4

The Business Case for Diversity

Regina was what you might call a superstar—one of a generation of high-achieving, highly educated young women who seemed destined to break glass ceilings. Her accomplishments were all the more impressive because she grew up in a housing project in Newark and was raised by a single mother. Regina won a full scholarship to Rutgers, graduated with honors, and went on to Columbia Law School, again on a partial scholarship. Upon graduation, she joined a highly prestigious New York law firm—“one of the firms that people in law school kill to work for,” she recalls.

Regina settled in well and found her job exhilarating. She made a lot of money and enjoyed the status and standing that went along with her high salary. As a woman in a firm where “you could count the women partners on one hand,” Regina sensed that she was part of a wave of change. She also liked the partners she worked with, and seemed, at least on paper, destined for partnership herself one day.

Instead, Regina left the firm when she was a fifth-year associate—just two years shy of the firm’s seven-year partnership-track benchmark.

When Regina looks back on it all, she says her choice could have been predicted early on. “Like a lot of young associates, I found the prospect of making partner increasingly unattractive. You sacrifice seven years of your life to get this important promotion—and then getting promoted means you have to work even harder, since the junior partners put in more hours than the associates. At my firm, it was normal for people (associates and junior partners alike) to work seventy billable hours a week—which meant being in the office far more than that. I regularly put in fourteen-hour days during the week and went in for another ten hours over the weekend.” Regina felt she had no control over her workweek and no prospect of control into the future, even as her career advanced. “I never wanted to work those kinds of hours, even before having children,” says Regina, who by the time I interviewed her had married and was three months pregnant with her first child.¹

Two months after leaving her law firm Regina took a job as a teaching assistant in a private school in Manhattan. Accepting this job entailed taking a 70 percent pay cut. So far the trade-offs involved in her career switch are working for her. “This is a job that I can see doing over the long haul,” she says. Her one big regret: leaving her hard-won legal skill set behind her. “I spent ten years vesting in a legal career and I was good at it,” she says wistfully.

THE COSTS OF ATTRITION

Regina’s story is far from unusual. Indeed, it’s emblematic of the “offramping” trends described in chapters 2 and 3: a great many highly qualified women do indeed leave extreme careers. This kind of downshifting not only affects individuals—dealing them out of top jobs and high salaries—it has serious ramifications for businesses. By conservative estimates, it costs a law firm between $200,000 and $500,000 to replace a second-year associate—meaning that every time five associates walk out the door, the firm loses more than a million dollars.²

Catalyst recently conducted a study of Canadian law firms that focused on the costs of losing women associates and found that the firms, on average, took 1.8 years to break even after a hire, and the average cost of losing a second-year associate was $273,000.³ Regina’s commentary on this study was to the point: “Losing so many female associates is expensive for big law firms,” she said. “One would think they’d be doing everything in their power to retain this talent. If they offered flexibility, reduced-hour schedules, and perhaps more outlets for socially meaningful work, things would be different.”

The fact is, losing skilled personnel is enormously expensive. There are the direct costs of finding a replacement—advertising expenses, campus recruiting efforts, headhunting fees, and the “opportunity cost” of time spent selecting and interviewing candidates. There are also significant indirect costs—the former employee’s lost leads and contacts, the new hire’s depressed productivity while getting up to speed, and the time coworkers spend guiding and training.

Both the American Bar Association and the American Society for Training and Development have crunched the numbers and found that the cost of replacing a professional is one and a half times the departing person’s yearly salary.⁴ Peter Hom, professor of management at Arizona State University’s W. P. Carey School of Business, estimates the cost of turnover ranges from 93 percent to 200 percent of the departing employee’s salary.⁵ It all depends on the skill level. The rule of thumb seems to be the more senior the person, the higher the cost of replacing him or her. According to Anne Ruddy, executive director of WorldatWork, a global network of human resource professionals, the bill for filling the slot of a high-level executive is about three times the job’s annual salary.⁶ A recent study by Bliss & Associates, a management consulting firm, underscores the point that the costs of turnover are particularly high in client-facing and sales positions, ranging from 200 percent to 250 percent of annual compensation.⁷

