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Does Workplace Diversity Matter? A Survey Of Empirical Studies On Diversity And Firm Performance, 2000-09

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This study seeks to assess the state-of-the-art on the workplace diversity – firm performance relationship. Based on a review of academic research on workplace diversity and firm performance published in nine leading journals in the field of management during the period 2000-2009, it addresses the following research questions: a. How are diversity and firm performance constructs defined? b. What are the findings of research linking workplace diversity and firm performance? c. What factors mediate and/or moderate the diversity-performance relationship? Based on the findings of extant research, we develop a model to explain and interpret the diversity – firm performance relationship, and understand its implications.
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Journal of Diversity Management Second Quarter 2010 Volume 5, Number 2
37
Does Workplace Diversity Matter?
A Survey Of Empirical Studies On Diversity
And Firm Performance, 2000-09
Anne M. McMahon, Williamson College of Business Administration, USA
ABSTRACT
This study seeks to assess the state-of-the-art on the workplace diversity firm performance
relationship. Based on a review of academic research on workplace diversity and firm
performance published in nine leading journals in the field of management during the period
2000-2009, it addresses the following research questions: a. How are diversity and firm
performance constructs defined? b. What are the findings of research linking workplace diversity
and firm performance? c. What factors mediate and/or moderate the diversity-performance
relationship? Based on the findings of extant research, we develop a model to explain and
interpret the diversity firm performance relationship, and understand its implications.
Keywords: Diversity, Performance, Workplace
INTRODUCTION
ssues relating to workplace diversity have become increasingly important in recent years. This is not
surprising considering the far reaching changes in the competitive landscape immediately before of the
advent of the new millennium that radically transformed the corporate workplace. Powerful political and
technological forces led to revolutionary changes in the global business environment in the final decade of the last
century. The dissolution of the erstwhile Soviet block symbolized by the fall of the Berlin Wall in 1989, the entry of
China as a major player facilitated by normalization of its relations with the West, and the opening up of the
emerging economies in Asia and Latin America spurred by policies of economic liberalization have not only opened
up new markets for the expansion of US multinationals but also led to a reverse flow of goods, people and ideas into
the US on an unprecedented scale. Both these trends were accentuated by technological innovation and the
convergence of video, voice and data brought about by the Internet. The race for markets and the race for the
future (Doz and Hamel, 1998) complemented each other in a symbiotic fashion to add cultural diversity to the
melting pot of gender and ethnic diversity and radically transform the US workplace in the 21
st
century. Not
surprisingly therefore, workplace diversity has attracted widespread attention of academics and businesses alike.
Realizing the importance of leveraging diversity to achieve a competitive advantage, companies have
incorporated diversity training in their employee orientation and development programs in the United States
(Holladay, Knight, Paige and Quinones 2003). About two-thirds of the employers provide diversity training (CBLO
2006). Diversity training has in recent years expanded from an emphasis on equal opportunity themes typical of
such training programs since the 1960‟s. Now-a-days, the training programs also emphasize acquisition of diversity
competencies necessary for effective business strategy and assessing their effects on performance outcomes
(Holladay et al. 2003). Diversity competence, both at organizational and individual levels, is now seen as critical to
remain competitive in an increasingly global marketplace and in diverse employee labor markets (De Anca and
Vazquez 2007). Academic researchers in the business fields for their part inter alia focused on modeling the nexus
between workplace diversity and firm performance, presumably to provide a rationale and suggest ways to improve
the practitioners‟ initiatives and thereby enhance the diversity competencies of their workforce.
I
Journal of Diversity Management Second Quarter 2010 Volume 5, Number 2
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An interesting and instructive research issue would therefore be to assess the state-of-the-art on the
workplace diversity firm performance relationship. In what ways and under what circumstances does diversity
contribute to firm performance? Is the relationship between the two necessarily linear and positive? What insights
could practitioners gain from empirical research studies that investigated this relationship thus far? With this
perspective, we formulated three research questions to explore by reviewing the academic research on workplace
diversity and firm performance published during the last decade, i.e., 2000-2009.
