The Business Case for DE&I

While diversity, equity and inclusion initiatives continue to gain deeper traction within the middle-market dealmaking community, there is still plenty of progress to be made. It can be a challenge for businesses and their private equity sponsors to understand the most effective ways to pursue DE&I, make tangible progress, or even convince leadership that DE&I must be a priority.

Speaking at ACG’s InterGrowth panel “DE&I’s Impact on the Middle Market: What’s Working and How,” experts presented the business case for investing in DE&I efforts, and shared ways that companies can not only make a positive impact through these initiatives, but actually grow their business.

The Business Case for DE&I

What it means to be diverse, equitable and inclusive has evolved over the years, but at its core, the initiative aims to ensure individuals feel seen, welcome and safe. These are undoubtedly important characteristics for a company and its workplace, but for a middle-market company with limited resources, investing in DE&I initiatives—whether that means a more diverse workforce or an inclusive product line—may not take priority.

Yet as David Baboolall, associate partner at McKinsey & Company, pointed out, there is a data-backed business case for investing in DE&I efforts. A May 2020 McKinsey & Company report reveals that even companies that invest in hiring at least one woman or person of color display performance improvements.

Diverse teams lead to higher financial performance.

David Baboolall

McKinsey & Company

But success is most dramatically improved among companies whose executive boards are the most diverse. Baboolall, who uses the pronoun they, summarized, “Diverse teams lead to higher financial performance.”

Related content: How to Move the Needle with DE&I in the Finance Sector

What’s more, they emphasized, companies that fail to make any meaningful investment and progress in DE&I were found to underperform significantly.

“There is a penalty for not doing this,” they noted.

Indeed, McKinsey’s research found that the least diverse organizations underperformed against their peers by 19%, up from 15% in 2017.

Beyond Financials

Diversity supports corporate success in other ways, too. In today’s ultra-competitive talent market, a diverse workforce offers organizations a competitive edge in attracting and retaining staff members.

“I would say there’s a war on talent,” said Tanisha Wicker, SVP of human resources at Smile Brands, adding that hiring Black and indigenous individuals, people of color and LGBTQ+ individuals has noticeably supported talent retention at her company. This practice opens up accessibility to similarly talented individuals who may be friends with existing diverse talent; when individuals feel supported and accepted within the workplace, they’re more willing to suggest open positions to their peers.

Baboolall also highlighted that companies’ DE&I efforts must go beyond internal staff in order to derive positive business performance results. Focusing inclusivity efforts on product and service offerings, marketing and other efforts that reach the end-customer similarly opens up opportunity for revenue growth.

“If you have a room full of very qualified straight, white, cis men, they will likely appeal to straight, white, cis men,” they said. “But if you decide, ‘Hey, we’re going to have a Black woman, we’re going to have queers, a biracial person, we’re going to have Asian, Latinx [staff],’ the number of people that you’re going to be able to serve with the proper product-market fit increases by so much.”

How to Make It Happen

Once organizations understand the business case for DE&I, it can be easier to achieve buy-in from leadership and decision-makers to invest in such efforts. The next hurdle, however, is understanding how to develop and execute on a DE&I strategy. Setting the right goals is vital, the panelists agreed.

“Ultimately, it’s intentionality,” said Tanya Wong, vice president at Houlihan Lokey. “We need to be thoughtful, first and foremost. We need to be unafraid of the data.”

We need to be thoughtful, first and foremost. We need to be unafraid of the data

Tanya Wong

Houlihan Lokey

Organizations must pinpoint where they are, and where they want to be—and then, she added, they must be patient.

“We’re very good as an industry at wanting overnight results. Faster process momentum, that sort of thing,” Wong said. “The reality is, a lot of these things are going to take time.”

Baboolall agreed that starting with examining the data and establishing a baseline is a good first step. From there, they said, companies can establish their aspirations, and then reexamine those goals and progress made year after year. This offers a chance to shift strategy, as there is no one-size-fits-all approach.

“What works for PE firm A in Chicago may not work for PE firm B in New York City,” they noted.

At Smile Brands, Wicker said leadership plays an important role. “With us, it starts from the top,” she said. “Our CEO is committed. He and I work alongside one another to make sure our executive leadership team is equally committed.

“You have to have a commitment, and you have to have the right team around you,” she continued, “and you have to develop a strategy that works for your organization.”

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