: Third, the inclusive mindset needs to permeate the entire company. You need managers, executives, and board members who understand what it’s like to be outside the majority, and who can help to identify opportunities to improve the workplace for everyone. Diversity needs to be represented at all rungs of the ladder.

Embracing inclusion and increasing diversity at all levels of the company can create a virtuous loop with tangible ROI: having more diverse talent is likely to make the company more inclusive; being more inclusive can make it easier to attract talent from a broader pool of qualified candidates; the new talent will be less likely to churn, as they become more engaged and can focus on applying their skills; and this in turn will increase company performance by increasing productivity, reducing hiring and training costs, and minimizing the disruptions that arise from unhappy employees.

Fifteen years ago, marketers asked “Is internet advertising a good idea?” Fifteen years from now, I hope the question “Is diversity a good idea?” will sound equally laughable.