For a number of years, studies have shown the benefits of focusing on diversity, equity, and inclusion (DE&I), including increased employee satisfaction and productivity. When sharing the successes of such programs, it’s just as important to focus on the positive qualitative impacts along with any favorable economic impact. As human capital continues to play an increasing role in our economy and organizations, we may need to evaluate if our current accounting processes properly capture and report the costs, benefits, and impact of our workforce and its diversity.
In “Moving Beyond Culture Fit,” I discussed the benefits of hiring diverse talent and some of the steps an organization can take to better accomplish that goal. Recent data substantiates that those organizations that commit to DE&I initiatives in hiring and employee development gain an edge in improved value creation.
According to Diversity wins: How inclusion matters by McKinsey & Company, this relationship is also evident at the leadership level. Following hundreds of companies in several countries, this analysis showed that companies with gender diversity in their executive teams were 25% more likely to have financial outperformance. Those companies that had ethnic diversity were 36% more likely to experience financial outperformance.
Comparing these results to McKinsey’s previous two similar studies shows that the relationship between gender diversity on executive teams and the likelihood of financial outperformance has strengthened over time. “Why diversity matters” showed that companies with gender diversity in their executive teams were 15% more likely to have financial outperformance; this number increased to 21% in Delivering through diversity.
While efforts focused on improving DE&I within an organization provide a return on investment, it can be challenging enough to attract talent in a tight labor market, let alone diverse talent. To assist in attracting diverse talent, organizations should consider what tone they use in promoting their DE&I efforts.
COMMUNICATING DE&I PRACTICES
A study by Oriane Georgeac and Aneeta Rattan published in Harvard Business Review showed that how an organization talks about diversity can have a major impact on attracting and retaining diverse talent. Approximately 80% of the organizations in the study used a business case to justify the importance of diversity, with 5% using a fairness or moral case. But focusing on the business case when promoting DE&I efforts may not have the intended effect. In fact, Georgeac and Rattan showed that, when a company does so, candidates—particularly those from underrepresented groups—question a company’s motives, fearing that they will be stereotyped, resulting in a lower anticipation of a sense of belonging.
Because of this perception, it may be worth evaluating how an organization’s efforts regarding DE&I are communicated, in addition to evaluating the return or payback on an investment in DE&I. Georgeac and Rattan explained that if organizations don’t typically need an explanation for other core values such as integrity and innovation, there probably isn’t a need to justify DE&I initiatives, either.
An additional area of interest in the consideration of value creation from DE&I efforts is understanding the value of human capital, which is a measure of the education, capacity, skill, and other attributes an employee brings to the table that influences their productivity capacity. The higher the knowledge and skill level of the workforce, the more the organization should experience increased productivity and a higher economic value. Human capital and its related value can grow in relation to the investment made.
While human capital has always been important in organizations, its role, along with other intangibles, has become increasingly important over the last 50 years. Large industries that rely heavily on human capital, such as healthcare and technology, account for a much larger share of market capitalization. Colleen Honigsberg and Shivaram Rajgopal, in “Disclosure of the Extent to which Firms Invest in their Workforce” said the case for evaluating changes in the accounting for investments in human capital may need to be more like those of investments we make in areas of capital expenditure. If some of the expenditures are for long-term human capital development, maybe they could be amortized over a longer period rather than being treated as a onetime expense.
Honigsberg and Rajgopal also discussed the need for better disclosure of expenses related to workforce development. There’s a reasonable comparison made to the treatment of research and development costs and the use of both quantitative as well as qualitative disclosures. Investing in human capital is likely to make employees more eager to go the extra mile and create value when they feel supported. These considerations of revisions to current accounting policies could lead us to conclude that maybe the increased value through DE&I initiatives is likely to be underreported.
HELP FOR DE&I EFFORTS
Despite the positive performance data due to DE&I highlighted in Diversity wins: How inclusion matters, the analysis also showed that a sizable percentage of the companies studied have made minimal progress in DE&I initiatives. Those organizations that are struggling to make more progress with DE&I can look to how successful organizations implement their DE&I efforts. McKinsey found that the most successful organizations were those that took bold steps in five areas:
1. Ensuring the representation of diverse talent.
2. Strengthening leadership accountability and capabilities for DE&I.
3. Enabling quality of opportunity through fairness and transparency.
4. Promoting openness and tackling microaggressions (bullying and harassment).
5. Fostering belonging through unequivocal support for multivariate diversity (beyond gender and ethnicity).
By researching some of the most recent developments to understand the business case for D&I, we have learned some additional points of information that can be useful in reviewing the continuing efforts of supporting and promoting DE&I efforts. First, studies still show that diversity in leadership improves the likelihood of financial outperformance. Second, those organizations that utilize a business case approach to substantiate investment in DE&I programs, like many other programs, don’t need to feel called to share that information with all potential stakeholders since this can cause more harm than good. Lastly, the shift in the importance of human capital due to the changes of the mix of global industries may require changes in the accounting processes and reporting methods used in reporting related expenses and investments.