O. C. Richard, T. Barnett, S. Dwyer, & K. Chadwick
Academy of Management Journal (2004)
These researchers looked at the existing research on how diversity affects organisations’ performance and noticed that not all research comes to the same conclusion. Some research suggests that the more diversity in an organisation the better the performance, while others show that highly diverse organisations perform less well. The researchers understood that there does not appear to be a simple relationship between diversity and performance, and thought that the different characteristics of organisations could account for the different results that had previously been found. They wanted to investigate this possibility.
To do this they took a large sample of small, medium and large bank based on their total assets and took measures of diversity, performance and the banks’ ‘entrepreneurial orientation’; to what extent were they innovative, and how much risk the bank took on. For diversity, they asked HR departments about their banks demographic characteristics in terms of ethnicity and gender amongst managers. Senior executives, middle managers, and supervisors were included in their assessment. Firm performance was measured by the productivity of staff based on net income per employee, as well as a baseline performance measure which calculated the banks’ return on equity. Innovation and risk taking behaviours were assessed by asking the banks’ presidents to complete a questionnaire about their organisation’s degree of innovative and risk taking activities. In total they assessed 153 banks over one fiscal year.
On the face of it, the results showed that organisations with more ethnic diversity also performed better (than those with less diverse management). However, when the researchers looked at the relationship more closely adding the effects of innovation and risk taking, they found that the story between diversity and productivity was much more complex.
When looking at how diversity related to performance in organisations which reported high or low innovation, they saw that the relationship was not a simple one where as diversity increased, so did performance. What they found instead, was that in organisations that reported low levels of innovation, the percentage of ethnically diverse managers did not have a great effect on productivity – that is performance was largely the same for banks with low, medium and high levels of diversity. However, in highly innovative banks a ‘curved’ relationship was found. That is, as the banks reported levels of diversity moved from low to moderate, performance declined. Banks with lower levels of diversity had better performance than banks with moderate levels of diversity. But as banks’ diversity levels moved from moderate to high, productivity dramatically increased.
There was a similarly complex picture when looking at levels of risk taking in banks. Here the researchers split the banks into either low risk or high risk organisations and looked at how diversity and performance was related. They found that in high risk taking banks, those with both low and high levels of gender diversity performed more poorly than those with moderate levels of gender diversity. In low risk taking banks, productivity declined as gender diversity increased from low to moderate, but then improved when gender diversity was high.
It is clear from this that the argument that greater diversity equals better/poorer performance is too simplistic. It is important to understand that diversity and performance may depend on the level of diversity in the management group, as well as the context that the organisation operates in. Here, high risk banks performed better when they had moderate levels of diversity. It may be that groups with largely similar diversity characteristics do not do well in environments requiring quick decision making and aggressively competitive behaviour. As diversity increases, the management team may be better equipped to address a wider range of high risk strategies, but once levels of diversity exceed moderate levels, it is possible that communication problems or biases increase causing conflict or issues with cooperation, resulting in poorer performance.
This presents a very interesting perspective which would explain many of the conflicting findings regarding diversity. However, in order to get a much clearer picture, more work needs to be done in a range of other contexts with a wider range of diversity. As the authors themselves noted, the sample of bank managers they used were not generally diverse (although they put measures in place to mitigate for this) and it would be good to understand if these relationships remain in other contexts.
The relationship between cultural diversity (in terms of gender and race/ethnicity) at the organisational level and performance is a complex one; when diversity is very high performance is increased when the entrepreneurial orientation emphasis innovation and decreases when it emphasises risktaking.
The findings are based on a single cross-sectional field study in the US banking industry precluding strong causal inferences and generalisability to other sectors and countries. However, they highlight in line with other findings (Cunningham, 2009; Richard, 2000) that the strategy of an organisation might influence how diversity affects performance with an innovation, growth and valuing diversity strategy likely facilitating performance.
Richard, O. C., Barnett, T., Dwyer, S., & Chadwick, K. (2004). Cultural diversity in management, firm performance, and the moderating role of entrepreneurial orientation dimensions.
Academy of management journal, 47(2), 255-266.
Cunningham, G. B. (2009). The moderating effect of diversity strategy on the relationship between racial diversity and organizational performance.
Journal of Applied Social Psychology, 39(6), 1445-1460.
Richard, O. C. (2000). Racial diversity, business strategy, and firm performance: A resource-based view. Academy of management journal, 43(2), 164-177. Cunningham, G. B. (2009). The moderating effect of diversity strategy on the relationship between racial diversity and organizational performance.
Journal of Applied Social Psychology, 39(6), 1445-1460.