Knowledge

Transcript:

– Well, we’re all aware of the Royal Banking Commission’s findings. Widespread cultural failings and misconduct, which has eroded the trust of the public in banking and financial services. And it’s not surprising that when Deloitte launched their Trust Index in 2018, and surveyed over 2,000 customers in Australia, less than one in five, 20%, stated that they really believed the banks could no be trusted. So the banks understand that people are hurt, and that they have to ensure that this doesn’t happen again. And all roads point to culture. And we have to ask the question, why is culture being singled out as the significant factor that will really address the problems that are now endemic across banking and financial services?

Why culture, as opposed to governance, systems, controls, incentives? And the answer to that question is a really interesting one. Because the answer to that question is that people find it very difficult to behave in an ethical manner, even when those incentives, controls, and governance is in place.

And it’s hard for people to make ethical decisions. Not because they are unethical individuals, but because of the various steps that one has to go through in order to take ethical action. Let’s start off with the first step. Individuals actually have to be aware that there are ethical components or ethical ramifications to a decision that they’re about to make. And this is a big problem, because very often we are not aware of this. We fade out or blur consciousness of the ethical components of a problem, particularly, if it stands in the way of the objectives that we want to achieve.

Let’s say we are aware of the ethical components, the next step we have to take then, is we have to reach sound ethical judgement. And in order to reach sound ethical judgement , there are often many traps that we fall into that might stand in the way. Obedience to authority, slippery slope, bystander effects, a range of ethical traps, which can prevent us from actually making a sound ethical decision.

And then, let’s say we’ve achieved making a sound ethical decision, we then have to translate this into ethical intent. In other words, we have to decide that our ethical objectives and ethical values with take precedence over all the other values. In other words, being honest, or trustworthy, or having integrity is going to take precedence over wealth, fame, success, or achieving our KPIs.

And then finally, we have to take a fourth step. We have to translate that ethical intent into ethical action. And very often, what happens is, we might know what is the right thing to do, but because of the context, because of the situation, we don’t have the courage to actually do the right thing and then take the ethical action that’s aligned with our ethical intent. And because these four steps that we have to go through can create problems all along the way, the process can break down to making a good ethical decision. This is where culture can come in and play a really important role. Because culture can prompt us at each step of the way, and culture can be designed to operate in such a way that it will help us work through these four steps effectively.

So once we say that a culture will drive ethical behaviour, what then, does an ethical culture look like? Now, fortunately for us, the Financial Stability Board identified in quite a lot of granular detail they key drivers of misconduct, the key drivers that would lead to unethical behaviour in a culture. And they group these under leadership, decision making, and behavioural norms. And even though only one of those items was explicitly linked to diversity and inclusion to counteract group think, when we did an analysis of this extensive list of behaviours, we identified that, in fact, more than half of these behaviours are explicitly related to inclusive leadership and inclusive behaviours.

So how do we know that? How did we reach this conclusion? Well, we took a look at Symmetra’s model, which defines what inclusive behaviour looks like in the 21st century. And that consists of a range of 10 competencies, and it became very clear that the inclusive leadership behaviours that we are out there measuring and trying to build in leaders to build a more inclusive culture, are actually the very same behaviours, half of them, that have been identified by the Financial Stability Board. Behaviour such as embedding psychological safety, behaviour such as creating constructive conflict, behaviour such as having a learning mindset and being open to new ideas, and so on and so forth.

So we argue, that an ethical culture will manifest many inclusive behaviours. And we therefore argue as well, that it would be really important for the integrity teams and the inclusion teams working in organisations to actually not move on to disparate paths, but to work together, that you can actually build a more ethical culture by building inclusive leadership capability.

So where is this empirical evidence that lies between inclusion and ethics? Does it exist out there? And there’s a wide range of research and so many industry examples which demonstrate that organisations who build an inclusive culture behave more ethically. There’s also a wide range of research out there which demonstrates that diversity will lead to more ethical decisions.

Now a small caveat here, which I want to emphasise right from the outset, is we’re not suggesting for a minute that certain diverse groups have the monopoly on making more ethical decisions. But there’s no question that there’s some really interesting research which demonstrates that diversity, having diversity of thought in teams will lead to more ethical decisions. For example, researchers have identified that more diverse groups will make more ethical decisions than homogenous groups.