1. How are the diversity and firm performance constructs defined and measured?
2. What are the findings of research linking workplace diversity and firm performance?
3. What factors, if any, mediate and/or moderate the diversity-performance relationship?
In order address these questions we carried out a survey of empirical studies on workplace diversity and
firm performance during the period 2000 - 2009. A set of nine leading journals in the field of management were
identified and all the articles dealing with workplace diversity and firm performance published during this period
were reviewed in order to answer the research questions. The journals included in this survey were: Academy of
Management Journal, Human Resource Management, Journal of Management, Journal of Management Studies,
Management International Review, Management Science, Organization Science, Organizational Behavior & Human
Decision Processes and Strategic Management Journal. These journals were selected for the following reasons:
1. They are widely believed to be top journals as could be discerned from several lists of journal rankings in
the fields of management, strategy and human resources (Harzing, 2009; McWilliams, Siegel, and Van
Fleet, 2005);
2. They attract contributions from management scholars in general as well as scholars of strategy and HR;
3. Taken together, they employ a range of eclectic empirical methodologies in their studies quantitative and
qualitative, descriptive as well as prescriptive.
These journals represent visible, respected outlets for scholars and practitioners interested in a cross section
of diversity- firm performance issues. A search by word in the Business Source Complete database of business
periodicals, using multiple variations to refer to workplace diversity and firm performance resulted in a total of 50
hits. The subset of articles included in this survey was delimited after a careful perusal of the abstracts of all the
results of the search by word. All empirical studies relating diversity to firm performance published during the
period 2000 to 2009 were invariably included in the subset. Meta-analyses that summarized findings of earlier
research on this relationship but published during the captioned period were also included in the survey. Studies
with an essentially theoretical focus that do not use any empirical method were excluded from the list as being
outside the scope of this survey. Studies that related diversity to group effectiveness, cohesion, and similar outcomes
of group processes were excluded since the performance focus of our study is at the firm level. However, we made
an exception to studies relating diversity and top management team (TMT) effectiveness in light of the consensus in
extant research that TMT effectiveness is correlated with firm performance (Barrick, et.al., 2007; Lin and Shih,
2008). Applying these criteria to the master list of search results yielded a total of 24 articles as detailed in Table 1.
Table 1: Workplace Diversity and Firm Performance - Distribution of Research Studies by Journal (2000-2009)
S. No.
Name of the Journal
Number of Articles Published
1.
Academy of Management Journal
9
2.
Human Resource Management
3
3.
Journal of Management
2
4.
Journal of Management Studies
2
5.
Management International Review
2
6.
Management Science
2
7.
Organization Science
2
8.
Organizational Behavior & Human Decision Processes
1
9.
Strategic Management Journal
1
Total
24
Journal of Diversity Management Second Quarter 2010 Volume 5, Number 2
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Race/Gender Diversity and Firm Performance
In a study of the U.S. banking industry, Richard (2000) explored the relationship between racial diversity of
the workforce and the firm‟s beliefs on diversity on the one hand, and financial performance on the other in a sample
of 63 banks. The banks were drawn from three states: California for its high racial diversity, Kentucky due to its low
racial diversity, and North Carolina for the banks‟ financial wealth and asset size. Blau‟s index of heterogeneity was
used to assess workforce diversity of the banks. Financial information was obtained from the Shesunoff Bank Search
database. The independent variable for this study was the racial background of bank employees (white, black,
Hispanic, Asian, and Native American). The dependent variables were: productivity, return on equity, and market
performance. Firm size, state differences, gender, mix of loan portfolio, geographic scope, and banks‟ attitude
towards racial diversity were controlled. Although the hypothesis that racial diversity would be positively linked to
firm performance was not supported, the firms‟ business strategy was found to moderate the relationship between
the two. Thus, when a firm pursued a strategy of growth there was a positive relationship between racial diversity
and firm performance while the relationship was negative when the strategy was one of downsizing.
In a related study, Richard, Barnett, Dwyer and Chadwick (2004) added gender and the degree of
entrepreneurial orientation of the firm to the racial diversity of manager and supervisor groups as variables, and
studied the responses from 535 bank presidents and human resource executives. Covin and Slevin (1989)‟s nine-
item entrepreneurial scale was used to measure three dimensions of entrepreneurial orientation: innovativeness, risk
taking, and proactiveness. Firm performance was measured by labor productivity (net income per employee) and the
average return on equity for the preceding two years. The proportions of whites and men (due to a large majority in
sample), firm size, and annualized percentage of asset growth were controlled. The hypothesized U-shaped
curvilinear relationship between cultural diversity in management and firm performance was not supported.
