The Effects of Diversity on Business Performance:

Report of the Diversity Research Network 1

Thomas Kochan, Katerina Bezrukova, Robin Ely, Susan Jackson, Aparna Joshi,
Karen Jehn, Jonathan Leonard, David Levine, and David Thomas

November, 2002

Send correspondence to:

Thomas Kochan
MIT Sloan School of Management
Building #52, Room 583
Cambridge, MA 02142
617 253 6689
[email protected]

This research was conducted in partnership with the BOLD Initiative. Support was provided by the
Alfred P. Sloan Foundation and the Society for Human Resource Management Foundation. All views
expressed here are solely those of the authors.

The Effects of Diversity on Business Performance:

Report of the Diversity Research Network
Since 1996 a group of industry chief executives and human resource professionals
have been working together under the auspices of a non-profit organization called the
Business Opportunities for Leadership Diversity (BOLD) Initiative to help American
corporations learn how to leverage their cultural diversity for competitive advantage.
These leaders espouse the now popular business case for diversitythe view that a
more diverse workforce will increase organizational effectiveness. For them, providing
more opportunities for women and minorities is a business imperative. Realizing,
however, that they lacked clear evidence to support this view either within their own
organizations or more generally across American industry, these business leaders called
for definitive research to assess the diversity-performance link. An initial study
commissioned by BOLD found that no organizations were collecting the data needed to
assess the effects of their diversity practices on firm performance (Corporate Leadership
Council, 1997). Therefore, in 1997, the BOLD Initiative asked a group of researchers
from a cross section of universities to design a large-scale field research project to
examine the relationships between gender and racial diversity and business performance.
This paper presents our conclusions from this five-year research effort. We
believe this to be the largest field based research project on this topic undertaken to date.
We summarize our results here and their implications for managers and human resource
practitioners and describe the challenges we encountered along the way in the hopes of
advancing the study and practice of diversity in organizations in the future. 2 Our results

The details of our analyses and results are available upon request.

suggest the need to move beyond the business case argument for advancing the practice
of diversity in industry and how to modify it to reflect the complexities we discovered in
our research. We also propose steps that industry professionals can take to leverage the
potential benefits of diversity and to strengthen their ability to assess diversity initiatives
in their organizations.
Historical Context of the Business Case Perspective
The recognition that diversity is a reality in the workforce has generated an
enormous amount of activity over the years among leaders in business, government, and
civil society alike (for an extended discussion, see Jackson and Joshi, 2001). An outcome
of the civil rights movement, Title VII of the 1964 Civil Rights Act made it illegal for
organizations to engage in employment practices that discriminated against employees on
the basis of race, color, religion, sex, national origin, age, and disability. Through these
government actions, society made a statement: employers must provide equal
employment opportunities to all people of similar qualifications and accomplishments. In
addition, Executive Order 11246 issued in 1965 required government contractors to take
affirmative actions to overcome past patterns of exclusion or discrimination. These
societal mandates eliminated formal policies that discriminated against certain classes of
workers and raised the costs to organizations that failed to implement fair employment
practices. The laws remain a part of the legal responsibilities under which firms and
other labor market institutions, such as unions or job matching organizations, operate
today.
By the late 1970s and into the 1980s, there was growing recognition within the
private sector that, while the legal mandates were necessary, they were not sufficient for

ensuring the effective management of diversity within organizations. Although the

workforces of many organizations became more diverse, entrenched organizational
cultures, which remained inhospitable to traditionally underrepresented groups, were
slow to change. To promote the development of more positive organizational cultures
that would support the effective development of a more diverse workforce, many
companies and consulting firms began to offer training programs aimed at valuing
diversity. These efforts focused on changing employees attitudes and eliminating
behaviors that reflected more subtle forms of discrimination and exclusion, which often
inhibited effective interactions among people. The widespread adoption of such training
programs expanded the concept of diversity as people began to realize that visible,
legally recognized demographic differences such as race and gender were not the only
types of differences that affected work relationships among employees. Gradually,
training initiatives proliferated, encouraging employees to value the wide range of
physical, cultural, and interpersonal differences, which would presumably enhance
decision- making, problem-solving, and creativity at work. Unfortunately, however, most
studies show that such training rarely leads to the desired long-term changes in attitudes
and behavior (Bezrukova and Jehn, 2001).
During the 1990s, diversity rhetoric shifted to emphasize the business case for
supporting workforce diversity. Figure 1 reports how the former CEO of Hewlett
Packard described the new rhetoric. Essentially he was looking for a way to convince his
fellow executives and managers that to manage diversity effectively is a business
necessity not only because of the nature of labor and product markets today, but also
because a more diverse work forcerelative to a homogeneous one--produces better

business results. He believed that providing evidence to support these claims would
accelerate the rate of progress employers would make in hiring and developing a more
diverse workforce and produce organizations that are more fully integrated across
occupations and levels of hierarchy. Likewise, for diversity advocates, the new
imperative was to find evidence to support the business case argument.

Figure 1
The Business Case for Diversity
I see three main points to make the business case for diversity:
1. A talent shortage that requires us to seek out and use the full capabilities of all
our employees.
2. The need to be like our customers, including the need to understand and
communicate with them in terms that reflects their concerns.
3. Diverse teams produce better results.
This last point is not as easy to sell as the first twoespecially to engineers who
want the data. What I need is the data, evidence that diverse groups do be tter.
Source: Lew Platt, former CEO of Hewlett Packard, comments to the Diversity
Research Network, Stanford Business School, March 18, 1998.