Despite the steep costs wrapped up in high rates of turnover, few firms seem to pay attention—only 40 percent of companies even keep tabs on turnover rates. In an interview, Maury Hanigan of the Hanigan Consulting Group expressed surprise that there was so little awareness of the costs of losing talented employees: “If a $2,000 desktop computer disappears from an employee’s desk, I guarantee that there’ll be an investigation, a big to-do. But if a $100,000-a-year executive with all kinds of client relationships gets poached by a competitor—or quits to stay home with the kids—there’s no investigation. No one is called on the carpet for it.”⁸

EXPENSIVE LAWSUITS

The high price of attrition is not the only direct cost wrapped up in a company’s failure to retain or fully realize female talent. Take, for example, the costs associated with sex discrimination lawsuits. The numbers can be eye-catching.

In July 2004, the Equal Opportunity Commission and Morgan Stanley reached a $54 million settlement in a sex discrimination lawsuit filed on behalf of women at this Wall Street firm. The lawsuit, filed in September 2001, alleged that Morgan Stanley had engaged in a pattern or practice of sex discrimination since 1995 against Allison Shieffelin and a class of other women, all employed in Morgan Stanley’s Institutional Equity Division. The charges included claims that Morgan Stanley regularly excluded women from work-related outings, paid women less than their male peers, and denied women promotions.⁹

The eventual settlement was structured so that Schieffelin—who initiated the EEOC’s investigation by filing a charge of discrimination in 1998—was paid $12 million; $2 million was set aside to be spent on new diversity initiatives in Morgan Stanley’s Institutional Equity Division; and $40 million was earmarked for distribution to eligible claimants. Sixtyseven women came forward to participate in the claims process.

In another well-publicized case, also settled in July 2004, the Boeing Aircraft Company agreed to settle a gender discrimination lawsuit covering twenty-nine thousand women who worked for Boeing between 1997 and 2004. The class action lawsuit was brought by twelve female employees who charged that they had been denied access to overtime work, promotions, management positions, training, equal pay, tenure, bonuses, and other benefits and opportunities because of their gender. The plaintiffs argued that Boeing’s various compensation, promotion, and overtime decision-making practices were tainted with “excessive” subjectivity and managerial discretion and thus worked to systematically disadvantage female employees.¹⁰

In order to resolve the lawsuit, Boeing agreed to a consent decree, but did not admit to any fault or wrongdoing. Under the terms of the settlement, Boeing agreed to pay $40.6 to $72.5 million, to be divided among the named plaintiffs, other members of the class, and the legal team. The settlement also called on Boeing to change the way it determines starting salaries and to modify its performance evaluation systems so as to reduce the risk of gender wage discrimination reappearing.

Other high-profile sex discrimination lawsuits include Merrill Lynch, which has paid out more than $100 million in recent years, and Texasbased Rent-A-Center, which in 2002 agreed to a cash settlement of $47 million and significant changes in company employment practices.¹¹

Lawsuits can be surprisingly effective in forcing change. Unlike attrition costs, they cannot be concealed or ignored. Sex discrimination lawsuits incur penalties that have “teeth.” They grind on for years, often involve large sums of money, and generate negative media coverage that can undermine the most well-polished brand. No wonder lawsuits have a deterrent effect. Companies will go to some lengths to avoid a gender discrimination lawsuit—monitoring pay scales and fielding carefully balanced, diverse work teams.

STRUCTURAL AND CYCLICAL SHIFTS

Despite the importance of these various costs and expenses, they are not the prime drivers of the business case for gender diversity. More powerful arguments lie in the realm of broad-gauged structural shifts. The fact is, cyclical and demographic factors are aligned in new and alarming ways—and these macro trends are beginning to force action. The upper-echelon labor market is heating up at a time when highly qualified white males are in short supply and talented noncitizens are being drawn back home by robust economic growth rates in Asia. Who, then, will fill the talent void? The best candidates are well-qualified women who often have credentials, experience—and spare capacity.

McKinsey & Company first spotted these looming talent shortages. In 1998, at the height of the tech boom, this high-profile management consulting firm released a landmark report called “The War for Talent.”¹² This study, which surveyed seventy-seven companies and six thousand business executives, makes the case that the most important corporate resource over the next twenty years will be human capital—specifically, the education, skills, and experience embodied in talented professionals. In this age of globalization, financial capital, infrastructural resources, and advanced technology are all readily available. Price might be a barrier, but access is not an issue. Thus, human capital, or “talent,” has become the prime source of competitive advantage for companies around the world.

