Disregard Diversity at Your Financial Peril: Diversity as a Financial Competitive Advantage

Published: 18/12/2013

Vol. 3, No. 4
Sheryl L. Axelrod

Sheryl L. Axelrod, a Diversity Fellow in the GPSolo and Small Law Firm Division, is president of The Axelrod Firm PC, a four-attorney, certified woman-owned law firm in Philadelphia. The firm is a member of the National Association of Minority and Women Owned Law Firms (NAMWOLF).

The data is in: diversity is far more profitable than less diverse business models.

Supposedly, the business case for diversity is weak. It’s mainly “wishful thinking.” That’s what the Chicago-based Institute for Inclusion in the Legal Profession concluded in its 2011 report, “The Business Case for Diversity: Reality or Wishful Thinking.” The IILP’s review of data was so comprehensive, the study was widely accepted as definitive. There’s just one problem: the report never actually took a direct look at whether diversity is profitable.

The IILP considered a number of factors: whether corporate law departments incentivize law firm diversity; whether corporations disengage from law firms that fail diversity standards; whether corporate clients ask about law firms’ performance in becoming diverse; and how many lawyers are told they received business as a result of their firm’s diversity. These are all important issues, but they don’t directly speak to the profitability of diversity. If you want to know whether one product is more profitable than others, you could ask consumers whether they will buy it, but that won’t answer the question. You could ask them whether they will stop going to stores that don’t sell it, but that won’t answer the question, either. You need to look at customer, revenue, and profit figures.

The same holds true for the business case for diversity. The issue is whether diversity is more, less, or equally profitable than less-diverse business models. Specifically, the issue is whether it is more profitable for law firms to have diverse leaders—people who look more like the composition of the legal community in terms of their gender, race, religion, sexual orientation, nationality, age, disability, and other metrics—or whether law firms with more homogeneous leaders are more profitable. You can’t find out from asking in-house counsel whether they seek out diverse law firms. You have to look at which companies are more profitable.

Moving Past Assumptions: Diverse Companies Outperform Their Homogeneous Counterparts

Having Women at The Top Pays

A number of recent business studies, including a 2011 research report in Catalyst, Inc. by Nancy M. Carter and Harvey M. Wagner entitled “The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004–2008),” looked at the financial returns of companies with three or more women on the board. The findings are astounding. Those companies outperform companies with all-male boards by 60 percent in return on invested capital, 84 percent in return on sales, and 60 percent in return on equity.

Compare the Fortune 500 companies with the most women on their boards with those with the least. The companies with the most outperformed those with the least by 66 percent in return on invested capital, 42 percent in return on sales, and 53 percent in return on equity. Firms with few to no women at the helm should take stock of the enormous economic advantage their competitors with more women in charge have over them.You can see it looking at Fortune 500 companies. The positive influence of female board members is so strong that as the percentage of women board members of Fortune 100–500 companies drop, so does the success of the companies, according to the Catalyst, Inc. report “2010 Catalyst Census: Fortune 500 Women Executive Officers and Top Earners.” Women represent 18 percent (nearly one in five) board members of the most successful US companies, the top Fortune 100 companies. Catalyst found that as you move from Fortune 100 companies to their slightly less successful Fortune 200 counterparts, the number of women on the board decreases to 16.7 percent. Fortune 300 companies have slightly fewer women on the board, 14.9 percent, and so on down to Fortune 500 companies. Less women in leadership equates with less financial success.

This squares with what Brian S. Moskal discussed in “Women Make Better Managers” in Industry Week in 1997. Looking at over 900 managers at top US corporations, “women’s effectiveness as managers, leaders, and teammates outstrip[ped] the abilities of their male counterparts in 28 of 31 managerial skill areas.”

