Luis Salazar, Salazar Law

Much has changed since I began practicing law in 1992. Back then, as a minority at an Ivy League school, clerking for a judge or working for a large law firm, I was often given the impression — explicitly or otherwise — that I was lucky to be there or that everyone was doing me a favor by allowing me to be a part of the team.

There have been some significant changes in the decades since then, and both corporate America and Big Law are increasingly coming to realize that diversity is an essential asset. In fact, beyond the moral and social reasons to support diversity, studies now prove that diverse and inclusive businesses are more innovative and more profitable.

Of course, it should come as no surprise that diversity drives innovation, as well as creative thinking and outcomes. Common sense tells us that while homogeneous teams are not the optimal vehicles for creative solutions, teams with members from diverse backgrounds and with diverse experiences are likely to apply fresh perspectives and innovate.

Studies now support this logical conclusion. For example, the journal Financial Management recently published “Do Pro-Diversity Policies Improve Corporate Innovation?”, a study that compared the hiring policies of the 3,000 largest publicly traded U.S. companies with the number of new patent and product announcements by those same companies to determine if those with a diverse workforce developed more innovative products and services. The study found that those businesses with policies encouraging the retention and promotion of a diverse workforce were more innovative and released more products.

What's as compelling as that creativity and innovation effect is the clear evidence that diversity results in better financial performance as evidenced by numerous studies. Most notably, the Harvard Business Review recently reported on a study by Paul Gompers and Silpa Kovvali that focused on the impact of diversity on financial performance in the venture capital industry. Required disclosures in public filings gave the researchers a wealth of data on the demographic makeup of VC participants. Perhaps not surprisingly, the VC world is not very diverse: Only 8% of the investors are women, about 2% of VC investors are Hispanic, and less than 1% are black. Moreover, VC investors are more likely to invest with partners and participants that share their traits.

The results of this propensity to homogeneity is staggering: the success rate of acquisitions and IPOs was 11.5% lower on average for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity was even stronger, reducing an investment's comparative success rate by 26.4% to 32.2%. The researchers further concluded that the negative impact was most felt in later decision quality and shaping strategy and growth, where the diverse collaborators were better equipped to deliver winning options. In short, diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns.

These results are not unique. Leading consulting firm McKinsey & Co. has published research showing that gender-diverse companies are 15% more likely to financially outperform their peers and ethnically diverse companies are 35% more likely to do the same. Deloitte Australia research shows that inclusive teams outperform their peers by 80% in team-based assessments.

Moreover, diversity at the management level has the same or even greater positive financial impact. For example, Boston Consulting Group recently published a study showing that “increasing the diversity of leadership teams leads to more and better innovation and improved financial performance.” The study analyzed 1,700 companies across eight different countries, with varying industries and company sizes. The research showed that companies that have more diverse management teams have 19% higher revenue.

Likewise, Catalyst research shows that companies with more women on the board statistically outperform their peers over a long period of time. Additional McKinsey research also supports this finding. In its Diversity Matters report, McKinsey examined proprietary data sets for 366 public companies across a range of industries in Canada, Latin America, the United Kingdom and the United States.

In particular, it looked at metrics such as financial results and the composition of top management and boards. The results are as clear as they are remarkable: there is linear relationship between racial and ethnic diversity and better financial performance. For every 10% increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 of a percent.

It is hard to dispute all those studies and the many, many more reaching the same conclusion. Diversity, as it turns out, is as good for your company's — and your law firm's — bottom line as it is for your culture. In the face of all this positive research, I have come to believe that all those times I was told or led to believe I was lucky to be part of a team, just maybe they were lucky to have diverse me on their team.

Luis Salazar is the founder of Salazar Law, a minority-owned, Coral Gables-based boutique law firm representing clients throughout the country in matters involving commercial litigation, compliance, corporate law and restructuring. He is a winner of the Minority Corporate Counsel Association's Rainmaker award. Contact him at [email protected].