In fact, as both the study commissioned by BOLD and our own reviews of the
research literature ( see e.g., Williams and OReilly, 1998; Richard and Johnson, 1999;
Richard, Kochan, and Mcmillan-Capehart, 2002) have shown, there is little research
conducted in actual organizations that addresses the impact of diversity or diversity
management practices on financial success. While there are a large number of laboratory
experiments that test specific diversity-performance hypotheses, there are few such
studies in real organizations and fewer still that assess this hypothesis using objective

performance measures. An exception is a study that compared companies with

exemplary diversity management practices to those that had paid legal damages to settle
discrimination lawsuits. The results of this study showed that the exemplary firms also
performed better as measured by their stock prices (Wright, Ferris, Hiller & Kroll, 1995).
Overall, however, the search for evidence that directly supports the business case
hypothesis has proved elusive.
Two reasons might explain this lack of evidence. First, diversity is extremely
difficult to study in organizational settings because it raises sensitive, difficult to discuss
issues. In addition, organizations, including many we contacted during this project, are
reluctant to share their experiences or data, given the legal climate and the potential for
litigation. Another reason for the lack of evidence linking workforce diversity to
business performance may be that the relationship between diversity and the bottom line
is more complex than implied by the popular rhetoric. Decades of research on the effects
of diversity within teams and small groups indicate that diversity can have negative
effects, as well as positive ones. The empirical literature does not support the simple
notion that more diverse groups, teams, or business units necessarily perform better, feel
more committed to their organizations, or experience higher levels of satisfaction
(Williams and OReilly, 1998; Millikin and Martins,1996; Jackson, May and Whitney,
1995). Instead, the evidence suggests that diversity may simultaneously produce more
conflict and employee turnover as well as more creativity and innovation (Jehn,
Northcraft, and Neale, 1999; c.f. Williams and OReilly, 1998). For example, this pattern
of mixed results was found in two studies that examined diversity within top management
teams in the banking industry. In one study, diversity in top management teams was

associated with greater innovation within bank branches (Bantel and Jackson, 1989). In
another, diversity also associated with higher rates of turnover among top management
team members (Jackson et al, 1991). Thus, the research literature paints a more complex
picture of the consequences of diversity than does the popular rhetoric.
The Diversity Research Network and Research Project
It was this mismatch between research results and diversity rhetoric that led us to
agree to form a Diversity Research Network. Our purpose was to conduct a multi- firm
study of the effects of racial and gender diversity on organizational performance. The
Alfred P. Sloan Foundation, the Society of Human Resource Management Foundation,
and the BOLD Initiative provided the funding for the Networks research.
Figure 2 presents the model that guided the design of the studies discussed in this
article. Members of the Diversity Research Network developed the model
collaboratively based on a comprehensive review of the large number of laboratory
studies and the small number of field studies of the effects of diversity on group
dynamics and group performance (Williams and OReilly, 1998; Richard, Kochan, and
Mcmillan-Capehart, 2002). The model reflects both theory and empirical research, which
suggest that whether diversity has a positive or negative impact on performance may
depend on several aspects of an organizations strategy, culture, and human resource
(HR) practices. In addition, the model proposes that these effects are likely to operate
through group or team processes such that, under facilitating conditions, diversity is
associated with positive group or team processes and is therefore beneficial to
performance, whereas under inhibiting conditions, diversity is associated with negative
group or team processes and is therefore detrimental to performance.

Figure 2
The Model:
The Effects of Diversity on Group Processes and Outcomes
Organizational Context
Organizational Culture
Business Strategy
Human Resource Policies and Practices

Diversity

Group/Team Processes

Cultural
Demographic
Technical
Cognitive

Communications
Conflict
Cohesion
Information
Creativity

Outcomes
Performance
Satisfaction
Turnover

Specifically, the literature suggests that diversity, if unattended, is likely to have

an adverse effect on group processes, such as communications, conflict, and cohesion
(Williams and OReilly, 1998). More specifically, diversity in a work group can produce
lower cohesion and miscommunication among group members, which can lead to group
conflict (Jehn, 1995). Some of this conflict may be productiveif, for example, it avoids
"groupthink" and brings additional points of view into the discussion--whereas other
forms may worsen group performance.
The connections shown in the model that link diversity to team processes and then
to performance seem logical, but we recognize that past research has not always found
strong linkages between diversity and performance outcomes. In fact, past research
suggests that there may be no direct positive or negative relationship between diversity
and performance outcomes. In some groups, diversity may improve performance, while

in other groups, diversity may be detrimental to performance (Hoffman, 1978; Jackson,

1992; Jehn, Neale, and Northcraft, 1999; OReilly and Flatt, 1989; Steiner, 1972). If
diversity has inconsistent effects across groups, then in studies that examine the
relationship between diversity and performance across many groups, the positive and
negative effects may cancel each other out so that no effect obtains. Therefore, our
research model suggests tha t the relationship between diversity and performance may
depend on the organizational context in which the work takes place. For example, the
effects of diversity on organizational performance might be more favorable if group
leaders and members build on team members creativity and information. Diversity may
also be more likely to improve performance when group members and leaders are trained
to deal with group process issues, particularly those involved in communicating and
problem-solving in diverse teams. Presumably, HR practices for recruiting, selecting,
training, motivating, and rewarding employees partially determine whether team
members and leaders are skilled in communicating with and coordinating among
members of diverse teams. When HR practices support the creation of a workforce that
has the skills needed to turn diversity into an advantage, diversity is more likely to lead to
positive performance outcomes. In other organizations, however, HR practices may
inadvertently result in teams that are diverse but unskilled in diversity management. Such
organizations are more likely to experience negative outcomes, such as disruptive conflict
and increased turnover, which can harm performance.
Although not shown in the model, there is another hypothesis implicit in the
business case for diversity, which is related to the second point in Figure 1: a match
between the demographic composition of the workforce and the firms customer base will