However, it was found that the curvilinear relationship would be positive and moderately strong in firms with an
innovative orientation, and moderately negative in firms with a risk taking orientation when the diversity is very
high or vey low. Proactive entrepreneurial orientation had no impact on the relationship.
Broadening their study beyond the U.S. banking industry to include a range of other industries, Richard,
Murthi, and Ismail (2007) investigated the impact of racial diversity on intermediate and long-term firm
performance and the moderating role of the environmental context. Using data from Fortune magazine‟s diversity
survey for the years 1997 through 2002, they estimated the models employing ordinary least squares regression
(OLS). Firm Performance was measured by labor productivity and Tobin‟s q (ratio of market value to asset
replacement value). Firm size, R&D, net income, and the cost of goods sold were controlled.
Racial diversity displayed a curvilinear positive relationship to intermediate firm performance at low or
high levels of diversity. Racial diversity also exhibited a positive correlation to long-term firm performance. The
type of industry was found to moderate the strength of the relationship between the two. Thus, the predicted U-
shaped relationship between racial diversity and firm performance would be more noticeable in service industries
than in manufacturing industries. The linear relationship between racial diversity and long-term performance would
be stronger in resource rich environments. Environmental instability would negatively moderate this relationship
i.e., the U-shaped relationship between firm performance and racial diversity would be stronger in stable
environments than in unstable environments.
Despite these important findings, it is recognized by scholars that diversity measured by single attributes
alone might not provide conclusive evidence of the impact of workplace diversity on firm performance. Lau and
Murnighan (2005) therefore investigated the effects of demographic faultlines on the interactions within groups and
subgroups. It was observed that intra-group and cross-subgroup communications affected demographic faultlines. If
members of a group fall into more than one non-overlapping subgroups based on demographic characteristics e.g.,
young Chinese women and old African men, a strong “faultline” is said to be present in the group. Faultlines could
explain better why the perceptions of team learning, psychological safety, satisfaction, and expected performance
vary than single attribute heterogeneity indexes. The faultline model used in this study suggested that when a group
is split into subgroups, people associate their identities more with their subgroups than with their entire groups.
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It was found that members of strong faultline groups evaluate members of their subgroups more favorably
than do members of weak faultline groups. The identification of subgroups could accentuate members‟ awareness of
a subgroup‟s boundary and their feelings of belonging. When outcomes depend more on their subgroups‟ actions,
people tend to focus on subgroups rather than entire groups‟ actions. Group members are more likely to
communicate and share information within rather than across their subgroups when demographic faultlines are
strong. Groups with strong faultlines experience more intra-group conflict and poorer group outcomes (e.g., rating of
their task and relationship conflict, group learning, psychological safety, satisfaction and expected group
performance) than do groups with weak faultlines. The effects of cross-subgroup communications are moderated by
group faultlines.
Effective management of diversity is based on recognition of commonalities and awareness of differences.
Role modeling behaviors of those who readily accept the differences could help alter the organizational culture, and
thereby improve performance outcomes. Globalization and diversity have increased the need for investigation into
workplace attitudes towards diverse others. In a study of topical relevance, Strauss and Connerley (2003) explored
the relationships between race, gender, agreeableness, openness to experience, contact and cognitions, feelings &
behaviors. The Universal-Diverse Orientation (UDO) construct was employed as a measure of attitudes towards
diversity. This metric has three components: realistic appreciation (cognition), comfort with difference (feeling) and
diversity of contact (behavior).
Based on a survey of 252 undergraduate business students from two different institutions in the US, the
study found partial support for the hypothesis that women and non-Whites have more positive UDO attitudes.
Gender plays a role only as a first step. Persons who rate high on openness to experience would have more positive
UDO attitudes. Surprisingly, the findings did not support the view that people living in more heterogeneous
environments would have more positive UDO attitudes. Contact, gender and race would interact with openness and
agreeableness to predict UDO attitudes. Women had more favorable attitudes at high levels of openness than men.
