We need to think about diversity in the workplace beyond gender, argues Alison Woolsey, Director of Diversity & Inclusion at Clayton Utz, a member of The Ethics Alliance.

In December 2017, Chartered Accountants Australia NZ, The Ethics Centre, Governance Institute of Australia, and Institute of Internal Auditors released a publication titled Managing Culture – A good practice guide.

Inspired by the discussion, I wondered how important the link between diversity and inclusion (“D&I”) and a sound culture in which ethical decision making is a given? Being able to point to clear evidence of a link could only advance the case for D&I in our organisations and help address any resistance to change.

A lot has changed in the Australian market. In spite of, and perhaps because of, the Hayne Royal Commission and its fallout, the connection is worth exploring. It’s a topic that has been investigated by others in the past – certainly with a gender diversity focus. For example:

• Professor Robert Wood of the University of Melbourne’s Centre for Ethical Leadership, summarised several articles and studies linking more women on boards and in senior management with improved risk management and corporate governance
• The above paper references a study which found Fortune 500 companies with a higher percentage of women on their board of directors were more likely to be on Ethisphere Institute’s list of the World’s Most Ethical Companies.
• ‘The Lehman Sisters Hypothesis’, a study that concludes empirical literature backs the claim “more gender diversity in finance, and particularly at the top would help to reduce some of the behavioural drivers behind the crises”.

A little less on point, but worth noting as it often comes up in gender diversity discussions, is John Gerzema and Michael D’Antonio’s 2013 book, The Athena Doctrine: How Women (and the Men Who Think Like Them) Will Rule the Future. It offered a global survey of 64,000 people and revealed that two thirds felt the “world would be a better place if men thought more like women”.

What I would like to focus on here, however, are two key and interrelated theses around diversity and inclusion and their role in driving workplace culture:

1. Diverse teams drive better decision making.
2. Inclusive workplaces inspire better team performance (as well as employee satisfaction, success and security).

If these theses hold true (and I consider each in more detail below), the unavoidable conclusion could be that D&I helps shape an organisation’s culture for the better, and will be increasingly valued – and even demanded – by boards and investors as corporate governance rules are strengthened and companies’ social licences to operate come under increased scrutiny.

Diversity is a trigger for better decision making

Much is written about the “value of diverse teams” and “diversity of thinking”. Many leaders and organisations use the expressions liberally when promoting their diversity policies. But do we really understand what these expressions mean?

In her book, Which Two Heads Are Better Than One, Australian author Juliet Bourke acknowledges the collective intelligence that diverse teams can offer, but debunks any theory that it’s easy to achieve through simple gender balance and diversity of background.

Bourke introduces several enablers of diversity of thinking. These include the composition of any group and the process they use to think and debate. Gender balance in a group, she says, “promotes psychological safety and more conversational turn-taking, thereby encouraging people to speak up, offer their views, and elaborate on the ideas of others”. Racial diversity “triggers curiosity, causing people to ask more questions, make fewer assumptions, listen more closely, and process information more deeply”. Age and geographic location also play a role.

In addition to this, we need to consider more direct factors – firstly, diversity of approach to problem solving. Bourke identifies six key individual approaches to problem solving but notes we tend to focus on two in particular. She says that by deliberately taking a more balanced approach, groups report they reduced blind spots and “were able to develop more robust solution” and moreover “followers report greater faith in the ultimate solution”.

The second direct influence on diversity of thinking comes from the mix of functional roles such as general counsel, chief risk officer, and chief HR officer. These executive positions expose members to different domains of knowledge and social networks, Bourke says.

This theory challenges the simplicity of the proposition that having women in a group mitigates risk. Australian academic Cordelia Fine similarly dismisses the existence of any gender gap in risk taking in her 2016 book, Testosterone Rex. So too does Elizabeth Sheedy, who concludes in a 2017 study that senior female bankers don’t conform to stereotypes and are just as ready to take risks.

This rich research linking gender diversity and improved business performance suggests organisations also need to consider a wider range of diversity forms beyond women to men ratios. When you begin to grasp the complexity of optimal diversity, you begin to realise the opportunities and value that teams can deliver or destroy.

