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 / Winter 2005 / Issue 41(originally published by Booz & Company)


Developing Diversity: Lessons from Top Teams

Heterogeneous management teams give corporations a performance edge, but without the right incentives and leadership style, diversity can be a hindrance.

Who is better equipped to set the corporate agenda: a small and homogeneous top management team of like-minded individuals, or a larger, more heterogeneous team of individuals from a wider variety of backgrounds and perspectives?

There are many opinions on this issue, but very little hard data exists to recommend one approach or the other. As a result, in collaboration with the Center for Effective Organizations (part of the Marshall School of Business at the University of Southern California), we sought to address the issue by analyzing 66 peer-reviewed studies of top management team composition and performance conducted since 1984.

Two findings stand out. We discovered that diversely educated and experienced top management teams give corporations an edge, enhancing their ability to manage globalization and strengthening their financial performance. But there’s a catch, and this is our second significant finding: Without the right mix of incentives and an appropriate leadership style, diversity can hinder, not help, performance.

Specifically, we examined correlations between corporate performance and four measures of heterogeneity in the leadership team: breadth of functional expertise, educational background, international experience, and industry experience. We also considered whether corporate performance varied with the size of top management teams — a rough proxy for heterogeneity given that new team members are commonly added because they bring fresh perspectives resulting from their different experiences.

We found that in rapidly changing industries, such as semiconductors, natural gas, and medical devices, management team size does matter. On average, companies run by teams of between seven and nine people consistently delivered better top-line and bottom-line performances than companies managed by smaller teams.

Beyond team size, there was also a strong positive correlation between corporate performance and a broader range of experience (functional, industry, and international) and education.

But although a majority of companies profit from heterogeneity, others are actually hampered by it. The problem is that heterogeneous teams are harder to motivate and manage. Heterogeneity decreases loyalty and increases the probability of conflict.

The results suggest that the critical moment is the point of transition: when a close-knit, like-minded top team evolves into a more heterogeneous group of diverse senior executives. This type of transition is increasingly common in today’s globalizing world, and the companies that have navigated it successfully appear to have taken four steps:

1. Promote openness. Trust is harder to build and sustain in heterogeneous teams because the bonds that connect people of similar backgrounds are lacking. A secretive culture makes the task harder still. Consequently, for diversity to succeed, internal debate should be encouraged (and never punished) and information should flow freely within the organization.

One of the more interesting recent attempts at openness involved a major health-care company that organized a “fishbowl” at a leadership conference, at which the newly formed heterogeneous nine-member senior team sat in a circle and discussed the changes they had recently seen in their behavior and that of others. The discussion was watched by 75 executives one rung down from the top team, who had been enlisted by the CEO as a sounding board.

2. Focus on goals. Debate is valuable, but it should be explicitly directed toward defining and prioritizing goals. This indicates a more directive role for the CEO. Rather than controlling discussions, the chief executive should play a guiding role, helping participants keep their collective attention focused on topics of shared interest or concern.

3. Get the pay equation right. In heterogeneous teams, cohesion — already in short supply — will be further threatened by significant differences in pay among members (including the CEO). A fair compensation structure, which includes incentives based on objective performance benchmarks aligned with the organization’s core strategy, is essential to maintaining harmony
in a management team.

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