How can diversity improve middle market company performance? NCMM Executive Director Tom Stewart learns this and more from Managing Director of Out Leadership, Stephanie Sandberg.


How can diversity help even the most closely-knit middle market company improve its performance? Let's find out.


Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.

Today's episode of The Market That Moves America is about the value of diversity. How important is it for middle market companies to field a diverse workforce? And what is diversity anyway?

I'm Tom Stewart, the Executive Director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research outfit studying mid-sized companies, which account for a third of private sector employment and GDP, and the lion's share of economic growth. It is the market that moves America.

The National Center for the Middle Market is a partnership between Ohio State and SunTrust Banks, Grant Thornton, LLP, and Cisco Systems. With me today is a special guest, an old friend of mine, Stephanie Sandberg, who is the Managing Director of Out Leadership, a research consulting and advisory firm in New York. Stephanie is the former President and Publisher of the New Republic magazine, and the Chair of the Independent Magazine Group. She's also served as the chief marketing officer for a couple of consulting firms, and overseeing strategic communications for the private equity firm Rosemark Capital. Stephanie, welcome.

Thank you very much.

Stephanie, let me begin with a couple of points, and maybe a factoid or two to set the stage. Over the years, there's been a lot of compelling research that demonstrates that diversity isn't just a feel-good, socially responsible thing, though it's that. But it's also directly related to the bottom line. For example, there was one study that showed that when Fortune 500 companies are ranked by the number of women directors on their boards, those in the highest quartile with the highest percentage of women reported a 42% greater return on sales and 53% greater return on equity than the other companies. Similar studies have looked at the percentage of minority or female executives, and there are studies that show that cognitive diversity-- a mix of left brain and right brain-- old and young, poets and quants-- all this leads to better decision making.

Stephanie, you're working particularly in the area of LGBT diversity, and you've done studies that show the value of that in financial terms. What do they show?

Well, we've done some, but more importantly other firms, such as Credit Suisse, have done research that helps correlate. And let's be clear, no one has really found the magic pill that describes exactly the causation between diversity of any sort and women. But the correlations are so strong you'd be crazy to deny it.

LGBT as a diverse component in the diversity set is we think an undervalued asset that companies should probably take better advantage of. In terms of your question what's the research and what's left, they say typically companies that have been steady, that have a stronger mix and stronger policies around LGBT inclusion show year after year a pretty consistent 10% lift. But if you look at it even from a broader perspective and think of it so common "sensically," of course, pick your number. It's hard to please everyone, but call it 5% of the population just to use a medium, might be LGBT. And so from a market opportunity perspective it's a relatively small percentage of the population, but it drives disproportionate spending power.

That research has come out pretty consistently year over year, and now on par with other diverse populations. And that doesn't even get to the talent base, which maybe we can discuss.

Let's think about that. So we have this across all of the diversities if you will say. You see this evidence of lift, or you see a correlation. And you're right to say, it's correlation and you can't prove causation. And some of this could be there may be more of certain kinds of diversity in certain sectors.

I mean, we've heard a lot about the lack of diversity in technology for women, for example. But there may be more other kinds-- there may just be sector differences, there may be fast growing cities, residential differences. I think it was Damon Runyon who once said that the race is not always to the swift, but that's the way you bet. Correlation isn't necessarily causation, but it is pretty suggestive. Why? What do you think is the mechanism, and what could be the causative mechanism?

Well, the results in terms of getting away from groupthink, for example, and this notion of diversity driving better decision making, whether it's combining quants and poets, or people from different generations or different ethnic backgrounds-- there's just no getting around that there are going to be better decisions made. And any company worth its salt is going to want to make sure that they have a competitive edge on any front, and from a talent and decision making perspective in particular, you just don't want to leave anything on the table.

In terms of LGBT, what we've found is it galvanizes other minority groups. And again, I don't have the concrete proof for you. We have anecdotal and correlations to make in terms of the hundreds of companies that we worked with over the years and we had conversation with. Any company that is aggressively welcoming to its LGBT employees sends a message to any other minority group that you are welcome here. There's something about that rainbow halo that helps others feel, you know what, that's a company-- if it's really working hard to welcome that community on this axis we imagine that they will be welcoming.

You've been working with hundreds of companies, and obviously, the focus of this podcast is on-- the National Center for the Middle Market is on midsized companies. As you've looked at big, middle-sized and small, would you see any differences in terms of benefit, or maybe differences in terms of the willingness of these companies to embrace workforce diversity? Anything salient things you see that could show up in terms of company size?

Sure. I think it's a combination of intent. Something about willingness is I think there are few people-- and if there are people who are against any kind of diversity, they probably haven't met me yet, I would know them. But there are few companies that are unwilling, I think, but the question becomes one of resources and knowledge. And larger companies, by and large, spend a lot more time on, I imagine-- and from the folks that we've spoken to on this topic-- because they can. They hired chief diversity officers.