The findings suggest that the cognitive and affective components of UDO attitudes were impacted by agreeableness
alone, and the behavioral component was significantly related to race, agreeableness, openness and contact when all
variables were included in the model. Agreeableness emerged as the most important predictor of attitudes.
Diversity in business helps in pooling the best talent, reduces the gap between increasingly diverse
customer bases, unleashes creativity, promotes innovation and thereby enhances the competitiveness of the
organization. Extending the concept of diversity from attributes like race, gender, age etc to the entire spectrum of
human differences Jayne and Dipboye (2004) proposed that crucial to changing the workforce are efforts to recruit,
retain and develop employees from under-represented groups as well as creating internal structures to sustain an
effective diversity program. Using behavioral interviews, biographical data inventories, assessment centers, work
samples etc to assess KSAOs (knowledge, skills, abilities, experiences and other characteristics), this study suggests
that effective diversity programs should strike a balance between identifying right KSAOs and enhancing them
through training. Employing a “relational demography” method, the study found that working with dissimilar others
often results in negative outcomes. Increased group level diversity does not necessarily lead to higher performance
and a diverse group is not always a better-performing group. Based on two surveys and a review of extant research,
the study found that benefits of diversity are contingent up on situational factors such as organizational culture,
strategies and the environmental context. Successful diversity programs should be based on specific goals and not
quotas for minority groups.
The study makes the important point that the success of diversity programs depends on how they are
framed. Rather than as threats to overcome, they should be framed as challenges and opportunities. Comparing the
relative efficacies alternative approaches to framing, the integration and learning perspective (rethinking primary
processes) is recommended as the most effective in sustained motivation of management and employees for long
term success. Having a diverse top management team is the most powerful way to signal the support for diversity.
Drawing up on social identity theory, the research suggested encouraging employees to know each other as
individuals so as to overcome stereotyping, prejudice and intergroup conflicts resulting from an in-group association
based on likeness to oneself.
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Organizations can manage diversity effectively by building senior management commitment and
accountability with a thorough needs assessment of the people. Employee surveys, focus groups and exit interviews
could be useful in uncovering issues faced by the organization. Developing a well developed strategy to realize
realistic business goals also ensures diversity success. As noted earlier, the Richard (2000) study found a positive
relation between racial diversity and firm performance in organizations pursuing a growth strategy. Finally,
establishing metrics and evaluating the effectiveness contributes to success. Increasing diversity alone does not
guarantee immediate tangible improvements. Nevertheless creating a diverse workforce could yield huge benefits.
The “business case” for diversity – the view that more diversity would increase performance effectiveness -
is gaining momentum because of talent shortage and an increasingly diverse customer base. A report of the
Diversity Research Network (Kochan, et al., 2003) based on a large field based 5-year research project summarizes
the findings from the case studies of four large firms in the information processing, financial services, and retailing
industries on the relationship between race/gender diversity and business performance. The studies variously
measured performance, satisfaction and turnover and related them to cultural, demographic, technical and cognitive
diversities. They had also measured group processes of communication, conflict, cohesion, information and
creativity within the organizational context of culture, business strategy and HR policies. Qualitative data on
business unit cultures, HR and managerial practices, survey data based on quality of group processes and census
data on demographic composition of teams were used to interpret the results. The studies established few direct
effects of diversity on performance (positive or negative). The report looks beyond the existing business case by
adopting an analytical approach of linking HR practices to business performance. It supports experimentation and
evaluation and not simply sticking to the old frame of the business case. To inculcate a culture of mutual learning
and cooperation, organizations should implement appropriate management and HR policies in addition to training
programs for diversity management.
Recognizing the complex relationship between team diversity and team outcomes, the mixed nature of the
evidence and the moderating variables potentially affecting this relationship in extant research, Horwitz and Horwitz
(2007) carried out a meta-analytic review of studies published between 1985 and 2006 to provide quantitative
estimates of the relationship. A total of 78 correlations from 35 articles were included for the purpose. Correlation
coefficient on randomized experiments and post hoc analysis were used as tools to better understand the
hypothesized relationships. Based on a dichotomization of team diversity variable into task-related versus bio-
demographic diversity, they tested the hypothesis of synergistic performance resulting from diverse employee teams.