They’ve also identified that when individuals go out to consult with others in order to determine whether this is an ethical decision, which is a really important step that they need to take when they’re trying to reach the conclusion as to what a sound ethical decision looks like, the research has shown that when they do go out and consult with a diverse network, with critical thinking partners, not just echo chambers, people who are similar to them, they reach far better and more sound ethical conclusions. And the research has also shown that different diverse groups will address different ethical problems in better ways, so that the best that an organisation can achieve is to bring together a composite view.

In other words, a great deal of demographic inherent and acquired diversity, in order to deal with an ethical problem and reach the sound decisions.

So what’s the real world evidence out there that diversity is leading to more ethical decision? There’s heaps of it.

First of all, we know that Ethisphere, who votes in the most ethical companies in the world, has identified that those companies that they’ve voted in as most ethical in the last five years, have got greater gender balance than the Fortune 1,000 companies. We also know that when PWC did their Corporate Directors Survey, they found that 84% of the directors said that their boards were performing better when they had become more diverse. And last piece of real world evidence is the consequence a very broad study done in the UK on over 900,000 companies, where they found that better gender balanced boards lead to better risk management. In that, they found that where the companies had at least one female or more on their board, those companies were 20% less likely to go into bankruptcy.

In conclusion, what we are recommending here is that though training on ethics should continue, we do not believe that this is the key to embedding a more ethical culture across banking and financial services, and all other organisations, for that matter. What we’re arguing is that key is building inclusive leadership capability. Because what we need to be cognizant of is that an inclusive culture is the antithesis of greed and self interest. Because when you train people and build their capability, their skills, their knowledge, and awareness to behave in a more inclusive manner, they have to take into account the interests, the motivations, and the needs of others, not only of themselves. Those others being their peers, being their customers, being society and the community at large.

Trust in Banks has been weakened

The implicit trust which many Australians had in their banks and the belief that financial institutions would generally do the right thing has been rudely shattered. The final report of the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry laid bare the sorry state of affairs within Australia’s leading financial institutions. Financial misdeeds were not the acts of a few “bad apples,” but pervasive across the industry. Greater regulation and oversight is now inevitable, but it is widely recognised that this by itself is not enough to meet the challenge of reform.

“…every financial services entity, named in the Commission’s reports or not, must look to its culture. Every financial services entity must look again at the way it governs itself and manages not only its employees but also the entities and individuals who act as its intermediaries or are seen by consumers as representing or associated in some other way with the entity”. [Commissioner Kenneth Hayne, Royal Commission]

 

Banks ignored their deteriorating Culture

The Federal Reserve Bank of New York has pointed out: “[financial institutions]… exist, in part to benefit the public, not simply their shareholders, employees and corporate clients”.

Nevertheless these principles can be lost sight of when values and controls go awry. As we now know, in the Australian institutions examined by the Hayne Commission greed and self-interest were clearly on display in financial rate manipulations; giving totally inappropriate financial advice; encouraging vulnerable people to enter into unnecessary and onerous loan agreements; failing to implement controls against money-laundering; charging fees for no service; and lying to regulatory bodies.

The damage to banks’ brands and the trust they have lost will require each of them to examine and to recast their value systems. Calls for “a change in culture” have been coming from many quarters and the institutions themselves now seem to recognise that across the industry as a whole, values and norms had gone badly awry. But there is currently little consensus as to how to repair these cultures.

Since leaders set the tone for the any company cultures, they bear ultimate responsibility when the culture is shown to be blighted. In the process of cultural overhaul, leaders must show unequivocally that they are aware that their behaviour and attitudes serve as models for everyone in the organisation.

 

What went Wrong in the Culture of the Banks?

Repairing a culture that is acknowledged to be severely impaired requires, in the first instance, an understanding of what culture is and how it evolves.

Culture is a concept that describes a complex set of implicit understandings that exist within a group. Every organisation has a culture, but it is not fixed or immutable and it is influenced by many sources. Primarily it is the leadership which shapes the culture either through pronouncements and conscious behaviour on their part or else passively by what they are seen to condone or permit.

