Effects of Diversity on performance

I recently read two, at least superficially contradictory, pieces of research on whether gender diversity improves performance. The first (abstract here), reported in the International Herald Tribune, studied performances of mutual funds managed by different combinations of men and women. The all male and all female teams did about the same. But the mixed teams did worse.

The second, from Catalyst, a non profit research and advisory organisation specialising in issues which will expand opportunities for women in business, is research showing the Fortune 500 companies with the highest representation of women on Boards attained significantly higher financial performance, on average, than those with the lowest representation of women board directors. This research showed that the more women there were, the better – three women on Boards were better, than two, who were better than one (on average).

In researching this post, I found a speech from the managing director of Egon Zehnder (a headhunting firm) which makes some excellent points that probably help to reconcile these two studies. He quotes from James Surowiecki’s The Wisdom of Crowds:

“Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise. An intelligent group does not ask its members to modify their positions in order to let the group reach a decision every one can be happy with. Instead, they figure out how to use mechanisms to aggregate and produce collective judgements to represent not what any one person in the group thinks but rather in some sense what they all think. Paradoxically, the best way for a group to be smart is for each person in it to think and act as independently as possible.”

An effective Board is one that, by the nature of its deliberations, tries to ensure that all voices are heard. A good chair will have mechanisms to understand the views of the membership, and expect each member of the Board to contribute his or her opinion on key issues. In that process, the chair is helped by the very formal way in which Boards operate. Board papers are written, and Boards are asked to make specific, key decisions. THat process, run well, will make the most of the diversity of information and opinion on a Board.

Fund managers, on the other hand, do not operate so formally. Their decisions are probably less formal, with less push in the direction of ensuring that diversity is heard. So its easier for a fund manager to behave in a way that takes away the benefit of diversity – by communicating poorly, and not allowing all opinions to be heard. One of the authors of the studies suggests that:

“Ruenzi said that he though the negative effect of gender diversity on fund performance could be traced in large part to the frequency with which mixed teams communicate more poorly. As a result, he said, the single-sex teams were more likely to operate more cohesively and effectively.”

Another commenter on the first study added some advice:

“The hope that simply introducing diversity will lead to better outcomes is by itself a fool’s errand,”

said John Payne, a Duke University psychologist who has extensively studied group dynamics.

“Having people with different information isn’t in and of itself enough. To relize the benefits of diversity, the group’s decision-making needed to be sensitively managed, to ensure that all points of view are welcome and taken seriously.”

I’ve always been a fan of recruiting for diversity, and not just of gender. In any team I manage, I’m always pleased when I manage to add an extra language spoken, or country of origin. But this research suggests that diversity won’t just magically create better results. You need to create an environment in which it is valued, and communicated, not just hope for that to happen. And in an environment which has, until very recently been a very sexist place (e.g. the managed funds industry), that’s unlikely to happen without a bit of effort.