Why diversity should matter to investors

By Larissa Fernand |  06-07-20 | 

Last year, Italian fashion house Gucci received disastrous publicity for selling a sweater that was said to resemble blackface. The $890 product in question was a black turtleneck sweater that pulls up over the bottom half of the face with a cut out and oversized red lips around the mouth.

The uproar led to the product being withdrawn, an apology, and the hiring of an individual to oversee the company’s diversity and inclusion efforts.

Luxury fashion house Prada felt the heat too. In 2018, it found itself at the receiving end of outrage over a blackface trinket (the Otto Toto keychain). They swung into action. Now they have a diversity and inclusion officer, and advisory council in place. Moreover, executives and workers have to undergo anti-discrimination, diversity, inclusion, and racial equity training. The company also agreed to hire more people of colour.

If you are under the impression that diversity is just a nice corporate programme rolled out by human resource teams, you could not be more wrong. It is a business and global reality that carries a huge cost.

Lack of diversity can result in goof-ups that ignite uproar the world over, thanks to Social Media. The cost in pulling products off the shelf, the dent in brand image, and the repercussions on subsequent sales can be significant.

Starbucks comes to mind; the knee-jerk reaction to public outcry after a Philadelphia-based employee called the police on two black men. It shuttered more than 8,000 stores across the U.S. on May 29, 2018, as “racial bias education day”. According to MarketWatch, that would have probably cost the company $12 million in lost revenue.

In 2018, Dolce & Gabbana cancelled its Shanghai fashion show, slated to be the biggest fashion show in the brand’s then 33-year history. It all started with a patronising ad showing a Chinese woman comically attempting to eat Italian cuisine with chopsticks. The backlash resulted in major Chinese e-commerce platforms and retail stores removing D&G products from their offerings and shelves.

While such retaliations are short lived, the intensity of the commercial impact and dent to brand perception cannot be ignored. Vogue Business noted that the brand health of D&G (the average of 6 dimensions of consumer sentiment towards a brand), took a sound beating. WWD estimated that the controversy could have potentially cost the brand 400 million euros, not counting the financial hit of cancelling such a massive event, nor the effects of lost sales from Western shoppers who might have joined the boycott.

Diversity is not just a feel-good factor. There is a reason why shareholders are increasingly concerned that corporate cultures are hospitable to women and minorities.

In a 2012 global analysis of 2,400 companies conducted by Credit Suisse, organizations with at least one female board member yielded higher return on equity and higher net income growth than those that did not have any women on the board.

A more recent report by McKinsey titled Diversity wins, makes a strong case for business diversity, and concludes that greater the representation, the higher the likelihood of outperformance. It observes that companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians.

A Morningstar report on Proxy Voting by 50 U.S. Fund Families took a look at how fund providers are engaging in the proxy voting process. It was very encouraging to note that diversity resolutions experienced one of the highest levels of support in 2019.

Diversity is multidimensional – skill, education, gender, ethnicity, race, nationality, generational (age), disability, sexual orientation (LGBTQ) and religion. Such rich human capital brings creativity and innovation to the table that can help target customers and reach audiences in ways that would not be possible without it. By leveraging representation from various aspects of society, a company can create a pre-emptive emotional bond between the consumer and the manufacturer/ service provider.

In this context, the example of McDonald’s drives home the point. The fast food company was applauded for the Kwanzaa ads, where the focus was not burgers and fries but a respectful acknowledgement of the African-Americans’ sense of family and community. Another time, McDonald’s was praised for a commercial that featured a simple birthday party. But Hispanics recognised quinceañera, the celebration of a girl’s 15th birthday and the beginning of her journey into womanhood.

In Essentials of Management, Andrew DuBrin notes the competitive and financial advantage resulting from diversity.

A study at J C Penney Inc. found that the largest sales growth was found in stores during one year when managers and subordinates perceived a highly pro-diversity climate. In contrast, the lowest sales growth took place for stores in which both managers and subordinates perceived a less hospitable diversity climate.

A study of 250,000 crew members from 3,400 quick-service restaurants indicated that diversity helps reduce turnover. Crew members were more likely to quit when they were the only member of their demographic group within the crew.   

But…

For diversity to bring a compelling competitive advantage to the firm, it must be woven into the social architecture of the organization. It is not as superficial as having a diversity programme.

Neither should attempts at encouraging diversity be purely reactive and restricted to damage control. It MUST be a core component of a company’s mission.

The time has come to go beyond levelling the playing field. It is time to change the game altogether.

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