Author: Esther Yang | UC Berkeley School of Law | J.D. Candidate 2020 | Posted: February 14th, 2019 | Download PDF
As the investor community agreed and acknowledged, diversity makes companies more productive and retains talent.[1] A study by McKinsey & Company also showed that it was “increasingly clear that [diversity] makes sense in purely business terms.”[2] After examining proprietary data sets for 366 in public companies across a range of industries in Canada, Latin America, the United Kingdom, and the United States for several years, McKinsey found that “companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians.”[3] The research showed that in the United States, “there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior executive team, earnings before interest and taxes rise 0.8 percent.”[4] While correlation doesn’t equal causation, there is a general consensus that diversity is and will continue to be an increasingly important to institutional investors, pension funds, employees, and other stakeholders.
The Myth of the Pipeline Problem
Although many companies attribute the lack of diversity to a pipeline problem, Rory E. Verrett, managing director of Protégé Search, a boutique advisory firm which recruits and develops diverse talent, contends that this theory is but a myth. “I just went to a Harvard law celebration of black alumni. There were 1,600 black lawyers there, every one outstanding. There’s no pipeline problem.”[5] Verrett attributes the lack of diversity to traditional recruiting practices that do not engender an initial diverse candidate pool.
Traditional Recruiting Practices
People have a tendency to network, refer, and ultimately hire people similar to themselves. Even if diverse candidates make it through the door, the opportunity costs for qualified and seasoned diverse candidates pose retention issues.
Referral problem
- The traditional recruiting practice by referrals may curb diversity efforts. PayScale conducted a four-month study of approximately 53,000 U.S. workers. More than a third said they had received a referral.[6] Of the successful referrals, “41% were referred by a family member or friend, and 32% were referred by a business contact.”[7] PayScale’s data revealed that “white women were 12% less likely to receive a referral, men of color were 26% less likely and women of color were 35% less likely.”[8] Despite making up just 34% of the labor market in the United States, white men accounted for 40% of successful referrals.[9] Women of color benefited the least from these programs.[10] The results come as no surprise. Diverse candidates have a harder time networking and struggle to find advocacy within their network.[11]
The “Cultural Fit”
- Another traditional recruiting practice is finding candidates who pass the“cultural fit” test. In plain terms, it would be the candidate you would want to grab a beer with after work. However, the assumption that a person who does not look or act as though they would mesh with the organization may engender companies to select candidates that are too similar to the existing collective. This aggregate build-up of similar individuals “leads to complacency, lack of innovation, and underperforming teams in companies.”[12]
Aggregate Opportunity Costs
- Even if diverse candidates make it through the door, the aggregate opportunity cost over time poses recruitment and retainment issues. Verett stated, “I’ve seen this time and time again—minority executives watch less qualified white peers get promoted, get raises, and get identified as high performers more than them, and it’s demoralizing.”[13] Over a longer career period, the opportunity costs start to add up and companies struggle to retain diverse executives.
Diversity As a Way of Thinking – Not a Checklist
When companies have diversity in their sustainability policies they need to be mindful of how they craft the initial recruiting pool, assess during the hiring process, and manage retainment efforts.
- Proactively seek more diverse referrals – Pinterest had a simple yet revolutionary idea. The company sent a message across the company about the value it places on diversity. Pinterest “established a baseline of typical referral numbers and then challenged its engineering team to refer 10x more candidates from underrepresented ethnic backgrounds and 2x more women over the next six weeks.”[14] The results showed that this simplistic yet company-wide message made a difference. There was “a 24 percent increase in the percent of women referred and a 55x increase in the percentage of candidates from underrepresented ethnic backgrounds.”
- Put your money where your message is – Intel pledged to increase its number of female and minority employees. To do so, the company actively rewarded employees who referred women, underrepresented minority, or veteran by giving them double the typical referral bonus. This initiative increased diverse hiring from underrepresented groups by 9% within the first year. The most significant change occurred at the executive level. “In the first quarter alone, there was a 11% increase in senior executives hired from minority groups and 14% increase in women executives.”[15]
Diversity must become a way of thinking, not a checklist. If the pipeline problem is a myth, there is a diverse talent pool for every field. Companies cannot insert diversity in the sustainability policies as paper tiger instruments or investment incentives. Benefits of diversity are more apparent in the long-term. Therefore, investors must encourage companies to re-examine and re-calibrate their diversity efforts at all three steps – recruitment, hiring, and retention – to ensure that the long-term benefits of diversity bear fruit.
[1] Kohn, Arthur H., Elizabeth K. Bieber,, and Maria I. Maldonado. “Board Diversity Developments.” Harvard Law School Forum on Corporate Governance and Financial Regulation. August 21, 2018. Accessed October 8, 2018. https://corpgov.law.harvard.edu/2018/08/21/board-diversity-developments/.
[2] Hunt, Vivian, Dennis Layton, and Sara Prince. “Why Diversity Matters.” January 2015. Accessed October 8, 2018. https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters.
[3] Id.
[4] Id.
[5] McGirt, Ellen. “LinkedIn’s Diversity Struggles Don’t Come From a Lack of Talent.” October 19, 2016. Accessed October 8, 2018. http://fortune.com/2016/10/19/linkedin-diversity-report-pipeline-myth/.
[6] Frank, Lydia. “How to Use Employee Referrals Without Giving Up Workplace Diversity.” March 15, 2018. Accessed October 8, 2018.
[7] McLaren, Samantha. “Why Referrals Might Be Hurting Your Diversity Efforts (and What You Can Do to Change That).” LinkedIn Talent Blog. April 3, 2018. Accessed October 8, 2018. https://business.linkedin.com/talent-solutions/blog/diversity/2018/why-referrals-might-be-hurting-your-diversity-efforts-and-what-you-can-do-to-change-that.
[8] Frank, Lydia. “How to Use Employee Referrals Without Giving Up Workplace Diversity.” March 15, 2018. Accessed October 8, 2018. https://hbr.org/2018/03/how-to-use-employee-referrals-without-giving-up-workplace-diversity.
[9] Id.
[10] Id.
[11] Id.
[12] Reilly, Kate. “Ban the Term “Culture Fit” and Other Great Diversity Tips From Pandora.” LinkedIn Talent Blog. December 14, 2016. Accessed October 8, 2018. https://business.linkedin.com/talent-solutions/blog/diversity/2016/ban-the-term-culture-fit-and-other-great-diversity-tips-from-pandora.
[13] McGirt, Ellen. “LinkedIn’s Diversity Struggles Don’t Come From a Lack of Talent.” October 19, 2016. Accessed October 8, 2018. http://fortune.com/2016/10/19/linkedin-diversity-report-pipeline-myth/.
[14] McLaren, Samantha. “Why Referrals Might Be Hurting Your Diversity Efforts (and What You Can Do to Change That).” LinkedIn Talent Blog. April 3, 2018. Accessed October 8, 2018. https://business.linkedin.com/talent-solutions/blog/diversity/2018/why-referrals-might-be-hurting-your-diversity-efforts-and-what-you-can-do-to-change-that.
[15] Id.