One vital lesson I have learned over the years as an actuary is that while we may deal in numbers and reports, a company thrives on its people. People, unlike other assets, do not depreciate. Also, unlike technology and innovations, competitors cannot easily replicate a company’s culture and people. In that sense, and in my view, people are the only lasting competitive advantage and arguably the strongest driver of forward momentum for any company.
The thing about people is that they come as they are—complex human beings with diverse backgrounds, life experiences and needs. How can employers account for this, and how does it intersect with their work? More particularly, are diversity and inclusion just admirable virtues for a company to boast about, or do they actually have a tangible impact on business?
Information on the impact of diversity on workforce performance has been around for decades. For example, a study published by the American Sociological Association in 2009 concluded that “workplace diversity is among the most important predictors of a business’s sales revenue, customer numbers and profitability.”
This makes sense, and there are some broad, qualitative statements about the benefits of workplace diversity that I believe one could safely make. For example:
- Hiring immigrants with expertise from their country of birth could help introduce a firm to new geographical markets (especially if that employee has prior experience and connections in that country’s equivalent market and regulatory environment).
- Having multilingual employees might provide a competitive advantage when pursuing or working with clients in other countries.
- Having clear recruitment and hiring policies that address diversity and inclusion helps attract and retain younger employees. According to a Washington Post article from 2021, studies show that millennials consider these issues when choosing an employer.
- A diverse workforce (e.g., in a retail insurance market) could help attract a more diverse customer base. Even in a business-to-business (B2B) environment, a 2013 Harvard Business Review article claims that when at least one team member shares a client’s ethnicity, the team is more than twice as likely to understand that client’s needs.
But how does this translate into measurable financial benefits for companies with diverse workforces?
Benefits of Diversity
According to the 2013 Harvard Business Review article mentioned previously, their research indicated that earnings before interest and taxes (EBIT) margins for companies with diverse management teams were nearly 10% higher than for companies with below-average management diversity.
Another Harvard Business Review study from 2018 showed that companies with above-average total diversity had both 19% higher innovation revenues and 9% higher EBIT margins, on average.
What these studies show is akin to the effect of asset diversification. If people are an organization’s greatest asset, a smart leader will make sure those assets are well diversified (in the same way a prudent investor looks to diversify their portfolio for better risk-adjusted performance).
Furthermore, I believe it stands to reason that diversity of characteristics like gender, ethnicity, religion and orientation correlates to diversity of thought, including how people think about innovation and identify new opportunities.
Statistics compiled by the Pew Research Center in 2017 showed that there has been significant progress with respect to race/ethnicity diversity in the general workforce over generations. For example, out of all people born before 1946 who were still in the workforce in 2017, only 8% identified as Hispanic and only 5% as Black. However, when it came to millennials (born between 1981 and 1996), those percentages increased to 21% and 13%, respectively.
But are we doing enough? Statistics in terms of leadership positions don’t seem to reflect that same change. For example, as of 2022, women in the United States only held 21% of C-suite level positions, while Black employees only held 3.2% of senior leadership roles at large U.S. companies (despite making up more than 13% of the population). From a financial perspective, this implies companies likely are still leaving money on the table when it comes to diversity, especially in their higher decision-making roles.
In 2017, the Harvard Business Review defined cognitive diversity as “differences in perspective or information processing styles.” It’s not hard to imagine how this might benefit areas like strategic planning and risk management—having a diverse leadership team might result in the discovery of previously unconsidered risks and new approaches to managing existing risks. For example, people who have lived and worked in other parts of the world might be able to offer valuable firsthand experience with the financial and business impacts of climate change risk.
Building a More Diverse Workplace
So, where do actuaries come in? A strong human resources (HR) or recruitment team will have ideas on how to build a more diverse workplace. In my experience, these strategies typically include reaching out to specific communities, revising recruitment processes and adjusting onboarding and training programs to be more inclusive.
Company leadership will want to make certain any strategy is initiated correctly—and HR professionals can address any concerns with effective solutions and by reminding company leadership that it’s OK to make mistakes along the way, so long as the company learns from those mistakes.
One concern is that these initiatives will cost resources and money. Without some quantitative analysis, this might discourage company leadership from action. As actuaries, a fundamental part of our role is to help company leadership make data-driven decisions. In the case of workplace diversity, I believe we should be looking for opportunities to work with our HR colleagues to turn anecdotal discussions and qualitative arguments into quantifiable metrics that stakeholders can act on.
One way to do this would be to research existing studies that are more specific to a company’s industry or market. With such an overwhelming amount of research already done in this area, these should not be difficult to find. Going one step further and doing a deep dive into these studies might reveal insights and methods that could be applied to one’s company to demonstrate the effectiveness of diversity initiatives from a financial perspective.
In conclusion, the relevant quantification of the potential benefits of workplace diversity on financial results could be a helpful decision-making tool for company leadership in terms of hiring practices and workplace culture. I believe if we can use our technical skills to help build a business case for diversity, we could position it as a win that will not only pave the way for more equitable outcomes in employment but also provide better financial results for employers.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
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