Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 303

The business case for diversity and inclusion

In March 2019, the Thinking Ahead Institute conducted its first public seminars in Sydney and Melbourne. We polled the audience of investment professionals on the current pace of action in the industry on inclusion and diversity. Delegates voted on five options and the overwhelming response in both cities shows us there is a lot of scope to improve.

Improved diversity is the new corporate zeitgeist. We need more women, we need more ethnic minorities, we need more, well ... just anyone that doesn’t look like ‘us’. And sorry, did I forget to mention we need it fast?

The investment industry is struggling to catch up. Why? Because for too long both structural and unconscious bias have limited opportunities for non-white, non-male, non-private school educated individuals. The workforce is so visibly homogenous that it has almost become embarrassing.

There have been signs of progress. The light shone on gender pay gaps, the recently proposed crackdown in the UK on ethnic pay gaps, and the increasing challenge against companies who have exercised discriminatory policies have dragged many companies into the limelight.

Wanted: quick fixes please! But wait … why exactly are we doing this diversity thing anyway?

As with most things in life, anything worth doing is hard and quick fixes are elusive. While many organisations have accepted the virtue of more diverse teams, it’s worth spending a little more time exploring why. Is this about compliance or commercials? Is this about performance or is this about culture? And by the way, will more women help my team make better decisions?

Digging deeper: the business case for diversity

The benefits of diversity have already long been noted. In a speech to Stanford Business School in 1998, Lewis Platt, then-CEO of Hewlett Packard noted:

I see three main points to make the business case for diversity:

- A talent shortage that requires us to seek out and use the full capabilities of all our employees
- The need to be like our customers, including the need to understand and communicate with them in terms that reflects their concerns
- Diverse teams produce better results.

This last point is not as easy to sell as the first two - especially to engineers who want the data. What I need is the data, evidence that diverse groups do better.”

Therein lies the problem. While it is generally accepted that diversity has many benefits, the arguments quickly meld into answering the question “does having more diverse teams improve business performance?” The often-cited McKinsey publication, Diversity Matters, found that companies in the top quartile of gender and ethnic diversity were 15% and 35% respectively more likely to have experienced financial returns above their national industry median. They found the reverse for companies in the bottom quartile. But, as the study notes, correlation is not causation; greater gender and ethnic diversity in corporate leadership does not automatically translate into more profit.

Building collective intelligence: is it diversity or is it cognitive diversity?

So how do you improve the collective intelligence within teams? Improved cognitive diversity goes a long way. Business school professors, Alison Reynolds and David Lewis, define cognitive diversity as “differences in perspective or information processing styles.” In their research published in Harvard Business Review, they noted a “significant correlation between high cognitive diversity and high [team] performance” when executing new, uncertain and complex tasks.

Brilliant. We have a link between cognitive diversity and performance. Unfortunately, the bad news is, unlike demographics, cognitive diversity does not come with a shiny label. It is hard to detect at face value. The worse news, from Reynolds and Lewis, is that:

“ ... having run the execution exercise around the world more than 100 times over the last 12 years, we have found no correlation between this type of [surface-level] diversity and performance”.

And to add insult to injury, Wharton management professor, Katherine Klein, notes that “board gender diversity either has a very weak relationship with board performance or no relationship at all”.

Some readers will be torn between wanting to have more diversity in the workplace and some hard-line academics who say that merely putting a bunch of women on your board won’t necessarily improve performance (which of course needs to be balanced with the heavily caveated studies which say that they will).

There is, however, some further evidence. Anita Woolley, Associate Professor at Carnegie Mellon University, has devoted much of her research to systematically examining the collective intelligence of teams. In the search for a collective intelligence factor (the c-factor), Woolley and her co-authors argue that there are three factors which correlate significantly to a team’s collective intelligence:

  • the average social sensitivity of group members
  • the equality in distribution of conversational turn-taking, and
  • the proportion of females in the group.

But the latter two factors did not remain statistically significant after controlling for social sensitivity. In Klein’s work she postulates that the weak relationship between surface-level diversity and team performance could be due to the fact that the women named to corporate boards may not in fact “differ very much in their values, experiences, and knowledge from men”. Even if these women were different from men, “they may not speak up in board conversations and they may lack the influence to change the board’s decisions”. Her research points to the idea that outliers to a group often self-censor and even when these individuals speak up, majority group members may discount their views, not taking “full advantage of their own cognitive variety”.

Diversity: the not-so-hard facts

We need to tread carefully here. This is not a hard science. Greater surface-level diversity is not the magic bullet for solving your team’s decision-making issues. But, on the other hand, there are quite a few reasons why greater diversity is of benefit to your organisation.

Improved diversity of people from different socio-economic, educational and cultural backgrounds is a useful path to improved cognitive diversity, especially if all of your team currently comes from a limited range of backgrounds. We also know that good diversity policies (a) ensure that there are clear signals to your employees that there are no glass ceilings and everyone has fair access to opportunities, (b) allow organisations to access the best and widest pool of talent available, (c) ensure that your organisation is reflective of a global client base and a changing global landscape and (d) align with UN’s sustainable development goals.

So where does this leave us?

To truly leverage the benefits of diversity requires organisations to put in effort – diversity requires integration for it to work well. James Surowiecki in his 2004 book, The Wisdom of Crowds, argues that groups can make better decisions than individuals but only if three conditions apply: diversity, independence and an effective means of aggregating views. His last point on aggregation is critical. There’s no point in having a diverse team if nobody listens to what anybody else is saying. And there’s no point having a diverse team if people feel excluded and believe they don’t have a voice.

Organisations need a sustained, systematic and long-term commitment to diversity and inclusion. While the theory around diversity is important, it’s the practice that really matters.

We explore this point further in our paper, How to choose? A primer on decision-making in institutional investing.

 

Marisa Hall, MSc, FIA, is a Director in the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute.

 

  •   24 April 2019
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Why gender diversity matters for investors

Is it time to fire the consultants?

Decoding the DNA of exceptional companies

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Latest Updates

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Superannuation

The Division 296 tax is still a quasi-wealth tax

The latest draft legislation may be an improvement but it still has the whiff of a wealth tax about it. The question remains whether a golden opportunity for simpler and fairer super tax reform has been missed.

Superannuation

Is it really ‘your’ super fund?

Your super isn’t a bank account you own; it’s a trust you merely benefit from. So why would the Division 296 tax you personally on assets, income and gains you legally don’t own?

Shares

Inflation is the biggest destroyer of wealth

Inflation consistently undermines wealth, even in low-inflation environments. Whether or not it returns to target, investors must protect portfolios from its compounding impact on future living standards.

Shares

Picking the next sector winner

Global equity markets have experienced stellar returns in 2024 and 2025 led, in large part, by the boom in AI. Which sector could be the next star in global markets? This names three future winners.

Infrastructure

What investors should expect when investing in infrastructure: yield

The case for listed infrastructure is built on stable earnings and cash flows, which have sustained 4% dividend yields across cycles and supported consistent, inflation-linked long-term returns.

Investment strategies

Valuing AI: Extreme bubble, new golden era, or both

The US stock market sits in prolonged bubble territory, driven by AI enthusiasm. History suggests eventual mean reversion, reminding investors to weigh potential risks against current market optimism.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.