As the United States becomes more diverse, ethnically and otherwise, the pressure on companies to reflect that diversity through their hiring practices has grown. But diversity—and its sibling, inclusion—is not as simple as adjusting demographics. The authors detail how companies can conduct effective diversity management, providing insight into the myriad benefits, needs, and challenges of a more diverse workplace.
Diversity in the workforce drives economic growth and contributes to the success of individual organizations as well as the national economy. It is a core strength of the United States, and it will grow in importance as the country becomes increasingly diverse. Workplace diversity promises great benefits, but it also presents great challenges.
Diversity management is a process that leads to a positive work environment where the similarities and differences among employees and all persons are valued. Research confirms a positive correlation between successful diversity management and organizational performance. As such, diversity and inclusion have become integral parts of the Big Four’s plans for the future of the accounting profession. This article discusses the opportunities, needs, benefits, and challenges of diversity management, as well as recommended approaches to reap those benefits.
Background, Opportunity, and Need
Diversity refers to differences among people and can encompass many characteristics, including race, gender, ethnic group, age, personality, cognitive style, organizational function, education, sexual orientation, socioeconomic status, physical ability, religious belief, and political ideology. The U.S. workforce is more diverse than ever and is predicted to become increasingly more so as the country does likewise. The National Center for Public Policy and Higher Education projected that the nonwhite portion of the working population would double from 18% to 37% from 1980 to 2020, with a concomitant decrease in the white working population from 82% to 63% (“Fact #1: The U.S. Workplace Is Becoming More Diverse,” November 2005 policy alert, http://bit.ly/2pDYcnq). Furthermore, the U.S. Census Bureau reported that in 2014, for the first time in history, a majority (50.2%) of children under 5 were categorized as ethnic minorities (“Millennials Outnumber Baby Boomers and Are Far More Diverse,” June 25, 2015, http://bit.ly/2NovBLS).
Despite growing diversity, however, minority workers are more likely than whites to be unemployed and less likely to be promoted to executive or senior management positions. According to the 2018 U.S. Department of Labor’s Bureau of Labor Statistics report, 89.5% of corporate executives were white and 73.1% were male (http://bit.ly/2SdSqkN). In 2018, only three of the Fortune 500 companies had an African-American CEO (Grace Donnelly, “The Number of Black CEOs at Fortune 500 Companies Is at Its Lowest Since 2002,” Fortune, Feb. 28, 2018, http://bit.ly/2NowkN6). Pew Research has published that 40% of both men and women are more likely to hire men over women (Blaze Petersen, “The State of U.S. Workplace Diversity in 14 Statistics,” ArchPoint Group, Dec. 20, 2016, http://bit.ly/32h9sTS).
The Big Four have acknowledged the need for greater diversity in the accounting profession. According to Pricewaterhouse-Coopers, a culture of inclusion involves having diverse people and valuing differences. The firm acknowledges that 86% of women and 74% of men find that an employer’s policy on diversity and inclusion is important when deciding whether to work for a company (“The PwC Diversity Journey,” September 2016, https://pwc.to/2NLnMie). KPMG and Ernst & Young also recognize diversity by leveraging differences to promote inclusiveness, valuing differences, and influencing the overall culture (“D&I Means Growth,” EY, 2014, https://go.ey.com/2CjaTqr). Deloitte has focused its diversity research on the generation gap and its correlation with how individuals view diversity. Different viewpoints will affect how diversity plans should be implemented, but it is important to note that millennials will make up almost 75% of the workforce by 2025 (“The Radical Transformation of Diversity and Inclusion,” Deloitte, July 3, 2017, http://bit.ly/2NM2gtx).
Benefits of Diversity
Exhibit 1 identifies the benefits of increasing workplace diversity to accounting firms and other organizations. Because resources and effort may be required to benefit from diversity, it is important to understand the significant potential benefits. Diverse teams are better equipped for new business opportunities because of their broader market knowledge, foreign language skills, and cultural sensitivity. Research published by Harvard Business Review in 2013 states that having an employee with the same ethnic background as a client can increase the possibility that the team will better understand that client’s needs by up to 152%. Thus, by increasing diversity, a firm is better able to serve a diverse customer base (Sylvia Ann Hewlett, Melinda Marshall, and Laura Sherbin, “How Diversity Can Drive Innovation,” December 2013, http://bit.ly/2rfvQA4).
