The central concept is that pursuing EDI will result in financial benefits for all stakeholders in a firm. This article explores the extent to which this 'business case' actually is or should be a reason for EDI.
"The evidence tells us there is a strong business case for diversity"
"A diversity of perspectives and thought, when part of an inclusive culture, results in better judgements and decision making [and]…reduces the risk of groupthink and encourages innovation"
These are quotes from about the Financial Conduct Authority ("FCA") from earlier this year (see 'Why diversity and inclusion are regulatory issues' and 'Diversity & Inclusion – why it matters to us'. The central concept is that pursuing EDI will result in financial benefits for all stakeholders in a firm.
This article explores the extent to which this 'business case' actually is or should be a reason for EDI. Is it really necessary or appropriate to 'incentivise' EDI financially, when the issue might properly be described as purely ethical? A firm’s advancement of EDI may not necessarily generate obviously tangible financial benefits. If so, does this mean that, in the absence of a ‘business case’, EDI should not be pursued?
This question matters because it arises for other environmental, social and governance ("ESG") considerations with the potential to run counter to (at least in the short term) 'shareholder value'.
Does EDI actually have a good business case? Statistics cited by the FCA (see the January 2021 speech by Georgina Philippou: 'Why does the FCA care about diversity and inclusion?'), seem more tentative than clear-cut as to increased EDI being the cause, and improved commercial performance being the effect:
"[McKinsey’s] [How [EDI] Matters] … Report, [from] May 2020,...found that the most ethnically diverse companies are 35% more likely to outperform the least diverse.
… the Race in the workplace: McGregor-Smith review (2017) … the potential benefit to the UK economy from full representation of BME individuals across the labour market, is estimated to be £24 billion a year."
There appear to be some unconvinced by EDI’s financial benefits.
However, there is evidence which suggests that shareholders are increasingly concerned with EDI, irrespective of financial returns. According to a survey of 600 investment professionals globally, including 100 UK participants:
The FCA recognises that shareholders can also be societal or ethical stakeholders: "… for firms to be more purposeful is not just an FCA objective, but is increasingly a broader societal expectation. There are ever more insistent calls for firms and their leaders to step forward on … on [EDI], on ESG (environmental, social and governance issues), … and not just to act so as to optimise profitability …" (DP20/1).
While taking account of EDI metrics may be a growing investment trend, there are potential problems with the quality of data and of the degree of standardisation – and therefore the reliability - of metrics in any quantitative approach.
For instance, McKinsey (see above) say:
In short, causality in the EDI business case remains unproven. Proving causality will require firms to emulate the FCA in collecting more granular data, if only to understand and address EDI issues better (see the 'Ethnicity action plan').
Moreover, simply hiring or retaining larger numbers of personnel with diverse characteristics does not necessarily mean more -
As the FCA has highlighted:
In addressing ‘simple metrics’, the FCA has also recognised the multiplicity and complexity of issues that can lie beneath (or belie) headline numbers:
"… black people are not all the same. We have different experiences as a result of background, sexual orientation, gender, having a disability, and so forth." ('Why black inclusion matters to us', April 2021).
When individuals have multiple marginalised identities, they subsequently face layered, and often more challenging, levels of inequality ('intersectionality'). This requires firms’ inclusivity methodologies (e.g. escalation and responsiveness within line management reports and structures, 'town halls' or other discussion forums, and whistleblowing) to be more effective on a broader basis.
In the above speech, the FCA noted that "You cannot have meaningful representation without inclusion – black employees must feel able to speak up and feel like they are being listened to." It’s one thing to recruit diverse talent but something else to enable already marginalised employees to thrive. In short, the FCA is saying that EDI needs to be a key feature of the entirety of a firm's culture.
It is clear that, from the FCA's perspective, there is a business case for EDI, even if the case isn't one that is founded on increased short-term shareholder value (see DP20/1 above):
"Consumers who experience firms acting purely and selfishly for profit lose trust and may vote with their feet … and shareholders that are more sensitive to reputational and regulatory risk may decide they want to invest in firms that have healthy and sustainable profits."
Further, the FCA’s obligation to protect consumers overrides shareholder value considerations which might potentially be inconsistent with EDI initiatives. Research by the FCA shows that ”Black adults” are disproportionately represented among vulnerable consumers, putting them at greater risk of financial harm. One may expect these findings to be reflected in the FCA’s supervisory approach moving forward.
Whether or not a firm takes the view that pursuing EDI is a proper end in its own right, there is a clear regulatory impetus that the business case does not involve increasing productivity within a particular timeframe but, as the FCA puts it, involves 'reflecting the society we serve'.
First published on Thomson Reuters.