Innovation without diversity – what are the risks?

Increasingly, a lack of diversity and inclusion in the workforce is seen as a significant strategic business risk that needs to be actively monitored and managed (1).

These risks could be financial, environmental, reputational or societal. Let’s take a closer look at each of them.

1. Financial risks

In an analysis of more than 1000 large companies across 15 countries, McKinsey & Company found that companies who performed poorly in terms of ethnic diversity were up to 27% more likely to underperform on profitability (2).

In 2020 in the UK, the country’s largest fund manager, Legal & General Investment Management (LGIM) warned the heads of FTSE100 and S&P 500 companies that it would vote against the re-election of their leaders if they failed to diversify their boards (3).

They also said there would be investment consequences, which presented a significant risk, as LGIM holds a 2%-3% stake in nearly every FTSE 100 listed company.

2. Environmental risks

In research in the United States, the country’s largest environmental NGOs and Foundations were surveyed on racial diversity in their organizations.

It was shown that ‘at both the Board of Directors level as well as in the C-suite (executives directly reporting to the CEO), people of colour only occupy 20% of these positions’ (4), which may impact the kinds of work that is resourced and carried out.

3. Reputational risks

Diversity Journal describes reputational risk as ‘the risk of disappointing and angering stakeholders by failing to meet their expectations. To communicate their disappointment, angry customers will boycott; angry employees will strike, and angry jurors will render costly verdicts. (5)

A lack of diversity at the board level can mean companies fail to understand and mitigate risks from making poor decisions around branding to failing to deal with sexual harassment in the workplace to failing to protect workers’ rights.

4. Societal risks

You also saw in the ‘Anti-racist approaches in technology’ course that not considering diversity and inclusion in product development can risk discriminating against or disadvantaging customers and communities.

Think back to examples such as the Home Office’s online passport checker, in which darker-skinned women were more than twice as likely to be told their photos ‘fail’ UK passport rules by the AI than lighter-skinned men.

References:

1. David Doughty. Diversity and inclusion: what’s the risk?, Business Reporter.
2. Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, Sara Prince, 2020. Diversity wins: How inclusion matters, McKinsey & Company.
3. Kalyeena Makortoff, 2020. Legal & General warns FTSE 100 firms over lack of ethnic diversity, the Guardian.
4. Nishan Degnarain, 2020. Ten Ways That Racial And Environmental Justice Are Inextricably Linked
5. Nir Kossovsky and Denise Williamee, 2020. Board Diversity Helps Recognize and Avoid Reputational Risks, Diversity Journal.