Inclusion and workplace performance

Achieving the ideal diversity mix in any group is no mean feat. However, a group can still underperform if its members do not feel included.

According to the Diversity Council of Australia, inclusion occurs when a mix of people are respected, connected, progressing, and contributing to organisational success. Deloitte’s HR research body, Bersin, shows organisations with inclusive cultures are six times more likely to be innovative, anticipate change, and respond effectively, and twice as likely to meet or exceed financial targets.

We see evidence that inclusion is associated with being treated fairly and respectfully, being valued for one’s uniqueness and sensing group belonging. The Deloitte Inclusion Maturity Model identifies the highest level of inclusion as being when people report feeling both psychologically safe and inspired to do their best work. At a more granular level, this is about people feeling (or leaders encouraging people to feel) they can contribute in a meeting, have a voice in decisions affecting them, and can disagree or challenge group decisions.

Leaders are instrumental in creating a culture of inclusion. Diversity commentators and practitioners largely agree on a common set of leadership capabilities including being collaborative, accountable, open and curious, a champion of diversity, and relational.  A big piece in the discussion on inclusive leadership is the importance of counteracting biases and assumptions in decision making. In recent years, not only have we seen a growing level of awareness of unconscious biases but also a push to explore practical ways (policies, processes and structures) to mitigate against them.

Positive traits of an inclusive leader include being particularly mindful of personal and cultural biases like confirmation bias and groupthink. Juliet Bourke also highlights the importance of leaders being cognisant of the situations and factors such as time pressures and fatigue which can cause them to be vulnerable to such biases.

As several authors have argued, there was potential for diversity of thinking and good decision making in the Enron board, but the decisions “concerned matters of high complexity, difficulty and moral uncertainty” and ultimately it succumbed to groupthink, says Bourke.

Does diversity and inclusion lead to sound culture?

If we have ideal diversity in a team and have cultivated inclusion through good leadership, does a sound organisational culture necessarily follow?

Logically, yes. We’ve canvassed positive outcomes such as good decision making, effective team work, psychological safety, and innovation. We’ve considered the impact of leaders being more open and curious, conscious of biases, and accountable. In both the Managing Culture paper and APRA’s report on the Commonwealth Bank, we see references to the need for improved behaviours of boards and senior leadership along the lines of these themes. If D&I doesn’t at least influence ethical behaviour or underpin the concept of an ethical framework, it would be easy to argue inclusive leadership can facilitate embedding an ethical framework.

McKinsey in its 2018 update suggests that, for many companies, D&I is a “matter of license to operate”. This is a theme at the heart of proposed changes to the ASX Corporate Governance Council’s Principles and Recommendations. In a substantial redraft of principle 3, the current words of “act ethically and responsibly” become “instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. The ASX says that “preserving an entity’s social licence to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders than just its security holders, including employees”. It goes on to suggest this may include, by way of example, “offering employment to people with disability or from socially disadvantaged groups in society”.

On one view this could be saying good culture drives greater levels of diversity, and not vice versa. What’s interesting though is the earlier editions of the Principles and Recommendations also included diversity under principle 3. It was then relocated in 2014 to Principle 1: “lay solid foundations for management and oversight”. In my view, D&I sits comfortably under both principles – a recognition of it being business critical but also critical for ‘good’ or ‘right’ decisions.

More reflection on the point may be required but I think investors and our regulators should care about what organisations are doing to make D&I a priority in the way they conduct business and as employers. D&I may be an undervalued lever to promote positive change in business behaviours and workplace cultures in Australia. The world’s largest asset manager BlackRock has identified board diversity as a “stewardship priority”. Larry Fink recently wrote in his annual letter to CEOs:

“We also will continue to emphasize the importance of a diverse board. Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.” – Larry Fink

It makes sense to continue to make the case for diversity and inclusion as being a driver of positive change – for business, and for the community.

Alison Woolsey is director of Diversity & Inclusion at Clayton Utz, a member of The Ethics Alliance.

AMP Capital was applauded last year when it committed to selling $600 million worth of shares that did not meet its ethical guidelines. However, barely a year after announcing it was getting rid of its direct and indirect interests in tobacco and landmines, AMP was itself ejected into a basket of “untouchables”.