But if talent is the most important resource, it’s also the one in shortest supply. The McKinsey study underscores the dangers posed by an emerging “demographic crunch” (a shrinking pool of employees in the prime thirty-five- to forty-five-year-old age group) and predicts that, for many companies, the search for talent will become a constant, costly battle. Not only will companies need to devise more imaginative hiring practices, they will also need to work harder to keep their best people. According to the McKinsey team, “today’s high performers are like frogs in a wheelbarrow: they can jump out at any time.”

Of the six thousand executives surveyed in the McKinsey study, 75 percent said they were chronically short of talent. Indeed, 40 percent of the companies surveyed said they were talent constrained in that they were unable to pursue growth opportunities because of a shortage of experienced, qualified employees.

The McKinsey study predicted that the war for talent would persist for “decades to come” as the demand for executives outstripped the available supply. The authors sounded a warning: “Everyone knows organizations where key jobs go begging, business objectives languish and compensation packages skyrocket.” In short, companies ignore the talent imperative at their peril.¹³

Almost ten years later, McKinsey’s warning has proved prescient—the war for talent has indeed escalated, spurred by an amalgam of factors: robust growth, a tightening job market, demographic shifts, and increased global competition.

The job market is, indeed, tightening.¹⁴ After a several-year-long jobless recovery, the market for highly qualified individuals is heating up. The job market for newly minted MBAs is indicative of trends at the high end of the labor market. The class of 2006 commanded starting salaries 17 percent higher than their colleagues in the 2004 class, and employers estimate that they will hire 18 percent more MBAs in 2006, compared with 2005.¹⁵ One out of two new MBAs is now getting a signing bonus.¹⁶ “It is the hottest market since the employment slump of 2001–2003 ended,” according to Amy-Louise Goldberg, senior director at the search firm Leslie Kavanagh Associates, “and it’s only going to get hotter.”¹⁷

In a similar vein, data from the National Association of Colleges and Employers (NACE) shows that starting salaries for college grads ratcheted up in 2006—particularly in financial fields. The average offer for accounting and business graduates is up 6 percent, compared with 2005.¹⁸ “Overall, the college class of 2006 is doing very well in terms of starting salaries” says Camille Lunkenbaugh, NACE research director. “Employers are facing more competition for new college graduates and that competition is translating into higher salaries.”¹⁹

Today’s booming search-firm industry confirms these trends in the job market—as might be expected, the headhunting industry tends to grow fastest when demand outstrips supply and companies need help finding key talent. After a slump in the early 2000s, search firms started to grow again in 2003. Since 2004, revenues at the big U.S.-based search firms have surged. Worldwide, the top twenty-five global recruiters added nearly a quarter-billion dollars to their top lines in 2005.²⁰ Korn/Ferry, for example, grew its North American business 30 percent in 2005 (the firm’s second consecutive year of 30 percent–plus growth).²¹ Stanton Chase International grew 40 percent. Steve Watson, chairman at Stanton Chase, attributes his firm’s growth to “a continued improvement in the global business climate and an increasing need for upgrading management talent.”²² The fact is, over the last two years, executives across a wide range of sectors—real estate, IT, marketing, and financial services—have found themselves in heavy demand.²³

The demographic trends driving this tightening job market are both broad and deep. To begin with, as baby boomers age and the smaller cohort making up the “baby bust” generation hits its most productive years, the supply of mature talent, thirty-five- to forty-four-year-olds, is at a low ebb. Between 2002 and 2012, the population of thirty-five- to forty-fouryear-olds in the labor force is projected to fall by two and a half million, a 7 percent decrease.²⁴ There are no countervailing trends to mitigate the emerging talent shortfall. In fact, as McKinsey pointed out in its seminal article, other demographic and economic trends are currently exacerbating the effects of the baby bust. By 2012 the workforce will be losing more than two workers for every one it gains.²⁵ According to AARP, as the members of the huge baby boom generation (78 million strong) move into their sixties, nearly 30 percent will retire—leaving more jobs open than there are workers to fill them, because of the smaller size of succeeding cohorts.²⁶ What’s more, boomers who remain in the job market are likely to demand various accommodations. Indications are, they’ll insist on much more flexibility and become more demanding of employers in terms of the nonpecuniary rewards of work. More than a third of those surveyed by AARP said they planned to work on a part-time basis during retirement for “interest and enjoyment.”²⁷ A paycheck was important (38 percent of AARP survey respondents had ongoing responsibilities for a parent, spouse, or grandchild), but they were also seeking serenity, purpose, and fun.²⁸

