"Innovation Thrives on Diversity"

Amid a growing backlash in tech against DEI initiatives, it is worth remembering increasing diversity, equity, and inclusion in companies and the economy at large boosts innovation & economic outcomes

Happy Monday, everyone! Today, I want to discuss the DEI backlash and examine some of the evidence regarding the importance of diversity to innovation. The evidence makes it abundantly clear that if you want to achieve positive outcomes, you should encourage diversity, not reject it.

Why Diversity Matters to Innovation & the Economy

Innovation thrives on diversity.

- Heather Boushey, Unbound: How inequality constricts our economy and what we can do about it

Recently, several major tech companies have rolled back their diversity commitments and their Diversity, Equity, and Inclusion (DEI) teams. Amazon and Meta have winded down resources dedicated to advancing DEI initiatives, joining companies such as Ford, McDonald’s, and Walmart. Apple, meanwhile, is under pressure to do the same, though for now, it is fighting against those efforts ahead of its next AGM. 

The Republican Party’s antipathy to DEI is a driving force behind these moves ahead of Donald Trump’s imminent return to the White House. Meta also cites the 2023 Supreme Court decision in which the conservative majority limited affirmative action in considering university applicants’ race in admission decisions. Companies have also come under pressure from conservative activists, and it seems some business leaders see DEI efforts as “distracting to business performance and growth.” 

I think the moral and ethical cases alone should be sufficient to convince leaders of the need to prioritize genuine commitments to achieving equity and inclusion. But even if we focus on the economic side of things and look at the evidence, we can see that claims that DEI doesn’t help business performance and that it runs counter to companies’ fiduciary responsibilities are, frankly, bullshit.

Better diversity, equity, and inclusion benefit innovation and economic outcomes. The evidence for this is pretty comprehensive:

• Research from Dame Vivian Hunt, Dennis Layton, and Sara Prince for McKinsey & Company in 2015 found that diversity positively correlates with better financial performance, with companies in the top quartile for racial and ethnic diversity 35 percent more likely to have financial returns above their respective national industry medians.

Source: McKinsey & Company

• Research by Raj Chetty, Xavier Jaravel, Neviana Petkova, and John van Reenen on innovation and invention in the US found that “the innovation rate in America would quadruple” if women, minorities, and children from low-income families were able to invent at the same rate as high-income white men. However, they are being held back by factors such as their neighbourhood environments and a lack of direct exposure to innovators through mentoring and role models. 

• Looking at Canadian evidence from Statistics Canada, women-owned businesses that patent have “higher survival rates, lower revenue growth, higher profitability compared with other businesses that patent”. Women-owned firms that applied for patents were also “less likely to experience an exit through an acquisition or merger,” helping keep their businesses in Canada.

• Research by Sylvia Ann Hewlett, Melinda Marshall, and Laura Sherbin, published in the Harvard Business Review, found companies with diverse leaders out-innovate and out-perform others. They looked at companies whose leaders exhibit at least three of what they call “inherent” diversity traits (e.g. gender, ethnicity, and sexual orientation) and three “acquired” traits (i.e. diversity gained from experience such as foreign work experience giving you an appreciation of cultural differences). Their findings included that firms with this kind of leadership diversity were “45% likelier to report a growth in market share over the previous year and 70% likelier to report that the firm captured a new market”. Yet 78% of their respondents worked at non-diverse companies, and without diverse leadership, women, people of colour and LGBT staff were less likely to win endorsement for their ideas, costing “companies crucial market opportunities, because inherently diverse contributors understand the unmet needs in under-leveraged markets.”

• Back to Canada, the 2023 State of Women’s Entrepreneurship Report highlights that “women-owned businesses focus more on innovation, as well as on improving organizational processes” and that “majority women-owned SMEs are significantly more likely to implement marketing innovations than men-owned SMEs, at 26.1% vs. 9.8%, respectively.”

• Work by Dan Munro’s discussion paper on An Inclusive Innovation Monitor for Canada highlighted research that showed that:

  • gender and ethnic diversity can improve firm performance by ensuring that there is a better mix of ideas, perspectives, and networks on which an organization can draw

  • equality may be “an important ingredient in promoting and sustaining growth”, rather than a hindrance to efficiency and growth as conventional wisdom has held

  • racially- and gender-diverse teams can improve the quality of both science and innovation by facilitating more open-mindedness, more deliberate consideration of possible outcomes, and more effective problem-solving.

• Looking at the macro picture, increasing diversity was essential to driving Canada’s economic growth over past decades. A 2017 IMF Working Paper by Bengt Petersson, Rodrigo Mariscal, and Kotaro Ishi highlighted how the increased participation of women in Canada’s workforce was an “important source of growth for Canada” and that “female labor participation rates are positively and significantly correlated with labor productivity growth”. They also found that “if the current gap of 7 percentage points between male and female labor force participation with high educational attainment were eliminated, the level of real GDP could be about 4 percent higher today”. Of note is the fact that the workforce participation rate gap has grown to 8.3% in the most recent data.

I could go on and on. Quite simply, though, increasing diversity, equity, and inclusion in companies and the economy at large provides massive economic gains and boosts innovation.

The crucial thing, however, is meaningfully doing this. Frankly, in too many companies, DEI initiatives have been performative and have masked leaders who are not actually doing the difficult work of breaking down systemic barriers. As this great piece by Gachi Issa in the Hamilton Spectator argued, instead of contributing to dismantling structural systems of racism, DEI “positions often deflect responsibility away from institutions and onto individuals filling these equity roles” and that “systems use these positions to protect themselves from critique; they distract us from the valuable and constructive change that is needed by simply off-loading responsibility to [DEI] experts”.

It is important that we point out the hypocrisy and economic illiteracy of those who criticize and try to dismantle DEI efforts. However, we should also not kid ourselves that if Meta, or any other company, had not rolled back its DEI work, these initiatives were ever going to deliver more equitable and inclusive companies or economy alone. Even with these teams and programs in place, Meta still appointed an AI advisory group made up entirely of White men, for example. AI being a technology that has the potential to greatly exacerbate income inequality and is rife with issues of bias and discrimination, of course.

Achieving real equity, diversity, and inclusion requires genuine systemic work. That includes addressing educational, housing, and health and care inequities that prevent too many people from realizing their potential. It also includes a focus on redistribution and predistribution—reducing the need for redistributive taxes by ensuring the economy is growing more equitably to begin with. 

It should additionally involve rewriting company duties in legislation, moving away from a narrow focus on fiduciary responsibilities to shareholders to a wider conception of stakeholder capitalism. The current model has led to short-termism and undermined our economy, decoupling markets from productivity and meaning that “financial success often derives from business practices that extract value rather than produce it.”

In light of threats to Canadian prosperity from US tariffs and protectionism and from our long-lagging productivity, there has never been a more pressing time for a genuine, systemic effort to strengthen our economy and society by increasing our diversity, equity, and inclusion.