Organisational Culture has been described as:

“ …the shared values and norms that shape behaviours and mindsets within an entity. It is what people do when no-one is watching. Culture can drive or discourage misconduct”

The Hayne Report set out some signposts of a healthy corporate culture

There are basic norms which underpin an acceptable commercial culture

-obey the law

-do not mislead or deceive

-act fairly

-provide services that are fit for purpose

-deliver services with reasonable care and skill; and

-when acting for another, act in the best interests of that other

These signposts basically tell us whether organisational culture is meeting or falling short of acceptable commercial and community standards. But they do not describe or identify the essence of a culture which organisations should aspire to and which, amongst other things, might promote more ethical behaviour.

 

How Diversity and Inclusion Contribute to a Robust Culture                        

It is not only in Australia that the contagion of poor culture and misconduct by financial institutions has made its appearance. Following the Global Financial Crisis, the Group of Thirty (G30) published a series of reports focusing on governance of global financial institutions.

In the latest of these reports Banking Conduct and Culture – A Permanent Mindset Change, the G30 made 12 specific recommendations which would place the banks firmly on the path to cultural reform. Notably amongst these recommendations were these two:

Banks should make efforts to promote diversity and inclusion in the workplace–

The G30 notes that a diverse workforce has numerous business benefits and fosters better decision-making processes but for this to be truly successful all employees need to be fully engaged and empowered, something which can only be achieved via an inclusive environment

Banks should encourage an environment of ‘Psychological Safety’

Here the G30 notes that employees should be encouraged to speak up without fear of retribution and employees must be made to feel that their voice will be heard and their concerns will be addressed.

And also a statement from top officials of the Central Bank of Ireland (Rowland and Sibley, Oct, 2018):

“Low levels of diversity among key decision-makers in banks and other financial services create excessive risks and inhibit necessary cultural change.

Similar people looking at similar information and facing similar circumstances are, unsurprisingly, likely to rely on similar assumptions and make similar decisions. This type of groupthink contributed to the depth of the financial crisis internationally and in Ireland and also contributed to many of the conduct scandals that have subsequently emerged.”

 

Greater Diversity Needed at the Top in Financial Institutions

On the face of it, these comments appear equally relevant to the Australian landscape.

The Australian Human Rights Commission’s ‘Leading for Change report (2018)’ found that 72.5 per cent of ASX 200 CEOs had an Anglo-Celtic background; 23.5 per cent had a European background and just 4 per cent had a non-European background – figures that are entirely out of kilter with the proportions in the general Australian population.

The Financial institutions are little different from other ASX 200 companies in their lack of diversity at leadership level. According to the 2018 report of the Australian Institute of Company Directors, only two of the banks, Macquarie and Westpac, had reached the baseline goal for that year of 30% female directorship. As far as ethnicity is concerned, board members and directors of these institutions are almost exclusively Anglo-Celtic in origin.

The question may legitimately be asked as to whether the failure to deal with eroding ethical norms in financial institutions was a function of similar thinking by similar people. Did the lack of sufficiently diverse thinking in the leadership of the financial institutions lead to complacency and the institutional diffusion of unconscious biases – entrenching beliefs that there are no alternative ways of doing things?

Just as was the case with overseas banks, the Hayne commission revealed that uniformity of thought prevailed at leadership and executive levels, not only within each institution but across the whole industry in Australia. As they battled for short-term financial advantage, very few in these institutions either noticed or acknowledged the extent to which the erosion of basic norms became acceptable.

Groupthink makes Unethical Behaviour more Likely

The relationship between organisational culture and ethical or unethical conduct from its employees has been emphasised by the Financial Stability Board (FSB) in its recent report on strengthening governance frameworks. The FSB observes that governance frameworks, culture and conduct all interact and mutually influence each other either positively or negatively.

The FSB report sets out in the table below a number of key cultural drivers of misconduct along three broad parameters: leadership; decision-making; and values and behavioural norms. Symmetra’s own research confirms that many of these drivers of misconduct are more likely to emerge in organisations which are not inclusive or largely homogenous. In working with clients to build inclusive cultures, we specifically assess many of the highlighted behaviours below and work to address the gaps we discover.

