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The Impact of Diversity on the Global Economy

Diversity matters, as there is overwhelming evidence that teams composed of individuals from different backgrounds in addition to gender (such as race, geography, disability, and age) outperform across multiple dimensions. ​

Some might argue that if civilization has come this far with an exclusive and discriminatory operating model (that is, with white men making most of the world’s financial decisions), does diversity of talent even matter? We think that we would have progressed much further as a civilization if everyone were empowered to make such decisions. As a Black woman who has the lived experience of both gender and racial exclusion and discrimination, Patience would posit that it matters not because she would prefer that opportunity was equally available to her but because increased diversity across all industries, job roles, decision-making rooms, and every country in the world would yield significantly stronger financial and social dividends, including health and wealth at the individual level.

What is intriguing is how, with all the data we have and the visual of 2020 where we saw previously “invisible” talent taking on critical and essential roles, the world has not broadly embraced a full-potential-of-all-talent operating model.

You belong diversity wall art

In a recent television interview, Bryan Caplan, an economics professor at George Mason University, posed a provocative question that may shed light on how the opportunity of greater talent inclusion is perceived: “How can we tell that something that helps some people and hurts others is overall a good thing?” His question was related to his book Open Borders: The Science and Ethics of Immigration, but it fits well in any situation in which there is a perceived zero-sum outcome. In the case of an inclusive talent model, applying his question would mean that those who would benefit are currently excluded and those who would be hurt are currently included.

But Mr. Caplan’s question assumes lower financial returns, a static or shrinking opportunity set, and a fixed economic pie. This assumption explains what is holding the world back from an inclusive talent operating model and the potential for better returns and accelerated growth it could bring. Fundamental to the inclusive talent operating model is that it brings better social outcomes for more communities and makes a bigger economic pie overall. The question: What will it take for the world to recognize this? When will it act accordingly? The answer: When each reader and investor makes investing decisions that fully capture the upside potential of women as decision makers, leaders, asset allocators, innovators, and full members of all levels of society.

Fundamental to the inclusive talent operating model is that it brings better social outcomes for more communities and makes a bigger economic pie overall.

Investing into a structurally unequal system creates friction that works against better financial performance and economic growth. For example, if we consider homeownership as a marker of control of capital at the individual level, the average person who owned a home at the beginning of the 2020 pandemic is relatively wealthier today. On the other hand, people who rent have been excluded from this form of wealth attainment, some of whom may have lost their jobs and moved to live with family, sometimes placing themselves further away from employment opportunities. In more extreme cases they may become homeless and are now unable to provide an address to a potential employer.

These people may have, for the medium to long term, lost the opportunity to join the workforce and will have further to climb to get back to their pre-pandemic economic status. The longer they are out of full employment, the harder it becomes to reenter the workforce. As economic activity has picked up again, employers are looking for talent and having a tough time finding it, resulting in negative pressure on profits. These phenomena create drag at a macroeconomic level as well as an individual business level. If we had entered the pandemic period with less structural inequity, we would have less drag as we begin to build back and accelerate GDP growth. Fortunately, this is addressable drag. If we collectively commit to a full potential operating model and take steps to implement necessary changes, we can position large parts of economies for growth. Doing so may be tough in the short term, but the results will be better in the long term.

If we collectively commit to a full potential operating model and take steps to implement necessary changes, we can position large parts of economies for growth.

What would these changes look like? In a June 2021 Barron’s conversation titled “Moving from Talk to Action,” Calvin Butler, CEO of Exelon Utilities, an energy generation company, talked about the work Exelon has been doing to build an inclusive workforce. It was clear that the company executives were intentional about the inclusive program and specified strategies for hiring, including a requirement that all company job offerings have diverse candidates in the short list and all interview panels be diverse.

“From those requirements, we get a diverse workforce,” said Butler. “When you have diverse slates and interview panels, diverse talent gets hired.” This philosophy is paying off for Exelon. Butler indicated that since starting this work, Exelon has experienced the highest service reliability and highest customer satisfaction ratings in company history while receiving recognition as a top place to work. The company has gone further and created a diversity honor roll. It now ranks its bankers, lawyers, and money managers on the diversity of the teams working on Exelon’s business.