yield higher sales, thus enhancing organizational performance. The evidence bearing on
this hypothesis is limited, however, and derived largely from laboratory studies. One of
the four studies included in this project contains what we believe to be the largest and
most complete examination of this hypothesis to date.
Data Collection
The BOLD Initiative first approached several of us in early 1997 with the idea of
forming a collaborative industry-university research project to explore the business case
for diversity. Researchers from a number of universities met twice to discuss whether
such a project was feasible. We were well aware of the difficulties associated with field
research on this topic. It raises politically and emotionally charged issues as well as legal
concerns. In addition, it would be difficult to develop and even more difficult to
implement a research design that would enable us to draw valid, convincing conclusions
about the causal effects of diversity on organizational outcomes. In an ideal world, such
a design would entail longitudinal data collected from a large and representative sample
of organizations, enabling us to track how changes in demography influence performance
over time. We knew from past organizational research that the data needed to examine
the impact of diversity on performance are quite extensive, seldom collected or relatively
inaccessible, and unlikely to be comparable across organizations. Yet we all shared the
view that, if we were to generate knowledge that would be useful to practitioners on the
relationship between diversity and performance, we needed to move the research on this
topic from the laboratory to the field. Moreover, we were intrigued by the potential
benefits of forming a research network among those working on this topic, generating a
common framework to guide research, and comparing results across multiple

10

organizations. Some of us had had positive experiences in building and participating in a

similar network to explore the relationship between human resource practices and firm
performance, a topic that individual researchers had previously found equally difficult to
study (Cohen, 1998; Ichniowski, Kochan, and Olson, 1998). Therefore, we decided to
move ahead with the support of the Sloan Foundation, SHRM, and the BOLD Initiative.
The process of recruiting companies to provide the data and participate in the
research proved to be even more difficult than we had expected. Over a two- year period
(1998-2000) members of the research network and leaders of the BOLD Initiative
initiated discussions with over twenty large and well-known Fortune 500 companies, all
of which expressed considerable interest in the topic. However, after often considerable
discussion of the data, confidentiality, and time commitments, all but four companies
declined to participate. In some cases, the diversity advocates and professionals in the
company lacked sufficient influence to convince line managers to spend the time required
to collect the necessary data. In other cases, these professionals were reluctant to
examine the effects of their organizations policies, with the view that they had sufficient
top management support for their current initiatives and did not need to demonstrate a
business case to maintain this support. In still other cases, we found that, even with the
support of the CEO, objections raised by internal or external legal counsel and/or by
other managers who would need to provide the data proved insurmountable. In the end,
each of the firms that agreed to participate had a prior relationship with one or more
members of the research team and/or leaders of BOLD Initiative and, therefore, had
already established a high level of trust. Thus, the first lesson of this research was that
not only had none of the organizations we contacted ever conducted a systematic

11

examination of the effects of their diversity efforts on bottom line performance measures,
very few were interested in doing so. While our original hope was to collect the same
kind of data in each company and to use the same instruments for measuring the group
process and context variables in our model, it quickly became apparent that this was not
feasible. Each company had its own particular ways of collecting and storing human
resource data and three of four firms indicated a strong preference fo r using their own
internal survey measures to capture the variables in the model. Therefore, each study
draws on somewhat different kinds of data to address common questions about the effects
of diversity on performance. All four companies are large and highly respected, and each
has a long history of success in achieving a diverse workforce and commitment to
leveraging diversity to enhance organizational performance.
Overall, our conclusions are based on analyses of a mix of qualitative and
quantitative data collected across the four studies. Within each company, we identified
comparable teams, work groups, or business units to serve as the unit of analysis. In one
study, we collected qualitative data on business unit cultures, HR and managerial
practices, and business strategies and on the quality of business unit processes. In others,
we relied on survey data to assess these aspects of the organizational context and the
quality of group processes. In all four studies, we used archival data on the demographic
composition of teams, work groups, or business units; in one study, we also had census
data on the demographic composition of the communities from which the business units
drew their customers. And finally, in all four companies, we used a va riety of objective
measures to assess performance.
Results

12

Study One: A Large Information Processing Firm

Study one was conducted by the research team of Karen Jehn and Katerina
Bezrukova from the Wharton School at the University of Pennsylvania. This study is
based on data from a large Fortune 500 information processing company with over
26,000 employees. Diversity has been at the forefront of this companys social and
business agenda for over half a century. In the early 1940s when the company chairman
took several sales representatives, including one African American, to an awards
ceremony, the hotel hosting the event refused to register the African American, so the
chairman left with his sales force in tow. In 1987, management realized that many
minority employees were not advancing through the ranks, so the Women's Resource
Group and the Minority Resource Group were created to address the issue. In 1992, a
Diversity Task Force was created to develop a strategic plan for promoting diversity.
Each year since then the Diversity Leadership Council, comprised of employees at every
level and in every department of the company, helps to create diversity action plans,
which outline initiatives linked to the strategic goals of the Diversity Task Force.
Each business unit of the company is required to submit an end-of-year report
measuring how well the unit performed against its diversity objectives. This report details
quantitative information on diversity initiatives, including the hiring and promotion of
women and minorities, succession planning, development, retention, and training. This
approach has resulted in a number of tools designed to support the companys diversity
objectives. For instance, all business unit newsletters cover diversity, employees have
access to a lecture series on diversity, and "Managing Diversity" is taught at every
manager orientation session.