 

Financial Institutions need to get strategic on D&I

The solution we propose is the adoption by Australian financial institutions of a more progressive and strategic approach to diversity and inclusion. The focus on diversity should not be limited to the goal of improving representation of diverse groups at leadership levels  but rather on the creation of teams which exhibit the greatest diversity of thought. Increasing demographic diversity will certainly contribute to this as it is a reliable indicator of diversity of thought, and should be positioned as the means to achieving this end, but not as an end in and of itself.

But more importantly with respect to inclusion it is critical to focus on what inclusive leadership looks like and how its scope has evolved dramatically over the last decade.  Inclusion, and inclusive leadership are no longer only about valuing, respecting and engaging with difference, but now encompass a wider and more complex range of behaviours.

Symmetra’s model of inclusion, which we have refined over many years of working with global clients is purpose-driven, and designed to entrench a trajectory for business growth, performance and innovation.

This paradigm encompasses 11 competencies:

• awareness of differences
• learning mindset
• valuing diversity
• engage effectively with difference
• working in flexible and agile ways
• counteracting bias
• openness to new ideas
• embedding psychological safety
• boundary spanning
• advocating for diversity and inclusion
• creating empathy and trust with customers

At a more granular level and looking closely at the drivers of misconduct identified by the FSB, it is clear that inclusive behaviours so defined will reduce the likelihood of misconduct becoming the norm in an organisation. In inclusive organisations mindsets will be attuned to the interests of colleagues, customers and other stakeholders rather than only of oneself; leaders will be aware of their fallibility and will welcome contesting and contrary ideas; information will be shared and disseminated across the organisation leaving fewer opportunities for mistakes through ignorance; debate will be the rule rather than the exception so that a greater range of options can be considered when decisions are taken; and team members will speak up to raise doubts or reservations about questionable actions so that mistakes can be forestalled rather than rectified after the event.

 

Inclusion must Extend to Customers

An inclusive culture is the antithesis of one where self-interest and greed prevail. An inclusive culture is one where the needs, aspirations and potential contributions of employees, stakeholders and customers are always part of the mix when important strategic and other decisions are made

Customers are, of course, the group which have been the primary victims of bankers’ misdeeds and therefore it is appropriate that in any paradigm shift on the part of the banks, their participation is sought. The concept of ‘customer inclusion’ which is embodied in our model (and should form part and parcel of any inclusive culture) is much more expansive than the notion of ‘customer centricity’ which involves merely focusing on the needs of and interaction with the customer. Customer inclusion is a process of establishing an authentic partnership with the customer, showing empathy and generating confidence and sustaining these over the long term. It is probably fair to say that in the absence of a genuine outreach to customers the broken bonds of trust will not be restored.

 

Conclusion

The wholesale rebuke delivered by the Hayne Commission to the financial services industry and the ensuing outrage from a whole range of institutions and individuals demands that this industry will be forced to take stock. It is unlikely that any of these institutions will be able to carry on in the same cavalier way as they did previously. The industry will certainly have to face up to the formidable challenge of culture change. But this is a challenge which should be welcomed, because if successful, these institutions (and Australian society) will be far better for it.

For each individual institution the test will be whether they will make changes defensively to minimise the risks of regulatory enforcement or whether they will be proactive in building a system of positive values, and an inclusive culture, to make their business more sustainable. As we have argued, an inclusive culture is a sure way of ensuring that at least some of the negative drivers of misconduct highlighted by the FSB are eliminated in a given organisation.

Regulators, legislators, stakeholders and customers will be watching intently to see whether real progress is made. It is thus essential that the institutions take steps to start building inclusive behaviours and measure and benchmark themselves in this regard. Application of suitable inclusion surveys, assessments of team and leadership inclusivity and other metrics, together with the maximum degree of transparency, will all assist in determining whether real cultural change is taking root.

It remains to be seen which of Australia’s financial institutions will rise to this challenge to be seen as trustworthy citizens in an industry which has let down so many Australians.

 

Women in Australia face almost no legal barriers in pursuing their careers or other economic activity. The just-released report by the World Bank: Women, Business and the Law, 2019: a decade of reform measures the level of gender equality across 187 economies – with specific reference to economic activity. The areas measured are: going places; managing assets; getting married; getting a pension; starting a job; getting paid ; having children. In each area countries scored from 0 to 100 where 100 is perfect equality.