Another example comes from the world’s largest pension fund, the $1.7 trillion Government Pension Investment Fund (GPIF) of Japan. GPIF requires its fund managers to explain how they are incorporating gender considerations in their investment processes.

Diversity in the economy graphic

When GPIF first rolled out this requirement, managers pushed back, arguing that this would take time to implement. The response from GPIF leadership was that the failure of fund managers to take gender into consideration created a material risk that would undermine their credibility and jeopardize their long-term contracts with GPIF. Given this position, the fund managers figured out how to develop the necessary strategies to meet the requirement.

The above examples are a couple of the many that show us that it is possible for companies and investors to move toward inclusive models. These efforts should be commonplace. What entity does not want better financial and workforce productivity returns, like Exelon, or what asset owner does not want to have better risk-mitigation structures, like GPIF? This matters to the long-term health of the individual investment portfolio and the growth of economies.

Let’s take a look at gross world product, sometimes called global GDP. This is the sum of all the goods and services produced in the world and can be thought of as the pie we all share. Projections by major economic research bodies have long indicated that an inclusive talent model would cause global GDP to grow. A 2015 McKinsey Global Institute report that studied 95 countries found that, if we had reached full gender equality starting in 2015, global GDP would increase by up to US$28 trillion by 2025. McKinsey also provided more conservative estimates that are still impressive. If every country in this sample of 95 had kept pace with its fastest-improving neighbor on the list regarding gender parity in the workforce, global GDP would have increased by up to US$12 trillion in a ten-year period. A 2017 report from S&P Global stated that a sustained effort to increase women’s entry into and retention in the workforce could add 5 to 10% in nominal GDP to the world’s principal economies in just a few decades.

Like the 2008 financial crisis period, the pandemic that began in 2020 has led to significant economic stimuli by governments around the world. We wonder if the world would have needed so much stimulus if global economies were operating with a full talent paradigm. With more people gainfully employed and more talent engaged in developing solutions to address health- and climate-related challenges, people would be healthier, wealthier, and better positioned to overcome the effects of the pandemic and other natural disasters at an individual level, mitigating the need for significant government-level interventions.

An eye-opening 2018 study by the International Monetary Fund (IMF) found that the economic growth from having women enter the workforce isn’t all derived from the benefits of a larger workforce, as women and men are not “standard” units of labor that bring the exact same skills and strengths to their work. For countries that scored worse on gender inequality in the workforce, for example, closing that gender gap could increase national GDPs by 35% on average. The IMF estimated that at least 20% of the GDP increase would be due to the way gender diversity, particularly the different skill sets and strengths that women bring to the workforce, amps up productivity. While some might worry that an expanded workforce results in a decline in average wages, the increase in productivity drives wages up for both men and women. Translating current welfare gaps from women’s exclusion from the workforce into potential gains, some countries could see a welfare gain of as much as 20% if they removed barriers to an inclusive workforce. That’s a health and wealth gain for everyone, not just women.

We need inclusive talent models across the spectrum, including in leadership positions and in boardrooms. In a survey published in 2021, commissioned by Bank of America, companies where a board’s gender diversity is above the median enjoyed a 15% higher return on equity (ROE) and a “50% lower earnings risk one year out compared with their less diverse peers.” Not only are boards with more women seeing better overall performance, but boards with fewer women are losing out. Having diverse talent grows the pie for all, yet only 11 of the companies in the S&P 500 Index have equally balanced male/female boards. Only eight have leadership teams where at least half the members are women.

We need inclusive talent models across the spectrum, including in leadership positions and in boardrooms.