Australian Ethical announced in May it was divesting itself of AMP shares in the wake of searing revelations from the Financial Services Royal Commission.

Billions of dollars were wiped from the value of AMP after the public and investors discovered the wealth manager charged “fees for no service” and steered people into investments that rewarded their financial planners, at the expense of the clients.

Head of ethics research at Australian Ethical, Dr Stuart Palmer, says there were a number of reasons behind the decision to divest, “… but specifically, a senior decision made within the financial planning business to charge clients fees for services they weren’t receiving. They knew it was wrong, they knew it was illegal.

“There were people in the business saying we need to stop doing this, and they kept doing it at a senior level”, he says.

The Royal Commission into Financial Services has been exposing the rot eating away at some of our biggest and most powerful corporations and has reenergised an ongoing debate about what is the actual purpose of business and who it serves.

Palmer says legal cases in the US established shareholder primacy a century ago, with the primary responsibility of business interpreted as creating profits for shareholders.

“Since then, and before then, there has been a debate about whether that is right, whether there are other ways of thinking about corporations having independent interests and responsibilities to all their stakeholders, including shareholders, but also employees, customers, suppliers and society”, says Palmer.

“None is necessarily dominant over the others, but they need to be balanced in the interests of all.”

This discussion about the role of the corporation is being weighed up at all levels, including by the chairman of NAB, Ken Henry, who delivered a speech in March saying that it was not enough for companies to use the “pursuit of profit” to explain away their contribution to negative consequences, such as greenhouse gas emissions and other forms of pollution.

“If that’s the best we can do, then we shouldn’t wonder that we find it so difficult to occupy positions of trust and respect in society. Neither should we wonder that politicians of all political colours have such an uneasy relationship with us”, he told a gathering of the Australian Institute of Company Directors.

This was a debate that the Commonwealth Bank non-executive director, Harrison Young, was alluding to when he wrote last year, “banks should not be profit-maximising institutions. They have duties to the community that oblige them to forego a certain amount of upside”.

Judith Fox, the CEO of the Australian Shareholders Association, says she is aware of increasing numbers of companies and boards having this discussion.

“I’m seeing a lot of conversations that ultimately are all about how something needs to change in the way we operate”, she says.

“I think we are one of those transition periods where there has been a social norm that the purpose of a company is shareholder return and that has been accepted in markets worldwide for four decades”, she says, adding the realisation that companies should stand for more than just profits may come as a surprise to people whose knowledge of economics does not extend further back than US economist Milton Friedman’s pronouncement in 1962 that there is only one social responsibility of business and that is to make money.

Friedman wrote in Capitalism and Freedom:

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Fox says the current debate about the role of the corporation is a return to the concept, popular in the 1930s – that business had a social role to play as well.

Professor of Human Rights Law at Sydney University, David Kinley, agrees that many people’s attitudes are formed by what they have experienced in the past 20 years.

“It is what they have seen since the 80s, which has been a long – until 2008 [the start of the Global Financial crisis] – largely uninterrupted boom period.”

Kinley says Scottish economist and philosopher Adam Smith would be horrified to see the societal cost of rampant free marketeers.

Smith had written in The Wealth of Nations, nearly 250 years ago:

“… that individual acts of economic self-interest combine, through the ‘invisible hand’ of market forces, to further the best interests of society at large”.

Says Kinley, “So, he certainly would be turning in his grave to see all this wealth, so much of it is now concentrated in the hands of the few. Yes, we are better off than we were 200 years ago. Unquestionably. But by God, it’s been at a big cost to the notions of equity and fairness.

“And [investor] Warren Buffett says often – and he is the second richest man in the world – he said he is amazed there are not more people with pitchforks heading for the rich like him because he can’t see how they don’t appreciate this appalling inequality.”

Kinley, author of Necessary Evil: How to Fix Finance by Saving Human Rights, says he is not advocating some sort of Socialist revolution, but remaking the “financial, commercial, corporate neoliberal system that we now have one that works better for people as a whole”.

