Diversity's Business Case Doesn't Add Up

    The multibillion-dollar diversity industry is thriving in corporate America. But before you spend another dime on your diversity program, carefully consider this conclusion reached by Thomas A. Kochan, one of the most respected human resources management scholars in the country: "The diversity industry is built on sand," he declares. "The business case rhetoric for diversity is simply naïve and overdone. There are no strong positive or negative effects of gender or racial diversity on business performance."

    Kochan, a professor of management at MIT’s Sloan School of Management, bases his conclusions on a recently completed five-year study of the impact of diversity on business results. The investigation involved a detailed examination of large firms with well-deserved reputations for their long-standing commitment to building a diverse workforce and managing diversity effectively. It built on a growing body of research that raises painful questions for companies that pour money into diversity programs, and for the diversity industry that supplies them with a dazzling array of diversity products.

    At a time when charges of racial harassment are way up, and racial discrimination class-action lawsuits are enjoying a renaissance, diversity programs are flourishing. Organizations appoint diversity officers. They hire diversity consultants, coaches, and trainers. They adopt diversity scorecards, benchmarks, and best practices, and send executives to diversity conferences and leadership academies. But despite the astonishing number of products and services--ranging from the worthy to the banal--one item is in very short supply: hard metrics for measuring performance results or the return on diversity spending.

    For years, the industry has claimed that diversity programs yield higher performance and greater productivity, but the evidence offered is largely anecdotal or based on limited data collected through questionable methods. The link to the bottom line, an entrenched part of diversity rhetoric, remains largely undocumented. Of the 20 large corporations with well-established diversity programs that Kochan initially contacted for his study, none had ever conducted a systematic examination of the effects of their diversity efforts on bottom-line performance measures.

    "Some companies have completed limited studies at a divisional level, but there are no formal reports with valid and scientifically determined numbers," says Michael C. Hyter, president and CEO of J. Howard & Associates, a large diversity consultancy in Boston. "Organizations like having the flexibility of not being put in a box about whether this does or doesn’t work. Too often, they are given a lot of credit for their efforts anyway."

    If there is little evidence on performance results, there’s even less indication of effectiveness in the aggregate compliance data. Although most diversity programs trace their roots to compliance efforts and, in some cases, the struggle against racism, the number of job-discrimination charges filed with the Equal Employment Opportunity Commission, including race-based charges, hit a seven-year high in 2002. The recent increase in charges can be linked to the recession--work-related lawsuits typically rise during economic downturns--but there was no evidence of improved compliance before the recession hit. Many companies that are routinely praised for their diversity programs--including Coca-Cola and Ford Motor Company--still find themselves in court fighting epic racial-discrimination lawsuits. Wal-Mart, ranked number one on Fortune’s prestigious "America’s Most Admired Companies" list for 2003, is facing the largest sex-discrimination lawsuit in U.S. history, with as many as 500,000 plaintiffs. Charges of racial harassment filed with the EEOC have increased fivefold in the past decade.

    The diversity industry and its corporate clients continue to promote diversity programs as a "strategic imperative" that boosts performance by unleashing the creative power of diverse groups. As Xerox Corporation chairman and CEO Anne M. Mulcahy observes, "Somehow, diversity breeds creativity." Unfortunately, the "creativity" that some Xerox employees demonstrated was clearly not what Mulcahy had intended. They fashioned a workplace display of African-American dolls with nooses around their necks, igniting a lawsuit against the company in 2002. EEOC charges against the company in the same year included racial discrimination in promotions and compensation and systematic retaliation.

    Xerox launched its first workplace equality efforts almost 40 years ago. The company draws 30 percent of its workforce from racial minorities and wins numerous awards for its diversity program. Yet it still faces multiple discrimination lawsuits. The number of racial-harassment cases involving hangman’s nooses has exploded in recent years, according to the EEOC, with incidents reported at dozens of leading companies, including Home Depot, Lockheed Martin, Boeing, Texaco, and Northwest Airlines.

State of the industry
    "Diversity has been promoted on the basis of a very weak construction of the business case and on grounds of social justice, but to be successful, programs must be built on scientific evidence," Kochan says. Without this evidence, especially in the context of budget constraints forced by the economic downturn, diversity programs may come under the same scrutiny routinely turned on most business functions.

    Hyter believes that an industry shakeout is on the horizon. "Five or 10 years from now, there are only going to be a few serious practitioners left--those who have demonstrated the ability to help organizations with measurable results," he says. Kochan believes, however, that the change must begin in human resources management. "Consultants sell what they are good at," he says. "They will shift what they provide when human resources executives become more sophisticated in what they demand."

    Kochan’s study builds on earlier academic research that questions the effectiveness of diversity-management programs and notes the unwillingness of most companies to explore the issue of results. "Meaningful discussions and analyses do not occur because companies are concerned about legal issues and because people simply want to believe that diversity works," Kochan says. "There is a great deal of defensiveness. Even when diversity is managed well, the results are still mixed. The best organizations can overcome the negative consequences of diversity, such as higher turnover and greater conflict in the workplace, but that still does not mean that there are positive outcomes."

    Luke Visconti, partner and cofounder of DiversityInc, which runs one of the largest Web sites in the industry, dismisses Kochan’s conclusion. "It defies gravity and flies in the face of logic," he says. "I can’t even imagine how someone could come up with that conclusion unless there was no diversity among the people doing the study." (Kochan’s team, in fact, is a diverse group.) Visconti’s Web site includes extensive resources on diversity, but doesn’t reference any of the studies that raise questions about results.

