Is there a business case for diversity? My gosh, it’s overwhelming. I know you’ve heard the opposite. Supposedly, the business case for diversity is weak at best. It’s mainly “wishful thinking” and difficult to understand. There’s just one problem with what you’ve heard. In clear, convincing and unequivocal numbers, the data shows the reverse.
HAVING WOMEN AT THE TOP PAYS
A number of recent business studies, including a research report in Catalyst Inc. in 2011 by Nancy M. Carter and Harvey M. Wagner titled “The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004-2008),” looked at the financial returns of companies with three or more women on the board. The numbers are astounding. Companies with three or more women on the board outperform all-male-board-member companies by 60 percent in return on invested capital, 84 percent in return on sales and 60 percent in return on equity.
When you compare the Fortune 500 companies with the most women on their boards with those with the least, the companies with the most outperformed those with the least by 66 percent in return on invested capital, 42 percent in return on sales and 53 percent in return on equity. Firms with few to no women at the helm should take stock of the enormous economic advantage their competitors with more women in charge have over them.
You can see it looking at Fortune 500 companies, which Catalyst Inc. examined in “2010 Catalyst Census: Fortune 500 Women Executive Officers and Top Earners.” The positive influence of female board members is so strong that as the percentage of women board members of Fortune 100-500 companies drop, so does the success of the companies. Women represent 18 percent (nearly one in five) board members of the most successful U.S. companies, the top Fortune 100 companies. What Catalyst found was that as you move from Fortune 100 companies to their slightly less successful Fortune 200 counterparts, the number of women on the board decreases to 16.7 percent. Fortune 300 companies have slightly fewer women on the board, 14.9 percent, and so on down to Fortune 500 companies. Less women in leadership equates with less financial success.
The reason is women make better leaders — far better leaders. As Brian S. Moskal wrote in “Women Make Better Managers” in IndustryWeek in 1997, “A study of more than 900 managers at top U.S. corporations found that women’s effectiveness as managers, leaders, and teammates outstrips the abilities of their male counterparts in 28 of 31 managerial skill areas — including the challenging areas of meeting deadlines, keeping productivity high, and generating new ideas.”
RACIAL DIVERSITY AT THE TOP PAYS, TOO
Companies with greater racial diversity at the top leave their more homogeneous counterparts in the dust. According to research cited in a 2009 article, “Does Diversity Pay?: Race, Gender, and the Business Case for Diversity” by Cedric Herring in the American Sociological Review, on average, the most racially diverse companies bring in nearly 15 times more revenues than the least racially diverse. In fact, for every percentage increase in racial or gender diversity up to that represented in the relevant population, sales revenues increase approximately 9 and 3 percent, respectively.
Racial diversity, Herring found, is a better determinant of sales revenue and customer numbers than company size, age, or number of employees at a worksite. Companies with the highest rates of racial diversity report having, on average, 35,000 customers, whereas companies with the least racial diversity report having only 22,700. According to Herring, companies that even only marginally increase their racial diversity gain an average of over 400 customers.
DIVERSITY: THE POTENTIAL FOR MUCH HIGHER LAW FIRM PROFITS
The benefits Corporate America reaps from diversity apply to law firms. Douglas E. Brayley and Eric S. Nguyen, authors of “Good Business: A Market-Based Argument for Law Firm Diversity” in The Journal of the Legal Profession in 2009, looked at data from the 200 highest-grossing firms (the Am Law 200). Highly diverse law firms report, on average, higher profits per partner and revenue per lawyer than the rest of the Am Law 200 firms.
Even controlling for hours, location and firm size, the study found that “differences in diversity are significantly correlated with differences in financial performance.” In fact, according to the study, “a firm ranked in the top quarter in the diversity rankings will generate more than $100,000 of additional profit per partner than a peer firm of the same size in the same city, with the same hours and leverage but a diversity ranking in the bottom quarter of firms.” If law firms want to see their client base and revenues rise, law firms should not only recruit diverse talent, but retain it, promote it and invite it to the management table.
The reason diversity works is that when a company’s leadership becomes more diverse, far more changes than the fact the people in it become a melting pot microcosm of their community. The studies show the company performs better.
There may be a host of reasons why. Perhaps when women and minorities see that they have a real opportunity for advancement, they become more motivated to not only stay in the company, but invest themselves in its success.
When companies become more diverse, they are also better able to solve problems and seize potential opportunities. According to Scott E. Page, author of the 2007 book The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies, on almost every measure, greater racially, ethnically and culturally diverse workplace teams function more effectively than more homogenous teams.
HOMOGENEOUS COMPANIES FACE GREATER EXPOSURE
Diversity not only holds great potential to increase law firm profitability; openness to candidates from diverse backgrounds — for employment, raises, bonuses, equity, etc. — is essential to minimizing a law firm’s exposure.
In January 2010, the Equal Employment Opportunity Commission sued a New York law firm for alleged age discrimination. The case should be a wake-up call to law firms engaging in discriminatory practices. I minimize companies’ exposure to employment, commercial, general and products liability matters for a living. A great way companies can lower their exposure is by implementing practices to lessen the chance women and minorities will be passed over for opportunities they deserve or treated less favorably otherwise in the terms and conditions of their employment. Law firms are currently at great risk of such suits. According to a 2011 news release from the National Association for Law Placement (NALP) and the sixth annual National Survey on Retention and Promotion of Women in Law Firms from the National Association of Women Lawyers (NAWL) and the NAWL Foundation, while just under one-third of lawyers reported in the NALP Directory of Legal Employers are women — 32.61 percent in 2011 — female lawyers make up only 15 percent of equity partners and female equity partners are paid 86 percent of what their male peers are. The numbers are worse for women of color. In its news release, NALP said women of color made up a mere 2.04 percent of law firm partners in 2011. When they added male attorneys of color, the numbers improved, but were still not representative of minorities’ numbers in law firms. Minorities account for 6.56 percent of partners in the nation’s major law firms whereas “minorities … make up 12.70 percent of lawyers reported in the NALP Directory of Legal Employers.”
If law firms want to increase their profits and decrease their exposure to discrimination claims, the numbers must change. From Corporate America to American law firms, the data makes the business case for diversity. Law firms that hold women and minorities back from their full potential not only expose themselves to liability, they prevent themselves from potentially multiplying their customer base and earning greatly increased profits. •
Sheryl L. Axelrod is president of The Axelrod Firm PC, president of the Temple Law Alumni Association and chair of the NAMWOLF Dodd-Frank Ad Hoc Committee. She provides strategic, results-driven advice and representation in employment, general and products liability, commercial and appellate matters.