Benefits of Diversity
- Broader pool of applicants and talent
- Better retention
- Broader service range to customers
- More innovative and creative solutions
- Increased workforce productivity and job performance
- Increased competitiveness and profitability
Diversity can lead to a more vigorous exchange of ideas that improves group decision making and performance and promotes innovation and creative problem solving. Studies support the notion that heterogeneous teams are more creative than homogeneous teams as long as team members have similar ability levels. In contrast, homogeneous groups have a tendency toward group-think, in which pressures to maintain group coherence discourage critical thinking resulting in poor decisions. With a more diverse set of ideas, companies will more effectively execute business strategies and meet customer needs. In addition, turnover is reduced when employees perceive equal access to opportunities and fair treatment.
There is, however, a gap between leadership capability and actual governance. Often “diversity” and “inclusion” are assumed to be the same, but that is not the case. Laura Sherbin and Ripa Rashid conclude that diversity equals representation, while inclusion provides the connections that entice diverse talent, encourage participation and innovation, and lead to business growth (“Diversity Doesn’t Stick without Inclusion,” Harvard Business Review, Feb. 1, 2017, http://bit.ly/2qul5tu). Inclusion strategist Vernā Myers explains the relationship on her website with the metaphor “Diversity is being invited to the party. Inclusion is being asked to dance” (http://bit.ly/32rAyaV).
Studies support the idea that diversity alone does not drive inclusion; in fact, without inclusion there is likely to be a diversity backlash. Sherbin and Rashid suggest leadership, authenticity, networking and visibility, and clear career paths as drivers of inclusion. Leaders need to ensure that team members speak up, take advice, provide feedback, and share credit for team success. Sponsorship is key for women and people of color to rise in an organization. For minorities, the map to career success is often indistinct, leading to a feeling of missing out on the right opportunities.
Studies support the idea that diversity alone does not drive inclusion; in fact, without inclusion there is likely to be a diversity backlash.
Successfully managing diversity leads to more committed, better satisfied, and better performing employees, which in turn likely leads to a better financial performance. A McKinsey study concluded that for every 10% increase in racial and ethnic diversity on senior executive teams, earnings before interest and taxes (EBIT) rises .8% (Vivian Hunt, Dennis Layton, and Sara Prince, “Why Diversity Matters,” January 2015, https://mck.co/2OwuB7C). Furthermore, diverse companies are 35% more likely to outperform their respective national industry medians. Ernst & Young’s research found that groups with best in-class engagement have a seven-point increase in retention, a ten-point increase in revenue growth, and a six-point increase in the gross margin (EY 2014). For a strong economy, diversity is not only a benefit, but also a necessity.
KPMG began implementing diversity initiatives in 2012 and has since seen great improvements. It made conspicuous efforts to improve gender equity, increasing the number of women partners to 21% and the number of women in senior leadership roles to 34%. It set goals to help reach these target objectives, and the next target is 30% women partners by 2020 (“Bringing the Future Forward,” December 2016, http://bit.ly/2XBcul3).
A work environment that does not support diversity and inclusion can lead to negative outcomes, such as increased harassment and discrimination, intergroup conflict, and turnover. To benefit, organizations must go beyond diversity in recruiting and hiring and invest resources to create an environment that supports a diverse workforce. The Big Four have demonstrated the importance of diversity and inclusion initiatives, as shown in “How to Succeed” below.
Challenges of Diversity
For a diversity program to be successful, companies must create work environments in which workers feel valued, respected, included, and safe. Employees should not feel a need to repress parts of their persona in the workplace, but minorities often do. Well-designed programs are key to benefiting from diversity, but they do not come without challenges. Lisa Burrell concludes that more than a decade of studies support that “a diverse workforce measurably improves decision-making, problem solving, creativity, innovation, and flexibility” (“We Just Can’t Handle Diversity,” Harvard Business Review, July-August 2016, http://bit.ly/36IthXD). A study published in the Harvard Business Review, however, suggests diversity training can lead to new pressures, blame, and negative messages, which may actually increase employee bias and animosity towards minority groups (Frank Dobbin and Alexandra Kalev, “Why Diversity Programs Fail,” July-August 2016, http://bit.ly/2Cow61Y). Exhibit 2 lists some challenges to becoming a more diverse organization.