Although it's interesting. I just was speaking to a company this week. They have only 700 employees, they're US-based, and their CEO is an enlightened leader of a company where he wants to make sure that he is having best practices on all fronts, and after looking into it and having a committee report back to him, just promoted someone from within to become a chief diversity officer of his mid-sized firm. Most such smaller firms don't have a chief diversity officer per se, whereas the Fortune 500 I would say the majority of them have that person, and then have a diversity and inclusion initiative. Apart from that, there really isn't a difference. There certainly isn't a difference in opportunity, right?

So anyone, whether you have 100 or 1,000 or 100,000 employees, you want the best talent. And so from a talent perspective, particularly among millennials as mentioned, the more LGBT inclusive you can be-- and we could talk about how companies can do that-- but in general, putting yourself out there and branding yourself as that kind of company helps attract not just the LGBT employees. The figure are around 70% of LGBT job seekers consider the company's reputation before deciding a company--

Do you think that would be true for blacks, Hispanics, women, anybody who could say is this going to be a place where I can thrive?

I would think so. So there's a perception, and then there's the data. And from our research, we do know we have the hard numbers on the LGBT front. I imagine that those numbers are also true.

So you mentioned groupthink earlier, and one of the things that I've been thinking about is what happens-- a lot of family companies for example are relatively small companies. They start out as a cohort of friends from business school, or my drinking buddies, or my sisters and brothers and cousins and aunts. They start out as this group of people who know each other very well, and who really value the close-knit team.

And I've sort of wondered personally-- what's the difference between a team that's so close that you can complete each other's sentences, and a team that's so close as you get, that you get groupthink? Are they are these things actually in tension with one another? How can you get the best of both worlds? How do you know that you're caught in sort of a cognitive or gender or racial or other kind of bubble that is not letting you take advantage of the world that's out there?

I think that's two things. One is the short answer is culture is hard to change. Even with the recognition we can get back to how one can see what's going on and when, and whether one has fallen short as a result. But recognizing that, we all are more comfortable with people who are like us, and people talk a lot about that. And so you're going against the grain already to reach across and bring in difference.

And celebrating difference means a different kind of person, a different kind of perspective. And potentially of course, as what we're talking about is that the results are in, that the more voices-- of course, informed voices, smart people, that's all a given.

So, around that table, if I'm the CEO of a company, and I look around, and pretty much from an ethnicity and gender and orientation perspective, people are pretty much like me, I don't have to think that much deeper to know that we bring similar perspectives, because it's just built-in. Even the optics-- which might seem glib, but they're real, because you bring your whole self to work. Unless you're in the closet, which is something we've talked about. Our opportunity for corporate America to create a welcoming environment means that half of the workers which are still in the closet, they're leaving a lot of value on the table there. So that alone, of course, brings people out.

But putting those faces and then bringing those experiences around the table automatically diversify the conversation, and I think drive results.

I'm going to guess, thinking aloud, that the clearer our shared vision and shared goals are, the easier it is to value, encourage, and even relish robust and diverse conversations and arguments, because we know we're trying to get it right. If we're sharing that strategic vision, and sharing those values, it's a lot easier to love the idea that there are five or six different points of view around the table.

There's no question. And setting the tone from the top, and driving policy and decision-making from the top, that's what it's all about.

Talk to me about the market opportunity. We've mentioned two things that begin with M-- millennials and markets. And talk to me about LBGT in particular, but also what you sense and know about diversity in general, and I guess its opportunity, not just internally but in terms of revenue driving.

Sure. Well, in the narrow world of LGBT inclusion and market opportunity, there's no question that a company that isn't aware of the LGBT dollar spend, which in this country alone is now close to a trillion dollars-- and as I say, almost for the first time on par with other minority groups, people of color-- then that is a missed opportunity.

Now, you can be in the trade, and it's a B2B business. So where does that opportunity come in? That is one more turn of the wheel. So that becomes more of a talent and-- in terms of your end product, if you're not a B2C company, that's a different conversation.

But if you're selling something directly to customers and you don't understand the opportunity around the LGBT market, that simply is a missed opportunity, given that not only are those tens of millions, hundreds of millions of consumers ready to buy, and there's all sorts of data around-- they're willing to pay 20% more, they are willing to recommend it to their friends. They are, as we said, far more willing to work for a company that seems inclusive-- particularly to millenials.

For B2B companies in particular, we have found that companies that connect on this axis, if you will-- and I'll try to think of a clear example. Lawyers that work with a consulting company-- you probably know that a lot of companies are now holding their law firms far more accountable on diversity representation and diversity working on their issues. This is not about the moral high ground, and that's what makes this a sometimes confusing conversation and why we love bringing it back to data and business impact. Customers care if their law firms are bringing diverse voices and diverse participants to their work because they know the work will be better.