Forward thinking companies as trailblazing as The Coca-Cola Company are paying attention. Catalyst reports in “The Coca-Cola Company— Global Women’s Initiative: Women as the Real Drivers of the 21st Century” (2013):Externally, 5by20 is Coca-Cola’s global commitment to enable the economic empowerment of 5 million women entrepreneurs across the company’s value chain by 2020 [thus the name, 5by20 for 5 million women entrepreneurs by 2020]. Through this effort, Coca-Cola helps women overcome barriers that they face in the marketplace and grow their businesses sustainably.Coca-Cola’s initiative has significantly increased women’s representation around the world. Between 2008 and 2012, the proportion of women leaders increased from 23 percent to 29 percent among senior-level women and the proportion of immediate pipeline women increased from 28 percent to 34 percent, with consistent increases across regions. Globally, Coca-Cola’s external recruitment of women leaders rose from 13 percent in 2007 to 41 percent in 2011. The representation of women in Coca-Cola’s key assessment and development programs rose from 21 percent in 2007 to 49 percent in 2011. The reach of 5by20 has recently expanded to include 12 countries; by 2011, it had impacted 130,000 women, and was on track to reach 300,000 women by the end of 2012.

Racial Diversity at the Top Pays, Too

Companies with greater racial diversity at the top leave their more homogeneous counterparts in the dust, too. According to research cited in a 2009 article, “Does Diversity Pay?: Race, Gender, and the Business Case for Diversity” by Cedric Herring in the American Sociological Review, on average, the most racially diverse companies bring in nearly 15 times more revenue than the least racially diverse. In fact, for every percentage increase in racial or gender diversity up to that represented in the relevant population, sales revenues increase approximately 9 and 3 percent respectively.

Racial diversity, Herring found, is a better determinant of sales revenue and customer numbers than company size, age, or number of employees at a worksite. Companies with the highest rates of racial diversity reported having on average 35,000 customers, whereas companies with the least racial diversity reported having only 22,700. According to Herring, companies that even only marginally increase their racial diversity gain an average of more than 400 customers.

IBM: An Example of Diversity and Revenue Growth

Diversity represents a competitive advantage, and you can measure it financially just as IBM did. As a result of implementing a diversity task force initiative, IBM grew its female executives ranks by 370 percent, its ethnic minority executives ranks by 233 percent and the number of self-identified gay, lesbian, bisexual, and transgender executives by 733 percent. The result, as David A. Thomas wrote in “Diversity as Strategy” in the Harvard Business Review in 2004, was stunning:[T]he work of the women’s task force and other constituencies led IBM to establish its Market Development organization, a group focused on growing the market of multicultural and women-owned businesses in the United States. . . . In 2001, the organization’s activities accounted for more than $300 million in revenue compared with $10 million in 1998. Based on a recommendation from the people with disabilities task force, in October 2001 IBM launched an initiative focused on making all of its products more broadly accessible to take advantage of new legislation— an amendment to the federal Rehabilitation Act requiring that government agencies make accessibility a criterion for awarding federal contracts. IBM executives estimate this effort will produce more than a billion dollars in revenue during the next five to 10 years.

Workforce diversity helped IBM attract a more diverse base of customers that included women and minority-owned businesses. As Thomas put it:IBM’s efforts to develop the client base among women-owned businesses  . . . quickly expanded to include a focus on Asian, black, Hispanic, mature (senior citizens), and Native American markets. The Market Development organization has grown revenue in the company’s Small and Medium-Sized Business Sales and Marketing organization from $10 million in 1998 to hundreds of millions of dollars in 2003.

When IBM became more diverse, its revenues skyrocketed.

Diversity: The Potential for Much Higher Law Firm Profits

The benefits corporate America reaps from diversity apply to law firms. Douglas E. Brayley and Eric S. Nguyen, authors of “Good Business: A Market-Based Argument for Law Firm Diversity” in The Journal of the Legal Profession in 2009, studied the data from the 200 highest-grossing firms (the Am Law 200). Highly diverse law firms report, on average, much higher profits per partner and revenue per lawyer than the rest of the Am Law 200 firms.

Even controlling for hours, location, and firm size, the study’s authors found that “differences in diversity are significantly correlated with differences in financial performance.” In fact, according to the study, “a firm ranked in the top quarter in the diversity rankings will generate more than $100,000 of additional profit per partner than a peer firm of the same size in the same city, with the same hours and leverage but a diversity ranking in the bottom quarter of firms.”

What is stunning about these figures is that the most diverse of the Am Law 200 firms could be far more diverse and inclusive than they currently are. The $100,000 per partner additional profit differential could presumably be far greater.