Challenges of Workplace Diversity
- Cognitive bias
- Resistance to change
- Interpersonal conflicts
- Cultural differences
Most people agree that hiring, development, and compensation decisions should favor those with the greatest merit, but is it possible to objectively determine what constitutes merit or to define diversity? The Deloitte study cited above found that millennials think of diversity and inclusion as expanding participation by employees with different personalities and perspectives, while older workers think of diversity as equitable representation and assimilation from different demographic groups. This disconnect is causing businesses hardship, according to Deloitte, which believes that if businesses do not expand their diversity and inclusion initiatives, they may lose their millennial employees and have an even harder time retaining Generation Z employees. Opening up to younger employees may be what businesses need to transform their approach.
Cognitive roadblocks prevent the objective implementation of diversity programs. Research has shown that applicants with names that “sound” African-American are 14% less likely to get a call back than those with names that “sound” white. Another common bias is the assumption that diversity will spark an interpersonal conflict; subjects in experiments tended to assume that all-black or all-white groups are more harmonious than those with a combination of both blacks and whites (Shankar Vedantam, “Despite Improving Job Markets, Blacks Still Face Tougher Prospects,” NPR, Oct. 1, 2015, https://n.pr/2p0kdfM). In addition, the rate of advancement, particularly of women, may reflect choices women make that affect career trajectories, such as not applying for promotions that require extensive travel or long hours because they prioritize family and household responsibilities or seek a better work-life balance, rather than women’s actual capabilities.
Managers who think they are good judges of talent may be surprised to learn they are not; even those who are committed to equality and promoting diversity fall prey to biases. In the early 1970s, approximately 5% of musicians in orchestras were women, who were falsely perceived as less competent by auditioners. Then orchestras began blind auditions behind a curtain; today, more than 30% of players are women. Mindsets did not change, but putting up a curtain for auditions removed unconscious bias on the part of the auditioners, allowing them to focus on talent (Curt Rice, “How Blind Auditions Help Orchestras to Eliminate Gender Bias,” Oct. 14, 2013, Guardian, http://bit.ly/33rlfAp). This same bias is likely to occur in the traditional hiring process during interviews.
Managers who think they are good judges of talent may be surprised to learn they are not; even those who are committed to equality and promoting diversity fall prey to biases.
An SAT score should not be affected by whether a person is male or female; however, previously the test penalized test takers for incorrect answers on multiple-choice questions. Men tend to be greater risk takers than women and more likely to guess, whereas women are more likely to skip questions. Up to 40% of the gap between male and female students’ results on the SAT was found to be due to penalizing incorrect answers and the male propensity for greater risk-taking (Katherine Baldiga Coffman, “Gender Differences in Willingness to Guess,” Management Science, February 2014, http://bit.ly/33vgkhO).
In another example of gender favoritism, until recently, only pictures of men hung on the walls of the Kennedy School of Government at Harvard University. For beliefs to change, people’s experiences must change, and seeing role models who look like one’s self can affect what one thinks is possible. The message is to ensure that inspirational practices do not favor one gender or group over another.
Stereotypes result in evaluating and treating equal performers differently. Studies have consistently confirmed this “paradox of the meritocracy;” seemingly meritocratic organizations favor male employees over equally qualified female employees for managerial positions and award males larger monetary rewards. Believing that merit is justly rewarded is convenient for those at the top; if management believes the world is fair and just, they will not recognize or think about systemic unfairness. In addition, people consistently underestimate the benefit of good luck and mistake it for merit-based reward. Hindsight bias also causes people to believe that random events are predictable (Emilio J. Castilla and Stephen Benard, “The Paradox of Meritocracy in Organizations,” Administrative Science Quarterly, 2010, http://bit.ly/36N3JJ5).
People consistently underestimate the benefit of good luck and mistake it for merit-based reward.
Consultants believe they can counteract bias through group discussions; however, group conversations may actually dampen diversity by having racial stereotypes influence decisions when the ability of a candidate is not clear. Research supports the idea that bias is less of an issue for candidates at the top and bottom, but tends to surface for those in the middle. Black and Hispanic men are often seen as lacking polish, even when strong in other areas, while white men are deemed coachable. Shy, nervous, or understated nonwhite men are rejected for being unassertive; for whites, these traits are seen as a virtue of modesty.