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The companys external practices are also shaped by their belief that diversity is
essential to innovation and growth. These strategies include establishing alliances with
external women's and minority organizations, supporting small businesses, and
supporting regional minority business councils across the country. Additionally, the
company actively supports minority scholarships, cooperative education and internship
programs; and it provides substantial funding to national organizations concerned with
professional, social, and educational goals in minority communities.
To generate measures of the group process and context variables, we content
analyzed qualitative data contained in company documents that were part of a human
resources-sponsored program created to identify high potential employees and to
recognize and hold accountable leaders at all levels of management and supervision. As
part of this program, managers create Development Plans (DPs) for their work groups
and discuss these plans with their supervisors. The Plans capture the dominant group
processes occurring in groups. In addition to DPs, managers and supervisors evaluate
their leadership competencies (i.e., values, goals, skills, and knowledge). The
competencies assessed in the supervisor reports serve as indirect evidence of actual
context regarding organizational cultures, business strategies, and human resource
practices (Doty et al., 1993).
To specify our group process and context variables, we developed respective lists
of key words based on relevant group and organizational theories as well as the concepts
used in the companys rhetoric. Team- focused processes relating to building
commitment and group spirit, change-focused processes relating to innovation and
exploring new perspectives, and career- focused processes relating to career

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advancements and professional success exemplify constructive group processes we

investigated in this study. Context variables are defined by business strategies (i.e.,
growth, stability, and customer-oriented), culture (i.e., people- and competition-oriented),
and human resource practices (i.e., training- and diversity-oriented). Following the
method of Jehn and Werner (1993), which was successfully employed in past
organizational research, two independent raters reviewed the surrounding context and
coded the textual data for each work group on each of these dimensions. Two measures
of team performance were available for this study: average performance appraisal ratings
provided by the managers of each business unit and average bonuses of team members.
Using these measures, our test of the model guiding the overall research project revealed
that:

1.

There were no significant direct effects of race or gender diversity on either team
performance appraisal ratings or bonuses.

2. Diversity had a significant effect on group processes, but the nature of the effect
depended on whether the diversity was in gender or race. Specifically, gender
diversity increased constructive group processes, while racial diversity inhibited
them.
3. Training- and development- focused HR practices, including coaching, open
communications and interactive listening, and providing challenging assignments
and opportunities for development, reduced the negative effects of race diversity
on constructive group processes.
4. Diversity-focused HR practices enhanced the positive effects of gender diversity
on constructive group processes.
5. Constructive group processes, in turn, had a positive impact on performance
ratings and group bonuses.
We also conducted additional analyses on a larger sample of groups for which no
group process data were available. With this sample, we examined the role that

15

organizational context played in shaping the relationship between diversity and

performance. We found the following.
6. Gender diversity was positively associated with group bonuses in business units
with a people-oriented organizational culture, diversity- focused human resource
practices, and customer-oriented business strategy but not in units that lacked those
specific cultures, practices, and strategies.
7. Racial diversity was negatively related to performance in business units with
competitive organizational cultures, growth-oriented business strategies, and trainingfocused human resource practices but not in units that lacked those specific cultures,
practices, and strategies.
In summary, our results in this organization showed no significant direct effects
of either racial or gender diversity on performance. Gender diversity had positive effects
on group processes while racial diversity had negative effects. The negative relationship
between racial diversity and group processes was, however, largely absent in groups that
had received high levels of training in career development and diversity management.
Study 2: A Financial Services Firm. Robin Ely and David Thomas at the Harvard
Business School carried out study 2. The data come from the retail branches of a large
financial services firm that is highly respected for integrating a commitment to diversity
into its managerial policies and strategies. At the corporate level, the company has
implemented four practices in particular which they believe represent best practice in
the field. First, all senior managers in the company, including regional managers of the
retail branches, are held accountable for managing to a formal diversity plan and for
linking diversity to education, recruiting, succession planning, career development and
business growth. These plans cascade down to individual branch managers who, as part
of their regional managers plan, have diversity objectives they are required to meet.
Second, in addition to a company-wide Diversity Council, chaired by the CEO, each

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business hosts its own diversity council chaired by its respective business executive,
ensuring hands-on employee involvement in their diversity initiatives. The company now
has 45 diversity councils around the world, involving some 1,000 employees, including
many retail branch employees. Third, the company considers itself unique in extending
the focus of its diversity efforts beyond race and gender. Their education efforts and
dialogue with employees across the company include race, gender, disabilities, religion,
sexual orientation, and age. Finally, they have an aggressive construction plan for backup childcare centers with the belief that they need to support the diverse work- life needs
of their employees. They are currently constructing a network of 17 on-site back- up
childcare centers in major company sites across the U.S., to which most retail branch
employees have access.
To ensure that their workforce reflects the communities they serve, the company
aggressively recruits candidates of all backgrounds. In their entry management training
programs, they have established close recruiting ties with Historically Black Colleges.
They participate in a number of internship programs that provide opportunities for both
high school and college level students. Their intercept programs include A Better
Chance, Smart Start, and a Fellows Program and Summer Jobs for Youth, with the hope
that many of their interns will choose full-time employment with their firm upon
graduation. Due at least in part to the success of these efforts, there are two distinctive
features of the branches demographic composition. First, the racial composition of the
branches is wide-ranging, including branches that are predominantly black, Hispanic,
Asian and white as well as branches with virtually every possible mix of these groups.
Thus, this study overcomes a common limitation to existing research on diversity in

17

which racial heterogeneity is often confounded with proportion of minorities, and

comparisons are limited to whites and blacks, or whites and others (Williams &
OReilly, 1998). Second, the branches in this bank are largely female-dominated. The
male-dominated setting, typical of many corporations, is nonexistent in the retail sector of
the bank. This means that the sex composition of the branches is narrow, ranging from
all women to about equal proportions of women and men, and that a more diverse branch
is one that has a greater than average proportion of men employees, or, stated another
way, a sex composition that is closer to a 50:50 ratio of men to women, relative to one
that is predominantly female. Our sample of consisted of 480 retail branches of the firm
located primarily in a large city in the northeastern U.S. Branches in this sample ranged
in size from 4 to 70 employees, with an average of 15 and a standard deviation of 10.
The average proportion of whites in the branches was 49%; the average proportion of
women was 83%.
The data came from 3 sources: 1) archival data on the demographic characteristics
of each employee in each branch; 2) employee attitude-satisfaction data from an annual
employee attitude-satisfaction survey and 3) branch performance data used to allocate
bonuses to branches on a semi annual basis. Most of the results presented here are based
on analyses of data collected at the end of 1999; some analyses included data from 2000
and 2001, as well.
We obtained performance measures from the firms branch bonus award system
whereby branches are assessed semi-annually on six areas of performance, relative to
goals set for the branch in each area. The six performance areas were: 1) revenue from
New Sales, 2) revenue from growing the Consumer Portfolio (growth over the 6- month

