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The fund benchmarks companies against a laundry list of strengths and concerns, such as whether the company harms the environment, discriminates in hiring or promotion, is represented by a non-diverse board or makes a product the fund deems socially harmful. Two diversity strengths out of seven is modest but better than average, she says.
"This is amazing. I never really thought about it this way," Domini says, referring to how a company’s stock performance could relate to its diversity level. She is not surprised by the relationship, however. Domini believes that using social criteria to evaluate a company paints "a picture of the corporate culture and a picture of the quality of management."
Many in the business world and on Wall Street are taking notice of an apparent link between successful diversity programs and the bottom line.
The accent, however, is on the word successful.
The links between diversity initiatives and the bottom line are complex and not necessarily positive. Poorly managed diversity programs can be as harmful as well-run ones can be beneficial. The best programs succeed when they are one part of a good workforce management plan.
"Effective management of a diverse workforce translates into bottom line results," says David Thomas, a professor of organizational behavior and human resources management at Harvard University. "That’s different from saying just because you are diverse you are going to get the benefits of that diversity."
One hallmark of successful diversity programs is diverse company leadership. Diverse leadership suggests that a company has drawn a wide pool of talent up through its ranks and is opening itself up to a variety of different views and ideas. Experts say that a diversity program that doesn’t move talented minority and female candidates to the top ranks of the company is not working. For instance, Domini’s fund has a special negative measure for companies that have no women or minorities on the board. She said in such cases, "They really have to be trying" to keep women and minorities off the board.
Diverse Boards Boost Returns
Amy Hillman, a management professor at the University of Western Ontario’s Ivey School of Business, recently turned up evidence that companies with diverse boards reap greater market returns in a study she co-wrote based on data from Kinder, Lydenberg, Domini & Co. Kinder is a New York-based investment research firm that collects and sells social data on companies, which Domini uses to rate investments for the Domini fund. A diverse board has at least four female or minority members, or one-third in the case of boards with 12 or fewer members.
The study adds to a broad body of research that has borne mixed results at best. For example, some studies find that diverse groups make better decisions because they are more creative, while others find that diverse groups do worse because they have more conflicts. Hillman admits that even her results are weak.
What’s more, there is no clear proof that diversity causes better market performance. Better-performing companies may simply attract the best talent among all groups of workers.
"We think that there is something there," Hillman explains, "but we can’t rule out a whole bunch of different factors [that obscure the results]." She adds, however, that the studies "give us reason at least to believe that these diversity procedures and policies are headed in the right direction."
There are good, common-sense reasons to think that more diverse companies will outperform those whose ranks, including the top brass, have a less varied look. Diverse groups tend to be more creative problem-solvers when their differences in background and perspective are all brought to bear. Diverse companies, therefore, have the potential to be more innovative. Corporate boards and company leaders especially may benefit from a diverse makeup because they are often called into action specifically to solve problems that are out of the ordinary.
Common sense also contends that successful diversity programs may boost overall company morale, by giving people a feeling that they are doing the right thing and enhancing a culture where merit is rewarded regardless of gender or race.
For that reason, diverse companies also may attract better talent. The best job candidates, regardless of race or gender, shop for companies that offer ample opportunity for career advancement. Companies that offer such opportunities to women and minorities may cast a wider recruiting net.
Diversity also can increase a company’s access to new markets and help in understanding the needs of these markets. From a domestic, consumer standpoint, minorities and women are more aware than ever of the gender and racial makeup of the companies from which they buy.
The information is easily accessed. According to a recent Korn/Ferry study, 60 percent of U.S. corporate boards have ethnic minority directors. The study found African Americans on 39 percent of large company boards, up from 37 percent in 1998. Latinos served on 12 percent of corporate boards, the same as last year, and Asians on 9 percent, up from 6 percent. Women sit on almost three-quarters of U.S. boards, and they aren’t just token members. The study found that 25 percent of companies now report two women on their boards, compared with 22 percent last year and just 18 percent two years ago.
