Diversity Return on Investment
Making the Business Case for Diversity

Diversity recruitment is one of the hottest topics in corporate America today. The results of the 2000 Census firmly established that the ethnic make-up of the U.S. is changing at a rate faster than anyone anticipated. But corporate America was already becoming aware of the changing demographics, causing many corporate frontrunners to establish diversity initiatives in the mid-1990s. Less than a decade later, the bottom line results have not yet been measured in dollars, but rather in the demographics of women and minority recruitment, retention and supplier diversity.


Diversity enhances:
• Connection with the customer: The diverse needs of diverse customers need to be understood
• Employee motivation: Employees maintain productivity when they are treated with dignity and respect.
• Employee innovation: A work environment favorable to diversity is open and flexible and also favorable to employee innovation.
• Employee recruitment and retention: A workplace that emphasizes interest and concern for its employees as people first is able to attract a higher-quality workforce.
• Continuous quality improvement: An environment where employee talents are valued will help to continually improve quality.
(City of Mesa, Arizona, 2003)


Calculating DROI — Metrics

While little specific research data exists regarding the financial benefits of diversity to associations, it has long been established that private companies with the highest rating on equal employment opportunities have performed better in the stock market than companies with poor performances in areas related to hiring and advancing women and nonwhites. According to research conducted by Covenant Investment Management, the earnings of these highly ranked companies were two and a half times higher on average. It is fair to say, that any company that does not meet the opportunities and challenges of a rapidly changing work force and marketplace will be left behind the competition.

According to SHRM: (Society for Human Resource Management)
• Diversity initiatives can improve the quality of an organization’s workforce and be the catalyst for a better ROI in human capital.
• Customer bases are becoming more diverse than the workforce:
“Minorities” are the majority in six of the eight largest metropolitan areas of the U.S.
The combined Black, Hispanic and Asian buying power is more than $750 billion
Women are the primary investors in more than half of the U.S. households

The financial rewards of appealing to a more-diversified customer base are significant. Women purchase 70 to 80 percent of all products; African Americans spend nearly $500 billion each year on goods and services; and Hispanics are the fastest growing consumer groups in the U.S. A reputation for fair treatment is one of the primary reasons women and minority consumers say they remain loyal to a company.

According to Dr. Edward E. Hubbard, author of “Measuring Diversity Results” and “How to Calculate Diversity Return on Investment,” diversity performance is challenging to measure, because not everything can be easily measured with numbers (i.e. creativity, diverse work team productivity, innovation). Diversity impacts individuals, teams, the organization, customer markets, and communities at large.

He suggests that there is a diversity value chain that reflects value-added results, standards, diversity metrics and their impact:

Example: Diversity Best Practices (at business unit level)
• at least a 25% increase in customer satisfaction due to diversity intervention
• improved customer service
(Staffing): Diverse workforce reflective of customer and local population demographics
• diversity hire retention increased
• diversity hire performance impact and quality
• less than 20-day time to fill rate
• reduction in source cost per diversity hire
• at least 95% diversity hit rate
• at least 90% diversity hire performance impact
• 90% diversity survival rate
• 92% diversity stability factor
• target increase of minority and women promoted by category and level
• cost/benefit of turnover reduction


BEST PRACTICES

Some companies measure diversity results with recruitment, promotion, or turnover rates, but few look beyond simple head counts to measure the full financial or performance impact of their programs. (Thomas A. Kochan, professor, MIT’s Sloan School of Management, on his findings from a five-year study of the impact of diversity on business results.)

How some of the largest and most successful companies structure and evaluate their diversity programs:

Ryder System, Inc. — Ryder runs an extensive diversity program for its 30,000 employees, and measures the ROI by tracking litigation costs and the number of women and members of minority groups hired and promoted in key jobs throughout the company. The company uses a scorecard for each business unit that includes a diversity component, with specific targets for hiring and promoting women and people of color. Senior leadership bonuses are tied to meeting these targets.

Goldman Sachs Group — “At Goldman, it’s assumed that diversity is a good business practice, and we put a lot of resources into it, says Laura Liswood, senior adviser to Goldman Sachs. She continues to say, however, “There is a connection between diversity and financial success, but typical profit-and-loss systems don’t capture the benefits that diversity creates.” Goldman includes a diversity component in performance evaluations and assessments of corporate leaders, with results reflected in their compensation.

PricewaterhouseCoopers — The world’s largest accounting firm sees diversity as a marketing imperative. Clients are demanding that PC’s partners and staff reflect the diversity within their organizations. PC measures their ROI against very specific metrics focused on recruiting, retention of top performers and employee satisfaction.

New York Life Insurance — The largest mutual life insurance company in the U.S., runs an extensive diversity program focused on recruitment and retention of minority candidates. Angela Coleman, vice president of HR says, “It’s hard to quantify financial results. We don’t approach diversity in terms of a dollar return on investment.”

Cendant Corporation — As part of a broader “Employer of choice” initiative, the company appointed a diversity committee and named a vice president for diversity in 2002. The return on the resources dedicated to this effort is measured in number of hires, the volume of services provided by minority suppliers, volume of business generated by multicultural marketing initiative, number of minority franchisees, among other measures.

Pitney Bowes — Examines its diversity success in many ways, including employee-survey results, representation of women and minorities, inclusion on “best companies” lists, and monitoring individual business units for adherence to company’s diversity objectives.