It's not because they are trying to earn a gold star, or get a gold cup at a diversity banquet. It's because, to your point, your it's so hard to get culture moving that, without holding people accountable and actually doing a head count, and saying, how many diverse lawyers did you have working on my business, and what kind of diversity was that, then people will slip back into the "who has seniority," "who looks like me," "who do I speak to most easily." So that's a roundabout way of addressing a few different pieces of this--

It makes sense. Just looking at that, if I'm hiring a lawyer or a law firm, I want a law firm that's going to look at my problems from every possible angle. I mean, that will just be a definition.

You were also reminding me of a story which dates back 3/4 of a century, roughly, to the cola wars, when Pepsi Cola was trying to expand against Coca-Cola-- it was the Avis to Coke's Hertz-- and in particular, Coke owned the South. And at that time, I think Walter Mack was the famous CEO of PepsiCo, who also gave us the "Pepsi Cola Hits the Spot" jingles. So he has both stars and and black marks in his book.

But one of the stars was, he said, we can penetrate the South because we are going to sell to black communities, and started selling Pepsi Cola in places where Coke wasn't going. Because Coke at that time was very much a southern company, and there was like this untapped market. And Pepsi just sort of snuck in, and suddenly it started developing a market that hadn't been there.

Makes a lot of sense. We talk to companies who have employee resource groups, for example. Resource groups, as you know are minority communities within companies that come together to shore each other up, to network. And increasingly, companies are calling them business resource groups because they actually want them to say, tell us about your market.

So LGBT-- and we encourage this deeply-- there might be a social hour, but perhaps more importantly, there's a strategic plan conceived where this ERG helps its company understand why the market-- in a pharmaceutical, or it could be Skittles, who did rainbow Skittles this year-- is there a market out there that this group can understand better than the company at large? And that too is a great example of leveraging diversity within the company. And sometimes you just need a little tonnage that way. Get all of those people around the table to say, well, this has never happened. You shouldn't sell to our market this way, or to your point, you're ignoring our market, and they'll be delighted if someone pays--

--see in the middle market, which is really interesting, is when it comes to globalization, in many cases, in mid-sized companies rides on the back of the country of origin, or the ethnicity of an employee or two. We've got somebody on our staff from Argentina, who says, wait a minute, there's a market for widgets in Argentina, or somebody who is Slovenian. And these mid-sized companies rarely have windowless cube farms full of people crunching numbers and saying what the market is. And so it's often that personal awareness and knowledge and, hey, this is a market where we can go to, and I know a little bit about it, that can actually be the can opener that opens that market.

Before we wrap this up, I want to ask you. How do I get started? I mean, imagine that I'm a company of a mid-sized, I've got a pretty lean HR department, I get it, I understand the case, and I want to go a little bit beyond that informal riding the back of one person whom I know. What can a mid-sized company do to understand-- audit its current situation and understand its opportunity?

Well, the easiest and most practical short-term solution would be to use our diagnostic tool, which we developed earlier this year for precisely that company that doesn't have broader resources. Of course, the larger company can utilize it as well. But we found that there was no quantitative measuring device that also allowed a company a private purview across multiple dimensions. It kind of spit out to them, if you will, where the opportunity lies, and specific steps that they can take. So any HR lead could easily fill that out, and in an hour, have back a pretty comprehensive snapshot of how the company is doing.

And there's no judgment, of course, because it's private. And where the opportunity to improve specifically is by area and by tactical step. It might have to do with supporting your employees in a variety of different ways. It may have to do with the philosophy. If your company gives politically, it might have to do with making sure that you understand the implications of your political action committee work. So that would be my first self-serving, but true, because there's nothing else like it in the market.

And then the other thing is just to make sure that you do the gut checks, and that you educate yourself in this community of opportunity. And there's a lot of information out there. Of course, Out Leadership has a ton, but so does a lot of advocacy organizations. We're a for-profit business, so we focus pretty strictly on business impact, but there are lots of companies that do terrific advocacy work, of course.

So gut checks always go better with data. Give people who are listening the URL for this assessment tool.

Out Leadership, so outleadership.com. And if you go to our website and you go to the Diagnostics area and click on there, up will pop our OLIQ diagnostic survey, and you just click on that, and you're good to go.

One of the things that I sense, Stephanie-- and I'm really grateful to you for the time you've spent with us today-- is one thing that often happens with companies, particularly when they're lean and they're growing and they're really busy, is that there are opportunities that they miss, and that they're sometimes not even aware that they're missing them, and that this is a big one. That the opportunity to get the full panoply of opinions and backgrounds and ideas and insights around the table, and also the idea to present your company to a market that's right there, right in front of you-- but that you probably you haven't focused on keys that might unlock that specifically-- is one of those things that companies can do, even though culture change is hard, as you said, you can get a pretty fast benefit from it in terms of better decisions and in terms of better talent and better sales.

So with that, Stephanie Sandberg, the head of Out Leadership, the Managing Director of Out Leadership, thank you very much for joining us. And thank you all for listening to The Market That Moves America. Never miss a new episode. Please subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. You can subscribe and learn more about us at our website, middlemarketcenter.org. Thanks very much.