As for concrete data on the benefits of diversity, Hillman’s study finds that companies with diverse boards are less risky for stock market investors. Companies that are diverse in the highest ranks are probably making better decisions about diversity and workforce management in general, she says, because they are successfully channeling diverse people to the top of the organization.
In a separate study, Hillman finds that companies with greater diversity also make better business partners and merge more smoothly with other companies. A jarring clash of cultures can undermine these increasingly popular business deals. Diverse companies ease the transition because they more readily accept different cultures.
It’s in the Execution
The benefits of diversity certainly are alluring. Why then did Thomas and co-author Robin Ely find in a 1996 study in Harvard Business Review that diversity programs are not delivering the best results at most companies? They are not going about it the right way, the authors say.
Most diversity programs fall into two categories, explains Ely, who is a management professor at Columbia University in New York. They either stress a fair-treatment agenda and ignore the business case or focus too narrowly on reaching niche markets.
Many companies, especially those with a rigid management hierarchy, focus their diversity programs on recruitment and fair treatment of women and minorities and on compliance with federal Equal Employment Opportunity regulations. They strive to be color blind and gender blind and encourage people to see each other as "just the same as everyone else."
The problem is that everyone is not the same. Though such programs do broaden the demographic diversity of a company, they do not tap the wellspring of different experiences, viewpoints and ideas that are thought to generate the lion’s share of diversity benefits.
Joyce K. Fletcher, a management professor at the Center for Gender in Organizations at Simmon’s Graduate School of Management in Boston, found this problem among a group of engineers at a company she studied. When tensions developed between two engineering teams working closely on a project, a woman engineer went to her manager and suggested they send thank-you notes to team leaders so the teams would know that their work under difficult circumstances was appreciated.
Her peers saw this as a "nice" and womanly thing to do, but it did not occur to anyone, even to her, that she had come up with an effective strategic solution to a budding communication problem. Her unconventional effort, which smoothed tensions between the teams, was not recognized as a valid business contribution.
Niche Divisions ‘Ghettoized’
Since 1980, the business case for diversity has gained popularity. Many companies have reached out to women and minorities to tap lucrative markets they had been ignoring. This approach has been especially popular among consumer product companies and retailers. á
Some developed new product lines to target niche markets, and diverse staffs were recruited to offer insights into what would sell in these markets. Some recruited diverse staffs from the bottom up so a more diverse base of clients and customers would see people like themselves at the company.
Without the moral imperative of a fair treatment approach driving such efforts, however, it becomes easy for minorities and women to become "ghettoized" into niche departments. Upper management sees the top managers of these niche segments solely as niche contributors. Minorities and women do not cross over to the mainstream of the company where career-making promotions lie.
What then does an effective diversity program look like?
In the case of Avon Products Inc. in New York, it does not actually look like a program at all. Avon has made a point of not treating diversity as a separate program or department or initiative, says Patrice Dunckley, a human resource manager who specializes in diversity.
In fact, Dunckley stresses that she is not a manager of diversity because diversity at Avon is not a thing to be managed. Rather it is a reflection of all of the different experiences and viewpoints that every individual brings to Avon.
More than half of Avon’s workforce is female and one-third of the company’s officers are women. Avon topped Working Woman magazine’s September 1998 list of best companies for women executives and ranked among Fortune magazine’s 50 best companies for blacks, Asians and Hispanics in July.
Avon "associates" are encouraged to voice any ideas about how they can better reach clients in their market. That is why Avon began printing its brochures in Spanish. Associates reported that many Latinas they encountered did not speak English.
Avon does not categorize its products into lines for particular ethnic groups. Rather, the company views its core palette of 25 foundation make-up shades as embracing a broad range of women’s skin tones.
"Our customers, they are diverse. Their needs are diverse. It is just a natural part of doing business for us," Dunckley says.
The distinctions Avon draws may seem fine, but they reflect an integrated approach to diversity in which individuals can make contributions that reflect their unique perspectives while still fitting into the larger culture of the company. Everyone is shooting for the same target -- to sell more product to more women.
A clearly articulated business strategy for the company must be the starting point for effective diversity management, says Thomas.