“If you don’t do that, you have a bubbling up of disquiet, of resentment, that no matter what happens – even things like the global financial crisis – the rich, the powerful, the banking, the financial system, they sail through it, on the back of public funds that bailed them out because they had to be saved. When people ordinary people look at that, they say, ‘How is that fair?’.

“So you get the reaction of, ‘Well, let’s vote in somebody who is willing to drain the swamp, you know, shake up the area and I don’t care if he’s mad or narcissistic or a nincompoop. You put him in there in the White House and just see what happens.’

“These sorts of reactions are almost desperation. I don’t think they are logical, I don’t think they are at all laudable, but you see why people are doing it.”

While there is evidence ethical investments outperform the average large-cap Australian share funds over three, five and 10 year time horizons, Kinley maintains corporations and their executives should be ethical because it is the right thing to do, not because it might make them money.

“What I would suggest what all of us want to do in the morning, truly, is to stand in front of the mirror as you’re brushing your teeth and say, ‘I’m proud of what I do or at least I can see why I do what I do and it is something that is worthwhile’.

“You don’t want to look in the mirror and think, ‘Oh I’m making a lot of dosh, but Geez it is dodgy’.”

If you’re like us, you spend a lot of time reading the business news. And you’re be familiar with a strange paradox: while some highly respected business leaders can be brought to their knees by one poor decision or ethical stumble, there are others that seem to get away with it time after time. In the language of the CBD, they’re Teflon-coated.

It hardly seems fair that those who have spent their career doing the right thing attract more criticism when they fail. But it seems there is nothing the public hates more than a hypocrite.

Psychologist Dr. Melissa Wheeler says hypocrisy is often considered a bigger sin than the transgression itself.

“The thing that really gets people’s attention is someone’s moral hypocrisy – when you say something, but do something very differently. Or you condemn something, but then have been found to be doing it as well”, says Wheeler, who has a PhD in moral and social psychology and is a Research Fellow in the Department of Management and Marketing at the University of Melbourne.

Cyclist Lance Armstrong is therefore judged more harshly because he was a healthy-life champion who was doping himself throughout a career, which included winning seven Tour de France events.

“The thing that really gets people’s attention is someone’s moral hypocrisy – when you say something, but do something very differently.”

Conversely, we shrug off US President Donald Trump’s Twitter diatribes and troublesome behaviour because they’re generally consistent with his career and private life over the decades.

“With Trump, I keep wondering why people aren’t more outraged and shocked at all the things that are coming out, scandal after scandal, and why are people not even batting an eye anymore”, says Wheeler.

“And I think it is because we have come to expect that from him, because it conforms with what you are expecting and it conforms with your stereotype of what he, as a politician, is.”

Surprise makes a scandal ‘stick’

Mud seems to “stick” if someone does the unexpected or flouts their own stereotype, she says.

In the corporate world, Volkswagen’s falsification of its vehicle emissions data became one of the biggest scandals of 2015. It was trading on its “green” credentials, but was lying about its performance.

Organisations cannot even expect that their good record will help insulate them from future mistakes.

“If you do anything to fall from that grace, it is going to be worse”, says Wheeler.

In fact, not only can “good-practise champions” attract more criticism when they fail, they can also draw more scrutiny in the first place, according to the managing director of the Australian Centre for Corporate Social Responsibility, Dr Leeora Black.

“Paradoxically, sometimes companies with stated good intentions are targeted [by activists] more frequently than companies without, simply because they are more likely to respond.”

Black, an advisor with a PhD in Corporate Social Responsibility, says change campaigners will target companies that already have expressed a commitment to be socially responsible. “They know they will get more traction from those companies than companies that don’t care.”

“Paradoxically, sometimes companies with stated good intentions are targeted more frequently than companies without, simply because they are more likely to respond.”

Activists target companies they can change

Public opinion and media coverage often follow the activists, which goes some way towards explaining why socially responsible companies get more flak for their ethical breaches, she says.

“Normally, without that targeting by activists, if a company is doing well and it stumbles, stakeholders are more likely to give it the benefit of the doubt.”

“Many people have spoken to me about this [phenomenon] in their companies, particularly in the early days, when they get started. Normally, companies that are further advanced in their corporate responsibility journey become more resilient and they also develop stronger relationships with stakeholders and so they are much less likely to suffer that kind of backlash when they do slip”, says Black.

