How Diversity Makes Us Smarter

Being around people who are different from us makes us more creative, diligent, and hard-working.
BY KATHERINE W. PHILLIPS | SEPTEMBER 18, 2017

The first thing to acknowledge about diversity is that it can be difficult. In the U.S., where the dialogue of inclusion is relatively advanced, even the mention of the word "diversity" can lead to anxiety and conflict. Supreme Court justices disagree on the virtues of diversity and the means for achieving it. Corporations spend billions of dollars to attract and manage diversity both internally and externally, yet they still face discrimination lawsuits, and the leadership ranks of the business world remain predominantly white and male.
It is reasonable to ask what good diversity does us. Diversity of expertise confers benefits that are obvious—you would not think of building a new car without engineers, designers, and quality-control experts—but what about social diversity? What good comes from diversity of race, ethnicity, gender, and sexual orientation? Research has shown that social diversity in a group can cause discomfort, rougher interactions, a lack of trust, greater perceived interpersonal conflict, lower communication, less cohesion, more concern about disrespect, and other problems. So, what is the upside? The fact is that if you want to build teams or organizations capable of innovating, you need diversity. Diversity enhances creativity. It encourages the search for novel information and perspectives, leading to better decision making and problem solving. Diversity can improve the bottom line of companies and lead to unfettered discoveries and breakthrough innovations. Even simply being exposed to diversity can change the way you think. This is not just wishful thinking: It is the conclusion I draw from decades of research from organizational scientists, psychologists, sociologists, economists, and demographers. Informational diversity fuels innovation
The key to understanding the positive influence of diversity is the concept of informational diversity. When people are brought together to solve problems in groups, they bring different information, opinions, and perspectives. This makes obvious sense when we talk about diversity of disciplinary backgrounds—think again of the interdisciplinary team building a car. The same logic applies to social diversity. People who are different from one another in race, gender, and other dimensions bring unique information and experiences to bear on the task at hand. A male and a female engineer might have perspectives as different from one another as an engineer and a physicist—and that is a good thing. "We need diversity if we are to change, grow, and innovate"
―Dr. Katherine W. Phillips
Research on large, innovative organizations has shown repeatedly that this is the case. For example, business professors Cristian Deszö of the University of Maryland and David Ross of Columbia University studied the effect of gender diversity on the top firms in Standard & Poor's Composite 1500 list, a group designed to reflect the overall U.S. equity market. First, they examined the size and gender composition of firms' top management teams from 1992 through 2006. Then they looked at the financial performance of the firms. In their words, they found that, on average, "female representation in top management leads to an increase of $42 million in firm value." They also measured the firms' "innovation intensity" through the ratio of research and development expenses to assets. They found that companies that prioritized innovation saw greater financial gains when women were part of the top leadership ranks. Racial diversity can deliver the same kinds of benefits. In a study conducted in 2003, Orlando Richard, a professor of management at the University of Texas at Dallas, and his colleagues surveyed executives at 177 national banks in the U.S., then put together a database comparing financial performance, racial diversity, and the emphasis the bank presidents put on innovation. For innovation-focused banks, increases in racial diversity were clearly related to enhanced financial performance. Of course, not all studies get the same results. Even those that haven't found benefits for racially diverse firms suggest that there is certainly no negative financial impact—and there are benefits that may go beyond the short-term bottom line. For example, in a paper published in June of this year, researchers examined the financial performance of firms listed in DiversityInc's list of Top 50 Companies for Diversity. They found the companies on the list did outperform the S&P 500 index—but the positive impact disappeared when researchers accounted for the size of the firms. That doesn't mean diversity isn't worth pursuing, conclude the authors: In an age of increasing globalization, a diverse workforce may provide both tangible and intangible benefits to firms over the long run, including increased adaptability in a changing market. Also, as the United States moves towards the point in which no ethnic majority exists, around 2050, companies' upper management and lower-level workforce should naturally be expected to reflect more diversity. Consequently, diversity initiatives would likely generate positive reputation effects for firms.

Evidence for the benefits of diversity can be found well beyond the U.S. In August 2012, a team of researchers at the Credit Suisse Research Institute issued a report in which they examined 2,360 companies globally from 2005 to 2011, looking for a relationship between gender diversity on corporate management boards and financial performance. Sure enough, the researchers found that companies with one or more women on the board delivered higher average returns on equity, lower gearing (that is, net debt to equity), and better average growth. 

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