18

assessment period in revenue from retail customers), 3) revenue from growing the
Business Portfolio (growth over the 6-month assessment period in revenue from business
customers), 4) Customer Satisfaction (a composite score assessed from independently
conducted surveys of approximately 50 randomly selected customers for each branch), 5)
number of Qualified Referrals to bank services (referrals by employees from one product
to another that resulted in sale to the customer), and 6) Sales Productivity (total revenue
from new sales relative to total salary expense). There was also a Total Performance
score, which is generated from a weighted point system that the bank uses to assign
bonuses to branches. Averaging across five items from the companys employee
attitude-satisfaction survey, we developed a branch- level measure of the quality of a
branchs team processes.
As proposed in the model guiding this project, we expected that the relationships
between diversity and team processes and between team processes and outcomes would
likely depend on contextual factors that differentiated the branches. Using the employee
attitude-satisfaction survey, we developed measures of two such factors. First, we
examined the proportion of branch employees who had attended at least one of the firms
diversity education programs. Most of these programs address multiple dimensions of
diversity, such as race, ethnicity, gender, age, religion, disabilities, and sexual orientation.
The primary purpose of these programs is to increase awareness of cultural differences
and how peoples perceptions, biases, and stereotypes of others influence their behavior,
and teach skills for addressing conflicts and managing discussions of issues related to
diversity. We hypothesized that high levels of both gender and racial diversity would
lead to more positive outcomes in branches in which a higher proportion of employees

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had attended at least one diversity program. Second, we developed a measure of the
branches diversity perspective, a feature of work groups that we identified in previous
research as a crucial factor in determining whether racial diversity has a positive or
negative impact on group performance (Thomas & Ely, 1996; Ely & Thomas, 2001). In
particular, we used four items from the survey to develop a measure of the degree to
which branches evidenced an integration-and- learning perspective on diversity. In our
prior research, we identified three different perspectives on diversity that culturally
diverse work groups, or groups aspiring to be culturally diverse, hold. A work groups
diversity perspective is the rationale that guides members efforts to create and respond to
cultural diversity in the group. The three perspectives are the discrimination-and- fairness
perspective, the access-and- legitimacy perspective, and the integration-and- learning
perspective. We found that whereas all three perspectives can be successful in
motivating managers to diversify their staffs, only the integration-and- learning
perspective provides the rationale and guidance needed to achieve sustained benefits
from diversity. According to the integration-and-learning perspective, the insights, skills,
and experiences employees have developed as members of various cultural identity
groups are potentially valuable resources that the work group can use to rethink its
primary tasks, and redefine its markets, products, strategies, and business practices in
ways that will advance its mission. In branches with an integration-and- learning
perspective, we expected that employees of all races would be encouraged to bring all
relevant insights and perspectives to bear on their work and, hence, that high levels of
racial diversity would be associated with better performance in branches that enacted an

20

integration-and- learning perspective on their diversity and worse performance in

branches that did not.
The key findings from these analyses are as follows:
1. Across the six separate performance measures and the overall performance index,
we found only one significant direct effect of racial diversity on performance:
racial diversity was positively associated with growth in branches business
portfolios. Gender diversity had no significant direct effects on any of the
performance measures.
2. Our notion that the effects of diversity on performance would depend on certain
context variables was partially supported. In particular, racial diversity was
associated with higher overall performance in branches that enacted an
integration-and- learning perspective on diversit y, relative to racially diverse
branches that did not enact this perspective and relative to racially homogeneous
branches.
3. Employee participation in diversity education programs had limited impact on
performance. Branches in which a higher proportion of employees had
participated in at least one diversity education program outperformed branches
with lower employee participation in these programs on only one measure of
performance (sales productivity). Participation in diversity education programs
did not foster a positive relationship between racial and gender diversity and
performance. It had no impact on the racial diversity-performance link, and,
unexpectedly, a negative impact on the gender diversity-performance link for one
measure of performance, such that, in branches with high employee participation,
greater gender diversity was associated with lower performance.
In summary, this organization has many of the features that should be conducive
to leveraging the potential benefits of diversity or, at the very least, mitigating its
potential costs. This may explain the direct positive effect that racial diversity had on one
measure of performance and the lack of any direct negative effects. Nevertheless, there
was room for improvement. Racia l diversity had a positive effect on overall performance
in branches that used that diversity as a resource for innovation and learning and a
negative effect otherwise, suggesting that enacting a learning perspective on diversity can
pay off, even in groups embedded within organizations that are already highly committed

21

to and relatively sophisticated about diversity. We expected that employee participation

in diversity education programs might enhance performance, especially in the more
diverse branches, but found little evidence to support this. One possible explanation for
our finding that, overall, these programs had little impact on performance is that they are
serving as an effective ameliorative to problems encountered in more diverse branches,
thereby helping to create parity in performance between branches with more and less
diversity. The inverse relationship between gender diversity and performance in
branches with higher employee participation in diversity education programs is consistent
with this interpretation. It may be that branches that are more sex-balanced (i.e., more
gender diverse) are more likely to encounter problems in the first place, relative to their
more typical, female-dominated counterparts, thus sending a higher proportion of their
employees to these programs. In this case, program participation may more likely signal
performance- inhibiting problems than provide performance-enhancing training.
Study 3: An Information Processing Firm . Study 3 was conducted by Susan E.
Jackson at the School of Management and Labor Relations of Rutgers University and
Aparna Joshi at the Institute of Labor and Industrial Relations, University of Illinois at
Urbana-Champaign. The data were drawn from another Fortune 500 firm in the
information processing industry. Of all the organizations studied, this companys
diversity management efforts varied least across its different business units or locations.
Over the past several decades, the company consistently promoted workforce
diversity and proactively worked to increase the proportions of women and minorities
employees. It has a long history of supporting employee support/identity groups that
provide mentoring and other supports to their members. The companys initiatives for