“Maybe” candidates need a champion among evaluators to receive an offer. Champions are often white men and push for candidates similar to themselves—that is, “white, affluent, athletic graduates of elite institutions”—while women and minorities champion fewer candidates than white men do (Burrell 2016).
Although 40% percent of companies fight bias with mandatory hiring tests that assess the skills of candidates for important jobs, managers resent being told what to do and often selectively use tests that could magnify bias. Furthermore, studies show that, in performance reviews, raters tend to give lower scores to women and minorities. Researchers have concluded that grievance procedures often lead to retaliation against or belittling of employees who complain rather than the rehabilitation of biased managers. As a result, employees become less likely to report discrimination. Thus, poorly constructed diversity policies may increase discrimination. Members of the dominant group often assume that the system is fair because the company has a policy in place, which may lead them to discount instances or patterns of discrimination (Dobbin and Kalev).
Studies indicate positive effects of mandatory diversity training rarely last more than a day or two and can activate backlash; however, 50% of midsize firms and nearly all Fortune 500 firms have diversity training. If rewards are perceived to be based on race, gender, sexual orientation, or other factors rather than ability, a barrier is created that prevents diversity from being a benefit. When this happens, organizations reduce support for a diverse organizational culture instead of strengthening employees’ behaviors towards diversity. Voluntary rather than mandatory training leads to better results (Dobbin and Kalev).
Diversity training must complement a culture of diversity that pervades the company. Policies and strategies must be customized to the organization. Diversity programs can even lead to discrimination against whites encouraged by perceived or actual unfair treatment. This occurs when policies or practices encourage companies to base recruitment and promotion on personal characteristics rather than qualifications or job performance. Mandatory training might incorporate pressure, blame, and negative messages. Poor communication can arise due to perceptual, cultural, and language barriers, leading to confusion, lack of team-work, and low morale. Some employees resist social and cultural changes in the workplace, preferring to do things the way they have always done them.
When minorities are underrepresented at a company, they often feel pressure to conform to majority styles of dress, manners of speaking, and standards of demeanor. A 2012 Harvard Business Review report concluded that 40% of African-Americans feel like outsiders at work, and 35% of people of color report that they feel the need to project a work-place identity that differs from their authentic selves. This causes minorities to feel alienated from coworkers and disengaged from the corporate culture. Furthermore, it reduces loyalty and job performance (Sylvia Ann Hewlitt, “Too Many People of Color Feel Uncomfortable at Work,” Oct. 18, 2012, http://bit.ly/2pPpWp3).
When minorities are underrepresented at a company, they often feel pressure to conform to majority styles of dress, manners of speaking, and standards of demeanor.
Many organizations are wasting money on diversity training, as most diversity training programs do not work. Many companies conduct diversity training programs without measuring whether or not they work. Biases exist, and companies should redesign processes to reduce the opportunity for bias in decision making. It is hard to eliminate bias, but it is possible to make it easier for biased minds to make more objective decisions.
How to Succeed
Achieving diversity is a complex undertaking, so goals should be realistic. Exhibit 3 shows the key elements of a diversity plan. Each company should define its diversity needs. The workforce should reflect the community it serves; employees are not likely to consider long-term careers at an organization if they do not see people like them in management. Management should assess and evaluate its current diversity process to ensure it is an integral part of the company’s management system. Customized employee satisfaction surveys should be employed, and challenges and obstacles should be identified and policies modified. Reassessment will reflect the success of policy modifications.
Key Elements of a Diversity Plan
- Define diversity and goals
- Engage managers in solving the problem
- Expose managers to different groups of people
- Encourage social accountability for change
- Measure employee satisfaction
Diversity policies should be incorporated into every aspect of the organization. Attitudes filter downward, so the importance of diversity must be recognized at the top and incorporated into policy and decision making. Determine short- and long-term quantifiable metrics or goals, and collect and analyze the data about how well these goals are being met, periodically assessing progress based on the determined metrics. Ensure that diversity policies are not merely checking boxes. Companies can do all of the above themselves or hire consultants.