In addition, money at law firms is of course not equally distributed among partners. Those at the top are paid far more than the partners below them. That means those in the highest positions of law firms, those in the best position to change the direction of their firms, have the greatest economic incentive to embrace diversity and inclusion. They stand to profit the most from it. To do so, they should not only recruit diverse talent, but also retain it, engage it, promote it, and invite it to the management table.

The reason diversity works is that when a company’s leadership becomes more diverse, far more changes than the fact the people in it become a melting pot microcosm of their community. Studies show the company performs better.

There may be a host of reasons why. Perhaps women and minorities see that they have a real opportunity for advancement and become more motivated to not only stay in the company, but also to invest themselves in its success.

Maybe when companies become more diverse, they are better able to solve problems and seize potential opportunities. There is data suggesting so. According to Scott E. Page, author of the 2007 book The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies, on almost every measure, greater racially, ethnically, and culturally diverse workplace teams function more effectively than more homogenous teams. In fact, Page found diverse thinkers (defined as those with different educational backgrounds, experience levels, and/or racial, gender, and ethnic identities) are markedly better at solving problems than teams selected for their intellectual ability. The diverse team’s collective intelligence, he found, is generally significantly greater than a team whose individual members are uniformly “smart.” According to Deloitte,Only Skin Deep? Re-Examining the Business Case for Diversity (Sep. 2011), the most plausible explanation for these findings is that teams with members from diverse backgrounds, experiences, and perspectives avoid “groupthink,” whereas nondiverse teams approach problems from the same angle.

Companies That Don’t Diversify Face Greater Exposure

Diversity not only holds great potential to increase law firm profitability; openness to candidates from diverse backgrounds—for employment, raises, bonuses, equity, etc.—is essential to minimizing a law firm’s exposure.

In December 2012, Sanford Heisler LLP, which had won a massive judgment against Novartis for gender discrimination, announced that it was representing Francine Griesing, founder of Griesing Law LLC, in a discrimination suit against Greenberg Traurig LLP, where she had previously been a partner. Ms. Griesing claimed that Greenberg Traurig officials denied her the compensation, promotions, and support that the firm accorded to less-productive partners. Sanford Heisler sought class action certification for the 215 current and former female Greenberg Traurig partners who could join the lawsuit.

The lawsuit followed a multiyear investigation by the Equal Employment Opportunity Commission that concluded, according to a Sanford Heisler news release, that there is “reasonable cause to support class-wide claims of gender discrimination in compensation” and “reasonable cause to support claims that women are treated less favorably in the terms and conditions of their employment.”

Ms. Griesing’s lawsuit should be a wake-up call to law firms engaging in discriminatory practices. A great many law firms fall into that category. Although just under one-third of lawyers reported in the National Association for Law Placement (NALP) NALP Directory of Legal Employers are women—32.67 percent in 2012—female lawyers make up only 15 percent of equity partners, and female equity partners are paid 86 percent of what their male peers are, according to a study of the nation’s 200 largest firms conducted by the National Association of Women Lawyers and the NAWL Foundation using data provided by law firms. The numbers are worse for women of color. In its news release, NALP said women of color made up a mere 2.16 percent of law firm partners in 2012. When they added male attorneys of color the numbers improved, but were still not representative of minorities’ numbers in law firms. Minorities account for 6.71 percent of partners in the nation’s major law firms whereas they “make up 12.91 percent of lawyers reported in the NALP Directory of Legal Employers.” On average, law firms are failing to promote women and minorities to partnership in representative numbers, and law firms are paying those that are equity partners less than their white, nondiverse male counterparts.

I minimize companies’ exposure to employment and general liability matters for a living. A great way companies can lower their exposure is by implementing practices to correct these discrepancies. Law firms should conduct internal audits and actively work to lessen the chance women and minorities will be passed over for opportunities they deserve or treated less favorably in other terms or conditions of their employment.

From corporate America to American law firms, the business case for diversity is overwhelming. Law firms that hold women and minorities back from their full potential not only expose themselves to liability, they also prevent themselves from potentially multiplying their customer base and earning greatly increased profits. They lose out on the great financial competitive advantage that diversity and inclusion represents.


Reprinted substantially in its original form from the May/June 2013 issue of Diversity & the Bar, published by the Minority Corporate Counsel Association. Reprinted with permission of the author.