“It is the companies that are newer to CSR that are more likely to get targeted and may be more concerned about it.”

However, fears of harsh judgement should not be a disincentive to hold and display high ethical standards. The business case of corporate social responsibility (CSR) is that the “benefits outweigh the troubles”, she says.

“And the troubles are short term and the benefits are long term.”

Black says the benefits of CSR are better employee attraction and retention, higher employee productivity and organisational commitment.

“For companies listed on the stock exchange, over time, their better performance will be rewarded by shareholders. There is also the opportunity for enhanced risk identification and management, enhanced innovation and improved reputation”, she says.

“But it does take consistency and persistency. You don’t just do one good thing and expect everybody to fall all over the place, gobsmacked about how wonderful your company is. That doesn’t cut it. That is the kind of thing that is more likely to be viewed as hypocrisy.

“Where there are systemic, fundamental, deep-seated commitments being made by the company that are being expressed in its culture and its strategy, then, over time, the persistence and the consistency will be rewarded and the company will become much more resilient to shocks that may happen from an occasional stumble.”

Scandal recovery depends on response

Wheeler says once a scandal has broken, an organisation’s ability to recover will depend on how it handles the aftermath and whether it uses it as an opportunity to grow.

Effective responses include taking responsibility, working around the facts of the transgression, not sweeping it under the rug and providing appropriate explanations for the wrongdoing.

“I think there is a real sincerity in that. So, it is not just like trying to weasel out of the blame.

“And then people like to see that the companies are willing to accept and serve what might be considered an equitable punishment. They want to see there is some punishment for the action and some consistent internal changes – what sort of rehabilitation are they doing?”

University of Pittsburgh researchers studied 100,000 social media tweets to see how the tenor of the public discussion changed in the weeks following Volkswagen’s emissions data scandal.

A sentiment analysis over four separate weeks showed how criticism of the company abated once Volkswagen and the regulators took action.

“Ultimately, if the company’s efforts at recovery are successful, the sentiment returns to a neutral state”

Sentiment about the brand was extremely negative immediately after the news broke, but shifted once the company started recovery efforts (such as an apology and recall) and regulatory agencies placed responsibility with the company.

“Ultimately, if the company’s efforts at recovery are successful, the sentiment returns to a neutral state”, says the study’s lead author, Vanitha Swaminathan, Thomas Marshall Professor of Marketing at the Katz Graduate School of Business at the University of Pittsburgh.

Learning from the experience

The damage to Volkswagen included a plunge in their stock price, government investigations in North America, Europe and Asia, the CEO’s resignation, the suspension of other executives, the company’s 2015 record loss, and a tab estimated at more than $US19 billion to rectify the issues, according to American economist, Boris Groysberg, in the Harvard Business Review.

There are also expected to be long term impacts on the careers of Volkswagen employees. “Our research shows that executives with scandal-tainted companies on their résumés pay a penalty on the job market, even if they clearly had nothing to do with the trouble”, says Groysberg.

“Overall, these executives are paid nearly 4 per cent less than their peers. Given that initial compensation in a job strongly affects future compensation, the difference can become truly significant over a career.

Good news for those who have slipped up is that surviving a scandal can result in a stronger operating performance in the long term – if the organisation has learned from the experience, ejected the wrongdoers and put into place measures to avoid a recurrence.

Researchers at the University of Sussex studied 80 corporate scandals and discovered that although share prices plummeted by between 6.5 and 9.5 per cent in the month after the bad headlines started, the experience could lead to improved performance in the long term. The scandals included breach of contract, bribery, conflicts of interest, fraud, price fixing and other white-collar crimes, as well as personal scandals such as a CEO having an affair, lies on CVs and harassment cases.

Dr Surendranath Jory, who led the study, said safeguards put into place to protect against further abuses seemed to allay investor fears and avoid further drops in a company’s stock price, ensuring they rebound to the levels of their rivals. “Three years on from scandals, the share price performance of firms matched those that had not been affected by scandals.

“Clearly, investors value ethics and they place a premium on it.”

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