Six countries for the first time scored an overall 100, being Belgium, Denmark, France, Latvia Luxembourg and Sweden. Australia ranked 16th overall with a score of 96.88.  Australia, in fact ,scored a maximum 100 on seven out of eight criteria with the exception being getting a pension– scoring 75 here.

Having what is in substance almost complete legal equality is hugely important and is the basis upon which full equality can be built. It is certainly a situation not enjoyed by women in many other countries. But it would be a mistake to believe that legal equality signals true equality in the workplace.

The factors that disadvantage Australian women are often hidden or disguised and therefore more difficult to combat than blatantly legalised discrimination.

Three of the most significant factors are :

1       Unconscious Bias – Biases which exist at various levels of organisations and which come into play at various stages of women’s career paths tend to constitute barriers which prevent them from advancing as fast as men. According to the Bankwest/WGEA Gender Equity Insights Report  the current trajectory women will have to wait until 2100 to have an equal number of CEO roles as men.

2        Sexual Harassment – This is a major problem for women in Australian workplaces and it appears to be getting worse. Sexual harassment prevents many women from fulfilling their potential at work and forces a good number to change jobs just to avoid it. The Australian Human Rights Commission, 2018 Report states that the prevalence of sexual harassment in our workplaces has grown since the last report in 2012 with 39% of women aged 15 years and older having experienced it. 79 % of perpetrators are men; 83% of incidents of workplace sexual harassment went unreported; and 43% of those who did make a formal complaint experienced negative consequences as a result.

3       Structural Issues – Inbuilt economic detriments which tend to prejudice women have often been accepted as inevitable and almost impossible to change. These include industrial and occupational segregation where women who are the preponderant numbers in certain occupations are paid less than males in industries when men have the greatest numbers Also greater caring obligations falling on the shoulders of women which makes many of them work part-time

While we can celebrate the fact that Australia is an open and democratic society which does not have laws on its books which overtly treat women as inferior, we must recognise that there is work to be done before women in this country can be said to enjoy absolute equality of opportunity in every way.

 

By Gary P. Pisano (Harvard Business Review, Jan 2019)

ABSTRACT:

This article offers some important insights as to why some companies are successful in pursuing innovation while others fail at it. The proposition advanced by the author is that the nature of innovative cultures is misunderstood. He seeks to dispel five common misconceptions about how innovative companies work  and at the same describing what in fact they do.

The author sets out under five headings some widely-held myths about how innovative companies go about doing their business and he points out why they are misplaced or inaccurate. He asserts based on his research over a long period that only a proper appreciation of the demands which are made of employees in highly innovative organisations will enable those seeking to emulate them to do so.

The five myths he enumerates and his commentary on each one can be summarised as follows:

• There is no generalised tolerance for failure in innovative organisations. Many people believe that there is a free and easy atmosphere in such organisations where almost anything goes and team members have carte blanche to embark on any project that takes their fancy. In fact, innovative organisations accept that some failures are inevitable but they do not accept those that result from incompetence. They will not tolerate “… mediocre technical skills, sloppy thinking, bad work habits and poor management…”.
• Willingness to experiment does not mean that that experimentation can be hit or miss affairs. Rather they require careful formulation of goals, careful setting out of process and rigorous execution.
• Innovative organisations, typically are ones where psychological safety prevails which means that everyone feels that they can voice their opinion without fear of retribution. However, by the same token when employees fall short the criticism can be harsh and sometimes brutal. Every action or statement may be scrutinised regardless of the person’s title.
• Collaboration is not the same as consensus. While working together towards common goals is a feature of innovative organisations, responsibility for decisions cannot be shared. Ultimately, someone has to bear the responsibility and be accountable for decisions that are made.
• No multiple levels of executive status does not mean an absence of leadership. Strong leadership is still required to set out a vision for the organisation and to hold the reins so that plans reach fruition.

These pointers can offer valuable guidelines and criteria for those wishing to transform their company culture or to adapt it to one where the search for innovation is amongst the top priorities. Some features of innovative culture are easy to digest and will be popular, others are less palatable but are a necessary part of building an innovative and competitive organisation.

Read original article here

Sexual harassment in the workplace has been described often as an “intractable problem”. Despite legislation designed to combat it which has been in place in Australia for decades, and despite corporate leaders proclaiming that there will be zero tolerance for acts of sexual violence or harassment, evidence is that its occurrence has not come down.