In other words, a company that does not know where it is headed is not going to get there any faster with diversity initiatives. Once the business goals are established, HR managers can start asking how diversity will help achieve these goals. Presumably the company’s goals are directly tied to the bottom line, therefore diversity programs that help reach them will boost returns.
Simple to say but hard to do. Companies that want to make the transition to effective diversity are in for a long, bumpy ride. The transformation, diversity experts say, demands nothing less than a cultural revolution. Everyone in the company must be committed and open to change. They must be willing to question every aspect of the company’s organization, to experiment with new ways of doing work and to think in new ways about the people around them -- co-workers, managers, customers and suppliers alike.
Diversity does have the potential to create more conflict, Thomas says. "We have to acknowledge that."
Diversifying Diversity
One question that has captured the attention of Thomas and Ely is why many companies succeed at drawing either women or minorities into their culture but not both.
Only 10 of the companies Working Woman selected as the best 25 companies for women executives placed among Fortune’s 50 best companies for blacks, Asians and Hispanics.
"It, in part, has to do with the way the work is construed in people’s minds," Thomas says.
Thomas and Ely believe that some work traditionally has been "raced" in our society. For example, black and Hispanic minorities have been stereotyped as less intelligent than whites and Asians. People taken in by these stereotypes may believe that blacks and Hispanics are unsuited to jobs as engineers or computer programmers.
Such stereotyping may explain why high-technology companies have tended to make less progress in racial diversity, but have better track records on gender diversity. The women making inroads at these companies are usually white or Asian.
Similarly, companies specializing in stereotypically masculine businesses -- package shipment companies, for example -- have made more progress on racial diversity than gender diversity by advancing black and Hispanic men.
Companies can build on past successes to further broaden their diversity profiles, but they need to honestly assess the racial and gender biases that have stifled some groups while promoting others.
Leaders at all levels of the company must understand how stereotypes impact peoples’ perception of their own power in an organization and create an oppressive environment for some, Thomas explains.
For example, a company with an otherwise effective diversity program may be inadvertently channeling women away from top management posts, because on a case-by-case basis, candidates are rejected as too soft or sensitive to make the tough business calls, such as laying off people.
One solution Thomas suggests is to place high-potential executives in settings where they work with the most diverse segments of a company’s workforce, even if that means a stint in a region of the country or a department that is less strategically important than those on the company’s usual career ladder. Such managers are highly motivated to succeed and will carry the lessons of managing a diverse workforce to their next post.
Thomas stresses, however, that such tactics can only work in the context of a larger business plan that answers the question of why diversity matters. Every company needs to find its own path, consistent with its unique culture and business goals, he says.
Reaching the Bottom Line
Johnnetta Cole, a professor of anthropology at Emory University in Atlanta, stresses that the bottom line alone cannot determine a company’s commitment to diversity.
"There are perhaps times when the bottom line is not being completely and aggressively served [by diversity]," Cole, a past member of the boards of directors at Coca-Cola Co. and The Home Depot, stresses. "Diversifying the workplace may be simply the right thing to do."
Indeed, if boosting the bottom line was the only reason to increase diversity, some leading companies might wonder why they should carry their diversity programs any further than they already have. There are well-run companies that do not rank among the diversity leaders, as measured by the increasingly popular "best" lists.
For example, General Electric Co. tops several lists of most-admired companies in the United States and the world. GE made neither Fortune’s best companies for blacks, Asians and Hispanics nor Working Woman’s top companies for women executives.
A continuing tight labor market may give companies more of a financial reason to boost diversity.
The Labor Department predicts that by 2005, 85 percent of new workers entering the labor force will be women or minorities. Labor’s estimates of workforce growth also suggests workers will be in short supply. Companies already attractive to women and minorities will have a recruiting edge.
"If companies don’t want to make a move to diversity," warns Hillman, "they are going to find themselves high and dry in employees pretty soon."
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my Domini, president of the socially conscious Domini mutual fund in New York, never gave much thought to looking for a direct link between a company’s leadership diversity and its stock market performance.