22

managing diversity are reflected in staffing procedures, performance appraisals, and

training. Several national awards have recognized the companys excellent programs for
creating and managing diversity.
All divisions of the company must meet annual targets for the representation of
majority and minority males and females in each employee grade level. Availability of
minority and majority males and females is determined by examining the internal labor
pools as well as U.S. Census data. Of the entire work force in the U.S. division
approximately one-third were women, one-sixth were African-Americans, less than ten
percent were Hispanics, and Asian and other ethnic groups comprised about five percent.
These numbers attest to the success the company has achieved in recruiting and
promoting a diverse workforce.
In order to enforce the annual targets described above, performance appraisals for
line managers included measures managers ability to achieve the targets. The
performance appraisals were used for making promotion and compensation related
decisions. Training practices included intensive diversity training. Trainers used
behavioral modeling techniques to help develop managerial capabilities for interacting
with subordinates and colleagues irrespective of demographic differences. Thus the
training efforts focused more on skill-building than on building awareness or modifying
attitudes.
The quantitative portion of this study focused on the companys U.S. employees
in the sales (n = 3970 employees) and service (n = 8636 employees) divisions. The
demographic characteristics of employees in sales and service are substantially different.
Gender and ethnic diversity was greater in the sales division than in the service division.

23

In service, only 6% of employees were female, while 35% of sales personnel were
female. Within sales, the ethnic distribution was the same statistically for males and
females. Within service, however, the ethnic distribution was statistically different for
males and females. Although the difference was small, the pattern shows that females
were slightly more likely to be white. The individual participants in this study were
organized into 578 sales teams and 1820 service teams. Analyses were conducted
separately for these two occupational groups.
The performance measures used in the analyses for the sales teams were sales
goal achievement and sales-based bonuses. The company recorded performance for
individual sales personnel, and from this information we created team performance
measures by averaging across all members of a team. Sales team goal achievement was
the average value of the team sales representatives performance against their individual
goals for generating sales revenue. This measure was a percentage value that reflected the
actual revenue generated compared to the targeted revenue. The team sales-based bonus
measure was the average dollar amount of monthly bonuses awarded to the team sales
representatives. Bonuses were based on individual sales performance relative to revenue
goals and were considered by the firm to be a direct indicator of performance for these
employees.
For the service teams the performance measures used were the teams achievement of
goals related to machine performance and service response times. All service teams were
responsible for maintaining reliable machines while utilizing resources effectively. Thus,
one measure of team performance used in this company was success in meeting targets
for the performance of the machines serviced by the team. Performance targets were set

24

for the team using historical data that took into account the type of machine and the
typical performance of such machines. The resulting value was expressed as a
percentage. A score greater than 100% indicated that the quality of repair service was
better than the standard and machines assigned to these teams were more reliable.
Response time was another measure of team performance used in this company.
Response time refers to the amount of time that elapsed from the time a call was received
by the team until a technician arrived at a customer site. Response time targets were
based on the products that teams serviced and the locations of clients. Response time as
expressed as a percentage, with a value over 100% indicating that the team responded
faster than its target.
Summary of results for Service Teams (see Joshi, 2002, for more details):
1. Team level gender and ethnic diversity were not significantly related to process
outcomes such as team cooperation.
2. Team gender diversity was not significantly related to team goal achievement.
However, there was a significant negative relationship between team ethnic
diversity and team goal achievement.
3. In a second round of analyses, we examined the effects of diversity within larger
organizational unit s using hierarchical linear modeling techniques. In these
analyses, we considered whether diversity had different effects when regions (not
smaller work teams) were the focus. Within regions, employees were
interdependent with each other but not everyone was in close personal contact.
When we studied regions, our findings changed. Specifically, gender diversity
within service regions was positively related to cooperation within the region.
Additional analyses revealed that, in service regions with a greater proportion of
female service technicians and female managers, teams were more cooperative
(regardless of their diversity). We found a similar pattern for performance
outcomes. Gender diversity within regions was positively related to goal
achievement as well as speed of response to customers. The story does not end
here, however.
4. In a third set of analyses, we asked whether the regional demographic context in
which teams worked influenced whether the teams benefited from their diversity.
We reasoned that diverse teams would be best able to leverage their resources