Bell South — Believing that a diverse workplace enriches the environment and leads to greater creativity, improved leadership effectiveness, a more fulfilling employee experience, greater customer satisfaction and ultimately, increased value to shareholders, Bell South stepped up its long-standing diversity and inclusion program five years ago.
Results include:
• Establishment of a Diversity Council in 1997, which includes 9 of the highest-ranking officers, has helped to increase company diversity and awareness.
• Women and minorities comprise over 60% of Bell South’s total management workforce.
• In 2001, the Diversity Council appointed a Chief Diversity Officer to oversee all BellSouth diversity and inclusion efforts.
• In 2001, BellSouth officers, senior management and directors received inclusion training, and is continuing to tier through management ranks to all employees.
• In 2001, 39.4% of all new hires were women and minorities.
• Of the 50 top paid executives at BellSouth, 26% are minorities
• In 2001, 203% of all officials and mangers were African American
• 41% of all corporate officers are minorities or women: 9.6% are African American; 13% are Hispanic; and 21% are women.


Women

Susan Phillips Bari: President of WBENC, the leading third-part certifier of businesses owned and operated by women.
“Companies that connect with a diverse supply base that is attuned to gender, as well as ethnicity, will be the business success stories of the next 50 years.” Every year WBENC names “Top Corporations,” who are visionary leaders when it comes to including WBE’s. Bari says, “They have recognized the growing importance that women will have on the buying power of America — and how their pool of suppliers and vendors must reflect that.”

Accenture — Developed and implemented the “Great Place to Work for Women” initiative in 1994.
• Since then, the percentage of female “partners,” or senior-level executives globally has increased from 5.8% to 10% of all partners in 2002.
• Women comprise 14.1% of all promotions to partner globally and 19% of all promotions to partner in the U.S.
• Women currently comprise 17% of Accenture’s Management Committee, the company’s senior leadership group.

Ernst & Young LLP – The 1996 establishment of an initiative committed to the development of women has succeeded to:
• More than double the representation of women at the partner, principal, and director level, from 7% to 15%
• The promotion rate for women at the partner level has more than doubled between 1996 and 2002, from 12% to 25%.
• Women comprise 13% of all executive management positions. 16%, up from 0% in mid-1990s.
According to James Turley, Chairman and CEO, the benefits are enormous: Better people, better client service, a culture that is better for both women and men. He cites that the costs have been “next to nothing, because we’ve saved more money than we’ve spent on the initiative.”

WellPoint — As a health care provider, WellPoint recognizes that the customer base is geographically, culturally, economically and ethnically diverse, but in health care, women are the key decision-makers. Also, women have more direct experience with the heath care system than men, initially for themselves, then their families. As a result, women usually have the greatest influence over the purchase of health care services. Since the implementation of the Human Resources Planning Program in 1997, women’s representation in the executive ranks has increased substantially:
• Four of 14 corporate officers are women, up from 1 in 1997
• There are 18 women in key top positions (25% of presidents and EVPs, 26% of SVPs, and 36% of general managers.)
• In the broader executive ranks, 39.6% are women, 12 are women of color.
• 10 women hold key jobs with profit/loss responsibility (up frm 7 in 2001).
• The nine-member Board of Directors includes four women.


Shareholder benefits of diversity
April 18, 2003
Author: Phyllis Y. Keys
Department of Finance, Fisher College of Business
Ohio State University, Columbus, OH 43210-1144

ABSTRACT

We find a three-day average cumulative abnormal return of 1.57% significant at the 1% level around the Fortune publication date for a cross-section of firms ranked due to outstanding diversity promotion efforts. Contrary to prior studies, we find that affirmative action awards and discrimination lawsuit settlements have no significant impact on stock price. The filing of discrimination lawsuits, however, does produce a negative and significant price reaction. We contend that our results indicate competitive advantages for firms that promote and manage diversity, rather than firms which meet minimum affirmative action standards.
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FORTUNE
BEST COMPANIES FOR MINORITIES

Top Five in Key Areas
The companies listed below scored high marks in individual categories like managerial diversity and purchasing from minority-owned businesses.

PAY: Companies with the largest number of minorities among the 50 highest paid employees

1) PNM Resources 16
2) Solectron 15
3) Applied Materials 14
4) Xerox 12
5) Fannie Mae 11

MANAGERIAL DIVERSITY: Companies with the largest percentage of minorities among officials and managers

1) Yum Brands 41.6
2) Union Bank of California 38.9
3) Pep Boys 38.8
4) McDonald's 36.6
5) Hyatt 36.5

PURCHASING: Companies with the highest percent of total purchasing from minority owned businesses

1) McDonald's 35.4
2) Union Bank of California 30.8
3) J.P. Morgan Chase 28.8
4) Wyndham International 21.3
5) Southern California Edison 20.2

BOARDS: Companies with the highest percentage of minorities on the Board of Directors

1) PG&E Corp. 44.4
2) Darden Restaurants 41.7
3) Denny's 33.3
4) Eastman Kodak 30.0
5) PNM Resources 30.0

WORKFORCE: Companies with the highest percentage of minorities among all employees

1) Wyndham International 61.6
2) Hyatt 59.5
3) Marriott International 59.2
4) Hilton Hotels 58.7
5) Union Bank of California 55.8
From the July 7, 2003 Issue of FORTUNE