In This Article Expand or collapse the "in this article" section Diversity and Firm Performance

  • Introduction
  • Strategies for Maximizing the Benefits of Diversity to Improve Firm Performance
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Management Diversity and Firm Performance
by
Karin Dun, Michael Santoro
  • LAST MODIFIED: 21 June 2024
  • DOI: 10.1093/obo/9780199846740-0222

Introduction

The existing body of management literature explores the impact of diversity on firm performance and produces complex results that generally support the business case for diversity policies when thoughtfully implemented. A common theme gleaned from much of the literature is that hiring individuals from varied backgrounds will lead to improved innovation, creativity, decision making, and business outcomes. Leaders hope their diversity policies will increase financial returns and market value. Collectively, the research generally supports this claim. However, a number of studies identify circumstances in which one or more diversity variables negatively impact performance or produce mixed results depending on social, psychological, or environmental contexts. To achieve a cohesive understanding of diversity’s impacts on firm performance, researchers must consider confounding factors that potentially moderate the positive effects of diversity and thus yield unexpected outcomes. Where diversity is found to harm performance, the authors typically recommend potential methods to overcome the negative effects. In general, the studies highlight the significance of implementing flexible work programs and processes that incorporate diversity practices. Because the collective research indicates that contextual factors impact diversity effects, organizations should avoid implementing diversity programs by using a one-size-fits-all approach. Leaders and human resource professionals should thoroughly assess both internal and external conditions of the business, identifying factors that may moderate the effects of diversity programs. Based on such assessments, organizations should tailor diversity programs to maximize potential benefits. In addition, firms are less likely to realize the benefits of diversity when individuals from underrepresented groups are hired but lack support once employed by the organization. A number of studies find that to leverage diversity benefits effectively, leaders and management teams should encourage inclusive work environments that support varied perspectives, create new opportunities for learning, and encourage creativity. Inclusion encourages a sense of belonging and trust among team members. When employees feel included, organizations derive benefits from diversity such as increased team effectiveness, innovation, and a greater competitive advantage for the organization. The authors would like to thank research assistants Jonathan Aidlberg, Katelyn Johnson, Bethlehem Melaku, and Annabelle North for their dedication and hard work. We would also like to thank Prof. Erika George and Prof. Hooria Jazaieri for their comments on an earlier draft. In addition, the authors wish to acknowledge Dr. Francine Gordon for her pioneering course on Diversity, Equity, and Inclusion.

Methodology

The objective of this article was to conduct a comprehensive analysis of management literature from the past decade, with a focus on examining the impact of diversity on firm performance. Recognizing the importance and growing interest of diversity’s effects on organizational performance, particularly regarding how diverse teams can drive innovation and better decision making and improve business outcomes, the article is a qualitative review of literature published in top-tier management journals. Articles are categorized based on the impact of specific diversity variables on firm performance. The research team read and extracted key findings from a selection of approximately fifty relevant articles published over the last ten years, and through its analysis, extracted key insights and developed key findings. The aim was to understand the complexities and nuances of diversity’s role in boosting firm performance, the factors that moderate diversity effects, the significance of contextual considerations in implementing diversity, and the importance of coupling diversity with inclusion to achieve optimal business outcomes.

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