Breaking Barriers: DEI as a Driving Force in Business Innovation

APCO intern alumna Amy Huang is the co-author of this piece.

Diversity, equity and inclusion (DEI) is a priority for companies that are aiming to create a workplace where everyone feels valued. Diversity brings differences that enrich the workplace. Equity ensures access and resources for all, especially those who have been historically disadvantaged, while inclusion creates a welcoming workplace culture. The global market for DEI—that is, dollars spent by companies on DEI-related efforts such as employee resource groups (ERGs)—was estimated at $7.5 billion in 2020 and is projected to more than double to $15.4 billion by 2026.

DEI-related efforts ultimately start at the top. The behavior of leaders can drive up to 70 percentage points of difference between the proportion of employees who feel highly included and the proportion who do not. What’s more, the diversity in top management teams (TMT)—or the group of executives responsible for the overall direction and management of a company—can yield higher returns for companies and has a positive relationship with business success. Those in the top quartile for ethnic and racial diversity in management, for example, are 35 percent more likely to have financial returns above their industry mean. Similarly, those in the top quartile for gender diversity are 15 percent more likely to have returns above the industry mean since they focus more on the fact, process facts more carefully and become more innovative.

Thus, the DEI element within the TMT is key to setting the foundation of the business success.  With a broader range of perspectives and experiences from top management team, more creative solutions and ideas can cater to a wider audience and drive innovation. Research shows that diversity traits within the TMT, such as education and culture, increase firm innovation since the TMT defines the overall direction of the firm. A diverse and inclusive TMT can accelerate business innovation in three major ways:

1. Help to avoid homogenous decision-making processes and biased decision-making: TMT with members from diverse backgrounds can approach issues from various perspectives, taking into account factors such as cultural differences. This can lead to a more comprehensive decision-making process and ultimately result in less biased business decisions.
2. Bring in creativity and encourage critical thinking: When a TMT is diverse and inclusive, it can bring in individuals from different backgrounds, cultures and experiences. This diversity can lead to more ideas that cater to a new and wider audience. This diversity of thought can encourage critical thinking and challenge assumptions, leading to better business outcomes.
3. Help to identify new opportunities: A diverse and inclusive TMT can generate a better understanding of different markets and customer needs. This in turn can lead to the identification of new markets and opportunities, which is beneficial for business growth and innovation.

To fully realize the positive impacts of a diverse and inclusive TMT, it is important for companies to engage in data collection and analysis about their own leadership. While many organizations have made equality a priority, invisible biases, particularly in terms of gender and race, persist even at the highest levels of an organization. For example, women leaders switch jobs at the highest rate and the number of women of color decreases as their level increases. To overcome this current situation, companies can take the following steps to promote DEI practices in the workplace:

Conducting surveys and focus groups targeting top leaders: Although many companies conduct engagement surveys, only 22 percent of companies are getting satisfactory results, including a high level of participation and positive scores across key areas of engagement. What’s more, two-thirds of managers report being either unengaged or actively disengaged in their workplace. This highlights the need to gain a more comprehensive understanding of the organization at the leadership level. Companies should prioritize gathering feedback from the TMT, as they are the key to drive the organizational success, using both quantitative and qualitative tools such as semi-annual surveys and focus groups. These efforts can provide a deeper understanding of the TMT’s opinions, concerns and specific challenges they are facing within the organization. In doing so, companies can make more informed decisions, improve TMT retention rates and achieve better overall performance through innovation.

Regularly analyzing employee data and initiating case studies: The HR team should work closely with those gathering information to analyze data related to promotion rates, retention rates and pay equity in different seniorities. The team should also utilize an intersectional approach when examining how aspects of a person’s identity (e.g., gender, race, ethnicity, sexual orientation) may uniquely impact their workplace experience. What’s more, regularly conducting case studies and reviewing best practices from other companies can help to build trust and transparency, showing the company’s commitment to making meaningful DEI changes.

DEI in TMTs is essential to business innovation by facilitating an unbiased decision-making process, promoting creativity, and establishing an inclusive culture. To better achieve this goal, companies should work to better understand the experience of top leaders and employee perceptions of their leadership efforts.

Amy Huang, former intern at APCO, co-authored this piece.