Managers need to buy into diversity initiatives, be educated on their benefits, and be trained on processes that support diversity. Senior management should clearly demonstrate support for diversity. Retention may be more difficult than recruitment, so monitor employee satisfaction. Make diversity part of the company’s brand.
Resistance to change should be overcome with an attitude of inclusion and openness, particularly with promotions. Diversity training should be used carefully to shape policy. Diversity involves how people perceive themselves and how they perceive others, with those perceptions affecting interactions. For employees to function effectively, they need the ability and encouragement to communicate, adapt, and change. A diverse workforce that is comfortable communicating its viewpoints will have a larger pool of ideas and experiences to draw from and will inspire employees to perform at their best. Company strategies will be better executed.
Companies see consistently positive results applying three basic principles: engagement, exposure to different groups, and encouraging social responsibility. If managers are expected to engage in policies that encourage diversity, they begin to think of themselves as diversity champions; psychologists call this reducing cognitive dissonance. Having employees mentor women or black employees also removes cognitive dissonance by encouraging the belief that their protégés merit opportunities. White male executives might not feel comfortable reaching out informally to young women and minority men, so assigning protégés may be more effective. Exhibit 4 lists tactics that have been shown to work.
Effective Diversity Tactics
- Targeted college recruitment
- Mentoring programs
- Diverse self-managed teams
- Diversity task forces
- Diversity manager
- Rotating management trainees
- Loosen control over managers
Self-managed teams allow employees in different roles and functions to work together on projects as equals and increase contact and exposure to diverse employees. Working side-by-side breaks down stereotypes and leads to more equitable hiring and promotion. Rotating management trainees through departments also increases exposure and supports diversity.
Companies see better results when they loosen control, so avoid making lists of “dos and don’ts.” More effective approaches engage managers in solving a diversity problem, increase on-the-job contact with female and minority employees, and promote social accountability.
Encouraging social accountability functions on people’s need to look good in the eyes of the community. For example, one company had been giving whites higher pay increases for the same performance rating. After it started posting each business unit’s average performance rating and pay raise by gender and race, the gap in raises disappeared as managers realized that peers and superiors would know which departments favored whites.
Another technique is to set up a diversity task force with broad representation throughout the company. This task force might look at diversity numbers for the company and individual business units and determine where attention should be directed. Task forces can be used to promote accountability; engage members who might previously have been cool to diversity projects; and increase contact among minorities, white women, and men who participate. When managers know they have to explain their hiring and promotion decisions, they are less likely to act with bias. Diversity managers who are empowered to ask questions about these decisions encourage managers step back and rethink them.
Companies should increase awareness about diversity and emphasize its importance. Work with diverse individuals, encourage them to be open about their personal opinions, and educate employees about differences that they may encounter. Research suggests the most significant differences are between genders; thus, organizations should have different strategies for men and women. Significant differences were also found between different age groups; employees between ages 26 and 30 were more open to admitting, fixing, and reducing their own biases, while those between ages 31 and 35 were more likely to dismiss myths about diversity and did not value diversity in the workplace as much as their younger peers. Realizing that biases exist is key to eliminating them (Harold Andrew Patrick and Kumar Vincent Raj, “Managing Workplace Diversity: Issues and Challenges,” SAGE Open, April–June 2012, http://bit.ly/36KJNpS).
Diversity has been described as a “double-edged sword,” with positive and negative effects on an organization. According to Mason and Aramovich, climate is defined as what employees perceive based on an organization’s practices, procedures, and rewards. An affirmative climate includes fair treatment and integration. When an organization has a positive, diverse climate, one of the main outcomes is employee satisfaction, which in turn leads to reduced employee turnover. If underrepresented employees do not perceive the organization to be committed to promoting diversity, then turnover among minority employees will be higher (Donna Chrobot-Mason and Nicholas P. Aramovich, “The Psychological Benefits of Creating an Affirming Climate for Workplace Diversity,” Group & Organization Management, Oct. 31, 2013, http://bit.ly/2pPJ9H9).