25

when the members of the team could form beneficial relationships with other
employees in the region. Our analyses examined the influence of service region
peer and managerial diversity on the relationship between team diversity and team
process and performance. Our results indicated that the effects of team diversity
were influenced by diversity within the region. For regions with greater gender
diversity, there was a stronger positive relationship between team gender diversity
and team cooperation. That is, gender diverse teams were more likely to be
cooperative in regions that also were gender diverse. Similar analyses improved
our understanding of the relationship between team ethnic diversity and team goal
achievement. In regions with little ethnic diversity, the negative relationship
between ethnic diversity and goal achievement was moderately strong. However,
in regions with more ethnic diversity, the negative effects of ethnic diversity were
reduced. Furthermore, we found that ethnically diverse teams performed better
when they were embedded in ethnically diverse organizational units.
Summary of results for Sales Teams (see Jackson & Joshi, 2002, for more details):
1. For sales teams, we again examined the direct relationship between each indicator
of team diversity (e.g. gender diversity and ethnic diversity) and both team
processes and team performance. We found no evidence for a direct relationship
between team gender or ethnic diversity and the team processes or performance.
However, further analyses revealed that tenure diversity moderated the effects of
gender and ethnic diversity. For example, in teams with little tenure diversity,
ethnic diversity was negatively related to team performance, but in teams with
greater tenure diversity, there was a positive relationship between ethnic diversity
and team performance.
2. A second set of analyses considered the role of the demographic characteristics of
team managers. We found that team performance was influenced by the
combination of manager demographics and team diversity. For example, for
teams led by male managers there was no relationship between team gender
diversity and team performance. However, for teams led by female managers
greater gender diversity was associated with poorer performance. In contract, for
teams led by managers of color, we found a positive relationship between team
ethnic diversity and team performance.
3. As for service teams (see #4, above), we also examined the effects of regional
diversity. For sales teams, we again found that regional diversity influence the
effects of team diversity. However, the findings for sales teams did not mirror the
findings for service teams. For the sales teams, we found a negative relationship
between team ethnic diversity and team performance for teams located in regions
with greater ethnic diversity. This finding suggests that in a sales setting the
ethnic diversity may have some problematic outcomes unless managed
effectively. In analyses that considered the combined effects of gender, tenure and
ethnic diversity, we found a similar pattern. That is, in regions with more total
diversity (gender, ethnic and tenure), greater team diversity was associated with
poorer team performance.

26

In summary, this study found no significant direct effects of racial or gender

diversity on team performance but the results do reinforce the argument that
organizational context matters. The demographic make-up of the larger organizational
within which teams function has important consequences for effects of diversity within
the team. Although this general conclusion was supported by our analyses for both sales
and service teams, we cannot draw sweeping generalizations about the relationships we
studied because different patterns of results were found in these two occupational groups.
Study 4: A Large Retail Company. David Levine and Jonathan Leonard at the
University of California-Berkeley Hass School of Business and Aparna Joshi from at the
University of Illinois conducted study 4. The data are drawn from a large retailer with
locations across the country. This study asked whether workforces that reflect the racial
make-up of the communities in which they are located perform better than those that do
not reflect the make-up of the community. It also examined whether diversity within the
workplace had an effect on workplace performance. No data about team processes or
interactions among employees were available for this study.
Like most national chains, this firm organizes a subset of these outlets into a
single entity that invest heavily in establishing brand image. Most of the non- managerial
employees at work at any time are visible to the public, literally by looking through a
window. These workplaces are located in every U.S. market of any significance. Each
workplace typically employs 15 to 40 part-time employees with several full-time
managers and assistant managers. The employees work scattered shifts through the
week. Thus, employees work with a changing mix of the other employees on the payroll

27

that month. In general, most frontline employees rotate through the several tasks in the
store, spending some of their time dealing with customers and other time in support tasks.
We combine employee-level data on demographics, store-level data on sales, and
data from the 1990 Census on community characteristics. The employee data are the
complete personnel records from February 1996 to October 1998. We analyze data on
frontline workplace employees, dropping workplaces with fewer than ten employees.
Our performance measure is average sales at a store. We control for a number of
employee, store, and community characteristics.
Our results can be summarized as follows:
1. Contrary to theories of customer discrimination, communities with more whites,
blacks, Hispanics or Asians did not buy more from stores with similar employees.
2. The effects of diversity within a store are more complex. Gender diversity had no
meaningful effect. At the same time, stores with highly female workforces sold
less than more mixed stores.
3. Racial diversity has little effect on sales due to two offsetting effects. On the one
hand, the index of racial diversity (the odds that two employees plucked at
random are the same race) predicts higher sales. On the other hand, stores with
more whites sell more in this chain, and the primary means of increasing diversity
is to hire fewer whites. These two effects roughly cancel each other out.
.
In summary, we find no consistent evidence that most customers care whether the
salespeople who serve them are of the same race or gender. These results do not support
some recent proponents of diversity who advocate diversity so as to satisfy customers
desires to be served by those who physically resemble them. Such arguments may still
hold in other sectors, where relationships last longer and involve a higher level of trust
and communication between customers and service providers. We also do not find any
harms or benefits from racial or gender diversity within the workplace. Again, we might
see larger beneficial effects in settings when employees have more discretion and

28

autonomy so that they have more scope to act on their group-specific information.
Conversely, the harms might be larger in settings where communication among
employees is more important. At the same time, these results are heartening for oldfashioned proponents of workplace integration. These diversity proponents fought
against employers who claimed their (mostly white) customers cared about the race and
gender of the employees who served them.
Summary and Implications
The studies reported here were conducted in large firms that have well-deserved
reputations for their longstanding commitments to building a diverse workforce and
managing diversity effectively. Each of these firms has taken steps to ensure that its
formal policies support and reinforce its diversity objectives. While their specific
practices vary, our investigation clearly documents the importance and value of firmwide, diversity-sensitive managerial strategies, human resource policies, and
organizational cultures. Despite the variability in industry contexts, specific practices,
and performance measures we examined, our quantitative results are strikingly similar.
We found that racial and gender diversity do not have the positive effect on
performance proposed by those with a more optimistic view of the role diversity can play
in organizationsat least not consistently or under all conditions--but nor does it
necessarily have the negative effect on group processes warned by those with a more
pessimistic view. Most analyses yielded no negative effects on team processes at all, but
when racial diversity was shown to have a negative effect, it was mitigated by training
and development focused initiatives. Gender diversity had either no effects or positive
effects on team processes. This is consistent with research that has shown that sex