    Kochan’s team of researchers, supported by Business Opportunities for Leadership Diversity and the Society for Human Resource Management, struggled to find companies willing to participate in its diversity study. "Although extensive academic studies show that there is little evidence to support the business case for diversity, the business community has not embraced the literature," Kochan says. "Instead, there have been a lot of superficial analyses of how diversity works in organizations.

    "There are estimates that companies spend $8 billion on diversity training annually," he adds. "Much of this is wasted because it is spent on programs for awareness and valuing diversity that do not give people the skills they need." Kochan’s study, forthcoming in the Human Resource Management Journal, presents findings that have dramatic implications for the kind of diversity training that must be provided to achieve performance improvements. Training programs aimed at "valuing diversity" and addressing subtle forms of discrimination and exclusion do not lead to long-term changes in behaviors, the study notes. Instead, group members and leaders must be trained to deal with group process issues, with a focus on communicating and problem-solving in diverse teams.

    Hyter says the diversity industry includes "all types of people who profess to be experts in this area and who have a stake in companies’ programs," but that no recognized set of credentials or professional certification exists for practitioners. Diversity consultants are chasing what he estimates to be $400 to $600 million annually in consulting fees alone. Human resources executives often don’t demand documented results from outside consultants or in-house diversity staff because "it’s easier to create activities and get credit for doing something than it is to create metrics and measures and hold people accountable," he says.

    The business community has not pursued the implications of the academic studies, in part, Kochan says, "because of the traditional breach between the corporate and academic realms." Liswood retorts that "the academics might do a better job of marketing their work."

    Kochan acknowledges that quantifying performance results is problematic. "The needed data cannot, in most cases, be culled from existing human resources data," he says. "To create the needed data and analysis, human resources executives must run experiments within their organizations. They must invest in efforts to train departments in group processes, and then follow their performance over time, comparing the performance of groups that have been trained with that of groups that have not, using hard performance measurements based on the goals of the unit." These measurements might be time-to-market, error rates, sales growth, or any number of other productivity measures.

   The lack of sophisticated metrics for measuring diversity results derives, in part, from a broader problem. "Human resources metrics in general don’t have the same analytical power as other business metrics," Liswood says. In addition, diversity programs often center on training, a human resources field where metrics are particularly weak. According to the American Society for Training and Development’s 2002 state of the training industry report, only one in 10 companies attempts to create results-based evaluations of its training programs.

    The business case for diversity that dominates industry claims and corporate goals focuses on three related objectives: to allow organizations to tap talent pools and incorporate new ideas and perspectives from employees of different backgrounds; to expand market share; and to ensure legal compliance.

    The workplace objective may be simply a function of local labor market realities, or it may center on the ability to attract and retain female and minority candidates who will bring fresh viewpoints to work. Market-share objectives target the growing purchasing power of female and minority consumer groups, which many companies believe can be tapped only through an employee population that matches the customer base. Compliance objectives stress the need to avoid costly discrimination lawsuits and the damage to reputation that occurs when companies are charged with illegal workplace practices.

    Trivialization also occurs as the number of groups covered by diversity initiatives expands to include every conceivable cultural minority, far beyond historically underrepresented or oppressed groups. "There are practitioners in this business who push a very broad definition of diversity because they are trying to appeal to a larger audience to secure their own fate," Hyter says.

    Microsoft’s diversity program, for example, now includes "employee relations groups" for single parents, dads, Singaporean, Malaysian, Hellenic, and Brazilian employees, and one for those with attention deficit disorder. "Companies run a very high risk of allowing the broader definition of diversity to lead to the neglect of certain groups," Hyter says. "This hits a critical and raw nerve, and it’s a valid point."

    Patricia Pope, CEO of Pope & Associates, a diversity-management firm in Cincinnati, adds that "there’s been this desire to get away from race and gender issues because they are so uncomfortable. It’s often easier for companies to tackle other differences, such as diversity of thought or diversity of birth order."

    Several studies, including Kochan’s, have found that companies generally are more successful in managing diversity with respect to gender issues than racial and ethnic issues. The empirical studies indicate that racial and ethnic diversity may, in fact, have a negative impact on business performance unless specific forms of analysis, training, and monitoring are in place. If left unattended or mismanaged, diversity is likely to produce miscommunication, unresolved conflict, higher turnover, and lower performance.

    With little evidence of improved business performance, financial results, or accountability, there is much work to be done, Kochan says. "Diversity can enhance business performance, but only if the proper training is in place and the climate and culture support it. If companies can’t do this, they will lose the opportunity that diversity represents. There could be backward movement, and the negative consequences of diversity could predominate."

    The industry’s singular focus on success stories, and corporate reluctance to track and report results, makes it difficult to determine if diversity programs have fulfilled their objectives. Kochan’s research indicates that they haven’t. R. Roosevelt Thomas Jr., CEO of R. Thomas Consulting and Training, Inc., a large diversity consultancy in Decatur, Georgia, says that companies may succeed in "building a pipeline of people with all kinds of demographic characteristics" but then fail at dealing with different behaviors.

    Building diversity programs on bedrock instead of sand begins with recognizing "that there is virtually no evidence to support the simple assertion that diversity is inevitably good or bad for business," Kochan says.

    "Unable to link HR practices to business performance, HR practitioners will be limited in what they can learn about how to manage diversity effectively, and their claims for diversity as a strategic imperative warranting financial investment will be weakened accordingly," Kochan says. The first step in laying the new foundation, he says, is adopting "a far more analytical approach." And dropping the hype.