Although bio-demographic diversity was not significantly related to team performance, the positive impact of task-
related diversity on team performance was supported. Similarly, there is no discernible effect of team diversity on
social integration.
Employing the idiom of melting pot versus tossed salad, Bachmann (2006) explored what it takes to design
an effective multicultural team in the workplace. The study distinguishes between two types of coupling in
workgroups: structural and cultural. Structural coupling refers to the task-related domain, and cultural coupling
refers to non-task related social domain. The most effective multicultural groups tend to have a tight coupling in task
related structural domain and loose coupling in non-task cultural domain. While the former results in consensus,
cohesion, effectiveness and stability, the latter leads to diversity, accuracy, creativity and flexibility. Structural
coupling could be achieved by clarifying the group‟s objectives, dividing group tasks into interdependent subtasks,
assigning task roles, allocating responsibilities and authority and determining the norms of task related interactions.
The cultural coupling is accomplished by creating an atmosphere of mutual respect and acceptance, and signaling
approachability for smoothing differences. In short, an effective workgroup needs to be both a tossed salad and a
melting pot for the best possible outcomes.
Based on the premise that effective work groups tend to exchange and share knowledge with external
constituencies such as customers, organizational experts and others outside the group Cummings (2004), based on a
field study of 182 workgroups in a Fortune 500 telecom company, concluded that the value of external knowledge
sharing increases when such groups are structurally more diverse. Structural diversity is operationlized in terms of
member differences in geographic locations, functional assignments, reporting managers, and business units.
External knowledge sharing was measured using group member surveys and performance was estimated using
senior executive ratings. The study concluded that the interaction of external knowledge sharing and geographic
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locations was significantly associated with the performance. The greater the external knowledge sharing, the better
the performance, when there were more geographic locations. It was also found that external knowledge sharing was
related to better performance when there were more functional assignments. The interaction of external knowledge
sharing and reporting managers was also significantly associated with performance. However, there was only partial
support for the effect of structural diversity based on the number of business units.
Based on a study of 437 teams in 46 units of a large US company, Joshi, Hui and Jackson (2006) concluded
that in-group/out-group dynamics of diverse workgroups might contribute to sales performance differences between
members of higher-status majorities and lower-status minorities. The study employed measures such as individual
demographic attributes, work team composition, management composition of work units, and sales performance.
The control variables were age and tenure of service to account for differences in human capital. It is possible that
all employees experience both in-group favoring and out-group discrimination. As the in-group size increases, the
members of the in-group enjoy benefits of in-group dynamics. On the other hand, as the in-group size decreases the
group suffers from costs arising from out-group discrimination. Status is also an important factor in the performance
implications of workplace diversity. It is frequently observed that men and whites typically enjoy higher status than
women and people of color. Because status is usually associated with skill and expertise, men and whites may be
valued and rewarded even when they are in a minority or token position.
Tmt Diversity And Firm Performance
Earlier research studies had typically explored the direct link between TMT demographic characteristics
and firm performance presumably due to ready availability of demographic data. The support for the relationship
was at best modest or the findings were mixed. In contrast, Certo, Lester, Dalton, and Dalton (2006) employed
confirmatory factor analysis to investigate the moderating influences in this relationship. TMT heterogeneity was
assessed using four measures: size, organizational tenure, functional, executive tenure and educational. Firm
performance was defined in terms of Return on Assets, 3 year average ROA, ROA growth, 3 year average Return on
Equity, and sales growth. The study concluded that TMT size and financial performance are partially correlated with
a positive and significant relationship between TMT size and sales growth but no evidence of the effect of TMT size
on ROA or ROE. There is also a partial positive relationship between TMT heterogeneity and firms‟ financial
Performance with functional heterogeneity and executive tenure heterogeneity being positively related with ROA.
The study also found that several TMT variables were significantly related to strategic variables such as
diversification, R&D expenditures and internationalization.