Sexual harassment and associated workplace misconduct such as sexist behaviour and bullying are no longer peripheral matters which organisations can choose merely to quickly dispose of when an incident arises rather than treating it as a core issue relating to employee wellbeing and productivity.

A just-released report from LinkedIn identifies instilling an anti-harassment culture as one of the four major global workplace trends in 2019. According to the survey conducted by LinkedIn, 71 per cent of talent professionals see combating workplace harassment as important to the future of recruiting and HR.

The LinkedIn report notes:

“…companies face growing pressure from employees to take action [against harassment]. Employers are seeing anti-harassment as a business necessity, not just a legal and moral one. Hostile workplaces hurt the bottom line through lost productivity and turnover, while respectful ones attract talent…”

Coincidentally, the Australian Human Rights Commission is currently engaged in a formal investigation of sexual harassment in the workplace. Two academics, Professor Paula McDonald (QUT) and Professor Sara Charlesworth (RMIT) have prepared a wide-ranging paper submitted to the Commission.

They note that sexual harassment is a highly prevalent problem in Australian workplaces and that the effects on victims can be, and often are long-lasting and severe. By its nature it gives rise to systemic harm “in that it strips away an individual’s identity, reduces the quality of working life, creates barriers to full and equal participation in employment across the life course and imposes costs on organisations.”

“The central drivers of sexual harassment, sex-based bullying, everyday sexism and predatory behaviour are unequal power between men and women and rigid adherence to gender stereotypes that is supported by structural and attitudinal barriers to gender equality.”

Nevertheless, as the two academics argue, few employers take primary preventative action to ensure that the work environment is free of sexual harassment. International research indicates that employees who bring to light instances of sexual harassment are frequently ignored or victimised. This shifts the risk on to individual employees who have been the victims of sexual harassment to initiate remedial action.

Because major obstacles and disincentives exist against pursuing complaints of sexual harassment, incidents go unreported and victims respond by trying to avoid the harasser or minimising the severity of the conduct. Overwhelmingly the victims of sexual harassment are women and the perpetrators are men. International research reveals that only between 5% and 30% of those who experience sexual harassment file formal complaints with their employer.

When it comes to remedial mechanisms under current Australian legislation, essentially the same problem applies. Both at the Federal and State levels, claims arising from sexual harassment are primarily dealt with under the overarching jurisdictions of the Human Rights Commission or State anti-discrimination bodies. Individual complainants must pursue the claims to external agencies through the somewhat complicated regulatory mechanisms provided by Federal and State legislation. Most are disinclined to follow this route as they feel the odds are stacked against them and it is not worth the long-term negative impact on their career. Thus, as the two academics point out fewer than 1% of complainants formally participate in legal proceedings.

Current legislation in Australia is clearly not up to the task of counteracting this widespread incidence of sexual harassment in our workplaces which is undermining the right of many employees to work in an environment of safety, respect and harmony.

A number of overseas jurisdictions have responded to the #MeToo movement and the rising outrage against unpunished acts of sexual harassment and violence by passing legislation to cast greater duties on employers to take proactive measures to put a stop to this. The States of New York and California are amongst these jurisdictions.

The solution, which the two professors propose, is that the focus of the law be shifted from the complaints paradigm to one imposing clear obligations on employers to take preventative action against harassment, victimisation and other forms of offensive conduct in the workplace. They recommend that three legal avenues be used to implement these kinds of regulatory obligations on employers: anti-discrimination; workplace health and safety; and industrial relations. Furthermore, they recommend that financial penalties be imposed where employees fail to comply.

We at Symmetra believe this is a sound approach in an area where harm is being done to employees and there is a crying need to put comprehensive and effective legal systems in place to combat it.

It will be some time before the AHRC reports on all the evidence gathered, the submissions heard and further time for any legislation to be passed. But the ground on workplace harassment has undeniably shifted and employers would be well-advised to reassess whether their workplaces and managers and employees are properly equipped to deal with a more robust and less forgiving attitude to unacceptable behaviours at work.

Be proactive in preventing sexual harassment and everyday sexism in your workplace with E-Challenge

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