To reduce biased decisions, replace gut instincts with objective criteria. Exhibit 5 indicates techniques that have been shown to work. Analogous to auditioning behind a curtain, a company could screen candidates using software such as Applied, GapJumpers, and Unitive to blind themselves to applicants’ demographic characteristics. Another technique is to use structured interviews; every candidate receives the same questions in the same order, and answers are scored in real time. Job ads should be scrutinized for language that unconsciously discourages men or women from applying. For example, referring to the ideal candidate as “nurturing” or “supportive” has been shown to discourage men from applying. Describing the ideal candidate as “competitive” or “assertive” discourages women from applying.
How to Replace Gut Instincts with Objective Criteria
- Transparent hiring and performance rewards
- Screen candidates using software
- Use structured interviews
- Avoid wording on job ads that discourages candidates
- Promote on objective criteria
- Performance raters should not see employee self-evaluations
To design around managers’ biases, decisions should rely on hard data. For example, base promotions on objectively measured performance rather than a manager’s feelings. Note, however, that using the wrong data can be worse than using no data. Some companies use computerized algorithms to make more objective and thus theoretically better hiring decisions. Studies have shown, however, that algorithms can reflect the biases of the people who programmed them and the systems using them, so even this approach is not foolproof.
Many companies have employees prepare self-evaluations for their managers, but employees differ in self-confidence and self-promotion—the more prone the person is to self-promotion, the higher the self-evaluation. Research shows an anchoring effect, as managers will unconsciously adjust their personal appraisal by self-reported evaluation scores. Men tend to be more overconfident than women and more likely to self-promote; thus, self-evaluations should not be shared with evaluators before they have made up their minds.
KPMG presents three levels of effective diversity in its diversity and inclusion report. The first level is compliance; it is important to select both men and women, but they need to be selected because they bring something to the table. The second level is ensuring that the diverse competencies of employees are utilized. The last level is linking diversity initiatives to business problems (KPMG, 7).
Flexible work environments are increasing in popularity, especially in the accounting profession. KPMG discusses the push for flexibility in workplaces not just for women, but for men too. Flexibility in the workplace can include flexible work hours, working from home, and even reduced hours to pursue personal interests and ventures. Flexibility has been found to increase productivity, improve overall well-being, encourage gender equity, retain diverse talent, and increase innovation. Flexibility may not seem like a diversity issue, but it encompasses forms of diversity beyond racial and ethnic issues, which is just as important in businesses. Other areas of focus for KPMG include gender diversity, generational diversity, sexual orientation, gender identity, family, and disability (KPMG, 14-16).
Flexibility may not seem like a diversity issue, but it encompasses forms of diversity beyond racial and ethnic issues, which is just as important in businesses.
PricewaterhouseCoopers uses a network-wide diversity and inclusion ecosystem that channels all efforts into the areas that are most important in leading to desired changes and impacts. The data-driven approach embeds leadership commitment and accountability, awareness and education, and critical interventions to create sustainable progress. Since the implementation of these initiatives in 2012, PricewaterhouseCoopers has found that changes may need to be made if the desired results are not forthcoming, and that having the right levels of leadership commitment and accountability is key to success (PricewaterhouseCoopers 2016).
Ernst & Young has developed a roadmap for success specifically for organizations to begin their diversity journey. The first step is to establish a baseline and cascade awareness; this includes setting the tone at the top and identifying areas where the company can benefit. The second step is to identify meaningful changes, which include closing identified gaps and reviewing business processes with the idea of inclusiveness in mind. The third step is to recognize and reward role models, that is, those who are demonstrating inclusive leadership. The final step is to enable culture change by setting specific goals and monitoring and communicating progress (Ernst & Young 2014).
The Future Is Coming
Greater workplace diversity coupled with effective diversity management increases enterprise value. Benefits include better group decision making from accessing a broader range of talent, having a better understanding of customers and markets, considering more diverse viewpoints, and having better-motivated employees. Studies support the general notion that diversity is beneficial. If diversity in the workplace does not increase at a similar rate as diversity in the United States, the economy will suffer. Breaking down the walls of discrimination and having an open-minded attitude will lead to more diverse and successful organizations.
It is difficult, if not impossible, to remove biases at the individual level, but is possible to mitigate them and make it easier for people to reach rational decisions. Building a diverse organization requires significant effort and commitment. It will not be fast or easy, but companies that succeed will be better prepared to reap the benefits of an increasingly diverse America.