Applying the theoretical lenses derived from signaling theory and the behavioral theory of the firm, Miller
and del Carmen (2009) investigated how firm reputation and innovation mediated the board diversity-firm
performance relationship. The independent variables in the study were board diversity, innovation, and firm
reputation. Board diversity was assessed on the basis of race and gender. Innovation was measured by R&D
expenditures. Firm reputation was based on the 2004 Fortune Corporate Reputation Survey. Firm performance was
measured using the accounting based measures of ROI and ROS. Firm age, liquidity, size, product diversification,
international diversification, and industry were controlled. The study based on a sample of Fortune 500 firms, found
a positive relationship between board racial diversity and both firm reputation and innovation. Reputation and
innovation both partially mediated the relationship between board racial diversity and firm performance. Further
there was a positive relationship between board gender diversity and innovation.
Employing the MARKSTRAT simulation, which is widely used to study decision making, Kilduff,
Angelmar and Mehra (2000) investigated the role of cognitions in the TMT diversity-firm performance relationship.
The diversity variables included in the study were nationality, functional heterogeneity (computed using Blau‟s
index), age heterogeneity and cognitive diversity. Firm performance was measured by net contribution margin and
market share. The study conducted on a sample of 159 managers split into 35 teams revealed that the higher the
interpretive ambiguity of top management teams, greater the firm performance.
Earlier research studies had also paid scant attention to the nature of TMT team processes that interact with
TMT compositional diversity in influencing firm performance outcomes. Boone and Walter (2009) sought to
address this gap by investigating how team mechanisms such as collaborative behavior, accurate information
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exchange, and decision-making decentralization moderate the impact of TMT diversity on financial performance of
33 information technology firms - 14 Belgian and 19 Dutch. All the firms operated in software services and products
industries. TMT diversity was defined in terms of functional-background (FB) and locus-of-control (LOC). While
the former could potentially enhance decision quality and organizational performance, the latter could lead to
relational conflict and thereby adversely impact firm performance. The study found that functional background
diversity is positively related to firm performance. A TMT's collaborative behavior and information exchange are
prerequisites to reap the performance benefits of FB diversity but avoids the negative effects of LOC diversity.
Further, decentralized decision making while enhancing the effectiveness of functionally diverse teams, also
reinforces the negative consequences of LOC diversity on firm performance.
Researchers generally tend to overlook the impact of nationality diversity within subsidiary TMTs on
subsidiary performance. Drawing up on theoretical insights from knowledge and legitimacy perspectives, Gong
(2006) enquired into this important dimension of diversity using a large sample of 370 subsidiary TMTs with a total
of 2290 top managers in 28 Japanese multinationals. Firm performance was measured using subsidiary labor
productivity. Industry, TMT size, number of years a subsidiary was in operation, capital investment and gross
national income per capita of the host country were controlled. The study concluded that there was a significant
positive correlation between nationality heterogeneity and subsidiary performance. Furthermore, as the number of
years the subsidiary was in operation increased, the effect of subsidiary TMT nationality heterogeneity became more
positive. Thus, national diversity becomes more important when it is more pertinent to a team‟s work.
Diversity-Firm Performance Relationship: The Role Of Context
Focusing on the moderating effects of internal and external contexts, Cannella, Park and Lee (2008)
investigated the effect of co-location of TMT members and environmental uncertainty on the TMT diversity-firm
performance relationship. Based on a study of 207 U.S. firms in 11 industries, the study concluded that the effects of
TMT functional diversity on firm performance would be more positive as the proportion of TMT members with
offices in the same location increases. The effects of intrapersonal functional diversity would also be more positive
as environmental uncertainty increases.
Summarizing the results from 39 studies, Joshi and Roh (2009) in a meta-analytic study explored the role
of contextual factors at multiple levels - industry, occupation and team, in influencing performance outcomes of
relations-oriented and task-oriented diversity. It was found that although the direct effects of contextual factors were
small yet they were significant. After accounting for industry, occupation, and team-level contextual moderators, the
effects doubled, and in some cases even tripled, in size. Moreover, occupation and industry-level moderators
explained significant variance in effect sizes across studies.