29

balanced groups have more positive interactions than either predominantly male or
predominantly female groups (Hoffman & Maier, 1961; Wood, 1987).
There were few direct effects of diversity on performanceeither positive or
negative. Our findings suggest that, as we expected, this is likely because context is
crucial in determining the nature of diversitys impact on performance. Conditions that
exacerbated racial diversitys negative effects on performance included a highly
competitive context among teams. Finally, there was some promising evidence to
suggest that, under certain conditions, racial diversity may even enhance performance,
namely when organizations foster an environment that promotes learning from diversity.
In general, we also found that gender diversity was less problematic than racial
diversity. We expect that this may be, at least in part, because, in the companies in these
studies, womentypically white women--tended to be better represented than either men
or women of color.
If these studies are representative of other leading companies with similarly
strong commitments to diversity, our results may suggest that efforts to create and
manage diverse workforces have generally paid off by eliminating many of the
potentially negative effects of diversity on group processes and performance documented
previously in the literature. Moreover, there appear to be some conditions under which
diversity, if managed well, may even enhance performance.
An important goal of this research was to explore the feasibility of conducting
research on diversity in organizational settings. Our experience demonstrated how
difficult it is to conduct this type of field research and how little analytical attention
practitioners have paid to these issues in organizations today. Few companies are

30

equipped to assess the impact of their diversity efforts on their performance. One clear
implication of our work is that organizations need to do a better job of tracking and
evaluating the impact of their strategies for managing a diverse workforce.
Managerial Implications
What implications do we draw from this work for managers? Given the limited
nature of our sample and our findings, it would be inappropriate to propose broad or
sweeping implications for managerial action. In the course of this project, however, we
discussed the state of practice with managers from more than twenty large, well-known,
and highly regarded firms as we sought their involvement in our research. Through these
discussions we obtained what we believe is a valid picture of the state of practice in
managing diversity in large organizations today. Moreover, while our empirical research
is limited to four cases, to our knowledge, this research represents the first effort to test a
model relating diversity to performance in multiple firms. Thus, with appropriate
caution, we offer the following implications for practice.
Modify the business case. The simplistic business case of the past is simply not
supported in our research. Our experience and findings in these companies suggest that
those who want to invoke a business case to advance the cause of diversity need to
modify the way they frame the argument. They should start by recognizing that there is
virtually no evidence to support the simple assertion that diversity is inevitably either
good or bad for business. Based on our findings, we propose a more nuanced view,
which focuses on the conditions that can leverage benefits from diversity or, at the very
least, mitigate its negative effects. Our proposed reframing of the business case for
diversity follows.

31

Diversity is a reality in labor markets and customer markets today. To be

successful in working with and gaining value from this diversity requires a
sustained, systemic approach and long-term commitment. Success is facilitated by
a perspective that considers diversity to be an opportunity for everyone in an
organization to learn from each other how better to accomplish their work and an
occasion that requires a supportive and cooperative organizational culture as
well as group leadership and process skills that can facilitate effective group
functioning. Organizations that invest their resources in taking advantage of the
opportunities that diversity offers should outperform those that fail to make such
investments.

Looking Beyond the Business Case. We believe this restatement of the business
case accurately reflects both our results and the results from prior laboratory studies.
However, our results may offer an even stronger implication. It may be that the business
case rhetoric has run its course. Diversity professionals, industry leaders, and researchers
might do better to recognize that while there is no reason to believe diversity will
naturally translate into better or worse results, diversity is both a labor market imperative
and societal expectation and value. Therefore managers might do better to focus on
building an organizational culture, human resource practices, and managerial and group
process skills needed to translate diversity into positive organizational, group, and
individual results. Our more specific recommendations for doing so follow.
Adopt a more analytical approach. Despite the widespread availability and use of
human resource information systems, we found that basic HR data about individuals or
groups could not be readily linked to business- level performance data. Unable to link HR
practices to business performance, HR practitioners will be limited in what they can learn
about how to manage diversity effectively, and their claims for diversity as a strategic
imperative warranting financial investments weakened accordingly. Human resource
managers and other professionals in charge of diversity efforts should take a more

32

analytical approach in performing their roles. Sophisticated data collection and analyses
are needed to understand the consequences of diversity within organizations, and to
monitor an organizations progress in managing diversity effectively. Currently,
organizations typically assess their diversity efforts by simply comparing attitudes,
performance, advancement, pay, and so on, among different groups of employees. These
comparisons can be useful, but they are only a first step. Equally important but very
different questions are: Under what conditions do work units that are diverse with
respect to gender or race outperform or under-perform work units that are more
homogeneous? What conditions mitigate or exacerbate diversitys potential negative or
positive effects?
Support experimentation and evaluation. More work is needed to design and
evaluate specific interventions or experiments aimed at creating a positive link between
diversity and performance. Of necessity, we relied on assessing this relationship by
examining natural co-variations in diversity and performance across groups, but there
were many other factors that we could neither measure nor control, which may have
influenced our findings and no doubt attenuated the size of true effects. Researchers who
are better able to isolate effects by studying them in the controlled setting of the
laboratory tend to find larger effects than we observed in the field research on which we
reported here. Studies that can better replicate these experimental conditions in real
organizational settings would increase control without the artificiality of the laboratory.
To conduct such research, however, will require executives to commit to this type of
experimentation and learning within their own organizations.

33

Train for group process skills. Our results suggest that training programs must
help managers to develop the leadership and group process skills needed to facilitate
constructive conflict and effective communication. These are challenges that will
inevitably arise for managers who attempt to make diversity a resource for learning,
change, and renewal.
In summary, we believe that progress in both research and organizational practice
will come through continuing collaborative efforts between researchers and managers as
they design and evaluate new approaches to leveraging workforce diversity. Training
programs that improve the skills of managers and team members may be particularly
useful, but training alone is not likely to be sufficient. Organizations must also
implement management and human resource policies and practices that inculcate cultures
of mutual learning and cooperation.

34

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