For a company to enjoy optimum success, it must emphasize diverse talent in its management positions as well as its lower ranks. Diverse teams tend to outperform nondiverse teams across various metrics, including downside risk mitigation, better innovation, and financial performance. Credit Suisse’s 2019 Gender 3000 report found that from 2010 to 2019, companies around the world with higher proportions of women in management (i.e., greater than 17% of their management teams) had consistently better performance than those with lower proportions. According to the report, companies with women comprising 20% or more of their management teams saw, on average, 3.6% better share price performance than companies with management teams of less than 15% women. The 2021 Bank of America report mentioned above found that companies with above-median levels of women in management saw 30% higher returns on equity and 30% lower earnings risk over one year than companies with below-median numbers of women in management positions. And according to a 2009 study by University of Illinois–Chicago professor Cedric Herring, companies that scored highest on racial diversity generated almost 15 times more sales revenue than companies that scored lowest.

On the innovation front, diverse teams are critical to staying ahead of competition because they lead to better new product development and more robust go-to-market strategies. A 2018 survey by the Boston Consulting Group and the Technical University of Munich of over 1,700 companies of varying industries and sizes across eight countries (the United States, France, Germany, China, Brazil, India, Switzerland, and Austria) found a statistically significant correlation between greater diversity in management and a higher proportion of the company’s revenues generated by products and services developed in the last three years, which is a measure of innovation. Companies with above-average diversity had on average a 19% higher proportion of revenues coming from innovation and 9% higher earnings before interest and taxes (EBIT) margins, differences mostly attributable to diversity in industry, nationality, and gender.

Even asset allocation receives a healthy boost in returns by including diverse talent. In venture capital, where the presence of diverse talent is woefully limited, data points to the same missed opportunities. Fostering diversity is a winning strategy. A 2018 Harvard Business Review study found a direct correlation between the diversity of venture capital investment partnerships and the success of the investments their teams chose. An investment’s rate of comparative success increases by 26.4% if partnerships are made between people from different ethnic groups versus partnerships between people from the same ethnic group. Increasing female partner hires by 10% resulted in an average 1.5% increase in overall fund returns and 9.7% more profitable exits for venture capital firms. In a world where only about 28.8% of all venture capital investments result in profitable exits, those numbers are significant. It’s not that diverse teams were better at identifying worthwhile investments — venture projects selected by both homogenous and diverse investment teams appeared equal at first.

The creativity and dynamism brought to the table by diverse investment teams made it significantly more likely for the companies they invested in to succeed in today’s dynamic market context.

Their performances diverged later, when investors began influencing portfolio company strategies, recruitment, and other critical dimensions of their development. In other words, the creativity and dynamism brought to the table by diverse investment teams made it significantly more likely for the companies they invested in to succeed in today’s dynamic market context. The same dynamic shows up in local government, where community leaders make decisions that impact local communities. When women are involved in community leadership, more money is reinvested in their local communities and filtered into education, childcare, and other local infrastructure needs. In India, for example, women’s representation in local government councils, known as panchayats, has led to an average implementation of 62% more drinking water projects than in areas without female representation. Droughts from climate change and sanitation needs from health-care crises like the pandemic have demonstrated how even local-level infrastructure is critical to better overall welfare.

In Norway, women’s involvement in municipal councils resulted in better childcare facilities. We all now know how important childcare is, having lived through 2020–2021, when the world became acutely aware of how childcare affected other economic sectors.

These are just a few examples that show how applying an inclusive talent paradigm to financial decision-making provides significant tailwinds to individual investors and all economies and societies.

This article is adapted from the authors’ forthcoming book, The XX Edge: Unlocking Higher Returns and Lower Risk, to be published by Worth Books / Forefront Books on June 21, 2022. 100% of the proceeds from the sale of this book benefits Women of the World Endowment and Tara Health Foundation.

Patience Marime-Ball has more than two and a half decades of investment experience across capital markets and is widely recognized for using the levers of finance to innovate pathways for creating a more equal world. Patience has led many “firsts” in the investing space; she developed the Banking on Women ... Read more
Ruth Shaber, MD, is an innovator and changemaker on a mission to change the face of finance. As the founder and president of Tara Health Foundation, which promotes health, well-being, and opportunity for women and girls through innovative evidence-informed programs, the co-founder and board chair of Rhia Ventures, a group ... Read more
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