The hypothesized negative effect of gender and race/ethnicity diversity would be weaker in more gender
and ethnically balanced settings was confirmed. That the positive performance outcome of task-oriented diversity
would be stronger in more balanced occupational settings was disproved implying higher performance outcomes in
majority male and white settings. Results also showed that relations-oriented diversity had a positive effect on
performance in service industries but the support was weak for the moderating effects of the industry setting on the
performance outcome of task-oriented diversity. That the negative effects of relations-oriented diversity would be
strengthened in long-term teams was also strongly supported.
CONCLUSION
What emerges from the foregoing annotated review of recent research linking workplace diversity and firm
performance is a fascinating mosaic of insights and perspectives that enrich our understanding of both these
concepts as well as their interrelationship. Academic research on this topic has indeed made great strides and
attempts to dispel populist notions of the concept of diversity and how it could influence business performance.
Diversity is no longer conceptualized simply in demographic terms such as race, gender, education, and so on. Even
when it is expressed using these parameters, it is no longer uni-dimensional. Heterogeneity, even when such
demographic criteria are applied, needs to recognize the relevance of overlaps among these criteria while
considering workplace diversity i.e., “faultlines” (Lau and Murnighan, 2005), in order to derive meaningful
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inferences about diversity and how it would affect business performance. While bio-demographic diversity might be
easy to recognize since it is apparent, task-related diversity and cognitive diversity are more important criteria to
take cognizance of while attempting to understand workplace diversity and its true implications for firm
performance. Thus, task related dimensions e.g., functional background, organizational tenure and experience, social
psychological characteristics e.g., agreeableness, openness to experience, contact and cognitions, feelings and
behaviors, and team interaction abilities e.g., attitudes towards others, acceptance of differences, etc are equally if
not more relevant to assess workplace diversity and explain its influence on performance outcomes.
Contemporary research has also expanded the concept of firm performance in exploring the effect of
workplace diversity. While financial performance continues to be used to estimate performance outcomes in the
short term e.g., various measures of firm profitability such as Return on Assets, Return on Sales, and Return on
Equity, and in the long term e.g., Tobin‟s q, market share, etc, there is a trend in academic research to look beyond
financials to assess the performance implications of diversity. Slowly but surely, scholars are incorporating metrics
such as quality of results, social integration, decision making, creativity and problem solving, and other outcomes
e.g., Knowledge, skills, abilities, experiences and other characteristics (KSAOs), task and relationship conflict to
measure performance. Thus, the concepts of both workplace diversity as well as firm performance are now infused
with new meaning and significance, as these should be, while exploring their interrelationship. A summary of
measures of diversity and firm performance as used in empirical studies on this topic during the captioned period is
presented in Table 2.
The impact of workforce diversity, in its richer connotation, on firm performance is no longer considered as
linear. For the present it is hypothesized to be curvilinear, U-shaped and having larger effects at high as well as low
degrees of diversity. Such effects appear to be stronger in stable rather than in unstable environments. The effects of
diversity also seem to be more pronounced in service industries than in manufacturing industries. This phenomenon
might be due to the greater degree of interpersonal interactions in service industries such as hospitality, commercial
airlines wherein personalized customer service is likely to influence firm performance. While contextual factors are
important, the relationship between workplace diversity and firm performance is neither direct nor definitive. This is
clear from the mixed results of empirical studies attempting to establish this nexus. Diversity by itself alone can not
account for differential performance among firms. Certain firm-specific factors such as resources, capabilities, and
core competencies are more likely to account for such performance outcomes. It is interesting to note that current
research on the performance implications of workplace diversity recognizes this reality and is thus in tune with the
findings of research in strategic management. Diversity that enhances firm resources, capabilities, and core
competencies is more likely to lead to superior firm performance. Thus, the mediating factors identified by
researchers in the area of diversity-performance include KSAOs - Knowledge, skills, abilities, experiences and other
characteristics, entrepreneurial orientation, firm reputation, innovation, knowledge sharing and so on. Thus, we see
an emerging convergence in the views of scholars of diversity and strategy on how diversity is an important factor to
understand and leverage for superior firm performance. Diversity research has also recognized the importance of
organizational culture in enabling firm performance. Moreover, this research stream realizes that the diversity
variable becomes more important when the business strategy is growth-oriented rather than one where there is
downsizing that could work against workplace diversity due to traditional biases. The workplace diversity -firm
performance relationship as it emerges from the survey of recent empirical research is modeled as captured in Figure
1.
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Table 2
Workplace Diversity and Firm Performance: Measures of Variables
Research Study
Measure(s) of Firm Performance
Bachmann (2006)
Group Effectiveness and Efficiency
Boone & Walter (2009)
Return on Sales
Cannella, Park & Lee (2008)
Return on Assets
Certo, Lester, Dalton, & Dalton
(2006)
Return on Assets, 3 year average ROA, ROA growth, 3 year
average Return on Equity, and sales growth
Cummings (2004)
Problem Definition, Method Selection, Innovation, Result
Quality, Clarity of Presentation
Gong (2006)
Labor productivity
Horwitz & Horwitz (2007)
Quantity and Quality of Performance, Social Integration, Team
Cohesion, Decision Making, Creativity and Problem Solving
Jayne and Dipboye (2004)
KSAOs: Knowledge, skills, abilities, experiences & other
characteristics Individual reactions to work situations based on
„relational demography‟
Joshi & Roh (2009)
Various
Joshi, Hui & Jackson (2006)
Sales revenue, Pay
Kilduff, Angelmar & Mehra (2000)
Net contribution margin
Market share
Kochan, et al., (2003)
Performance satisfaction, Turnover, Quality of group processes
Lau & Murnighan (2005)
Task and relationship conflict, group learning, psychological
safety, satisfaction and expected group performance
Miller & del Carmen (2009)
Financial performance: ROI, ROS
Firm innovation: R&D expenditure
Firm reputation
Richard (2000)
Productivity, ROE, and Market Performance
Richard, Barnett, Dwyer & Chadwick
(2004)
Labor Productivity (Net income/employee)
Average ROE for the preceding two years
Richard, Murthi & Ismail (2007)
Labor productivity (Revenue/employee),
Tobin‟s q (Market value /Asset replacement value)
Strauss & Connerley (2003)
Universal Diverse Orientation: Measure of attitudes- realistic
appreciation, comfort with distance and diversity of contact
Journal of Diversity Management Second Quarter 2010 Volume 5, Number 2
46
Figure 1
Workplace Diversity -Firm Performance Relationship: A Model
Journal of Diversity Management Second Quarter 2010 Volume 5, Number 2
47
The instrumental implications of workplace diversity are doubtless important to businesses, and therefore
diversity needs to be managed. In doing so, one could be “reactive” to deal with the phenomenon of diversity. A
better approach might be to be “proactive” in leveraging diversity to achieve superior business performance.
However, it is important to recognize that diversity is a fact of life in today‟s workplace. It is a reality as much as
sustainability and achieving energy efficiency are in the 21
st
century. The proper approach should therefore be
“interactive” and designed to work with all stakeholders to achieve their individual and organizational goals as well
as societal imperatives (Post, 1978). There is a need to adopt a “normative” rather than an “instrumental” approach
to workplace diversity because that is the right thing to do in terms of social justice, community engagement and
rationale based on globalization of the business environment.
AUTHOR INFORMATION
Anne McMahon is Professor of Management in the Williamson College of Business Administration at Youngstown
State University where she teaches Organizational Behavior and Workplace Diversity. She has served several terms
on the national Workplace Diversity Panel of the Society for Human Resources Management. She organizes
community leaders in the Partners for Workplace Diversity, an alliance of over 30 organizations to develop diversity
initiatives for the Partnership and for the community at large (www.ysu.edu/workplacediversity).
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2003
... Some studies suggest that a diverse workforce in certain contexts can be highly firm for firm creativity and performance (McMahon, 2011). A diverse workforce became a contemporary tool for organizations to survive in competitive markets (Oswal, 2020). ...
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... Some studies suggest that a diverse workforce in certain contexts can be highly firm for firm creativity and performance (McMahon, 2011). A diverse workforce became a contemporary tool for organizations to survive in competitive markets (Oswal, 2020). ...
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Global diversity is a key issue facing all companies and organisations. This book embraces diversity and shows how this is a strength that can provide the tools needed to attain the values and characteristics increasing demanded by business corporations and environments. Diversity has enormous benefits and opportunities, but these need to be carefully understood and developed. This book provides a practical framework and approach