If the retiring baby boom generation poses problems for employers—creating both a shortfall of talent and a set of boomer demands—younger Gen X and Gen Y workers pose a different set of challenges. On the employment front, they are both skittish and picky. A study by the Floridabased staffing firm Spherion Corporation found that 51 percent of respondents under the age of forty said they would be looking for a job within a year, compared with 25 percent of those older than forty.²⁹ This “restlessness” among younger workers is due in part to the stresses and strains of an increasingly extreme work model. As discussed in chapter 3, high-level jobs negatively impact health and family relationships and are increasingly unsustainable. “Flight risk” is a real problem. Young women—and at least some young men—seek a better balance in their lives.

So who will make up the shortfall and take up the slack? In the past, immigrants have often acted as a “safety valve,” bringing scarce, soughtafter skills to the U.S. labor market. Indeed, in science and engineering fields, almost a quarter of high-echelon workers were born overseas. Given this reality it’s understandable that talent-hungry employers might comfort themselves with the thought of hiring from abroad. The problem is, wellqualified immigrants are newly in short supply. Over the past few years the number of legal immigrants coming to the United States has fallen by a third. In addition, for the first time since the 1950s, enrollment of foreignborn students at American universities has decreased.³⁰ Applications to U.S. graduate schools dropped 12 percent between 2003 and 2006, with applications from China falling particularly sharply.³¹ Twenty-five years ago 70 to 80 percent of foreign students stayed in the United States after receiving their degrees; now only 50 percent do.³² This falloff in numbers is partly a result of the security climate. As a response to 9/11, the U.S. government reduced the number of green cards and temporary visas available to noncitizens. In 2003, for example, Congress cut the annual quota of temporary (H-1B) visas from two hundred thousand to sixty-five thousand. Visas were more plentiful in 2004 and 2005, but numbers are still down over a five-year period.³³ These reductions are counterproductive. This country can ill afford the loss of immigrants who play such an important role in filling the talent pipeline—that is, until we figure out how to better accommodate and utilize our own human capital.

But the challenges go beyond ill-considered policies. Even if visas were readily available, they wouldn’t solve the talent shortfall since the number of highly qualified individuals available and potentially interested in coming to the United States is shrinking.

Because of high growth rates around the world (particularly in Asia), talented immigrants from third-world countries are increasingly being drawn back home. We’re beginning to see a reverse brain drain as China and India become “destinations of choice” for their highly skilled nationals. Estimates are that India’s economic boom could draw as many as 20 million Indian citizens currently resident in the United States and the United Kingdom back to their home communities, lured by opportunities that transcend what they can find abroad.³⁴

Deepak, a graduate of the Indian Institute of Technology and Columbia University, explained his recent decision to move home:

Deepak’s story underscores the fact that into the foreseeable future, U.S.-based companies will be vying for talent in an increasingly global labor market. But it’s not just competition in the marketplace. Governments around the world (but not in the United States) are beginning to get into the act, proactively seeking to attract key talent to their countries. In the summer of 2005 Australia launched a $2.3 million initiative to find twenty thousand skilled immigrants by hosting job expos in London, Berlin, Chennai (formerly Madras, India), and Amsterdam.³⁶ In a similar vein, in order to attract and retain talent, the European Union is considering a plan to offer citizenship to foreign students completing doctorates in Europe.³⁷

These government initiatives are part of an official response to baby busts and burgeoning elderly populations. By 2050, France, Germany, Italy, Japan, Spain, Russia, and Australia—among others—will all have serious dependency issues as the ratio of workers to retirees shifts sharply in the wrong direction.³⁸ The United Nations predicts that in high-income countries, the proportion of the population age sixty and over will grow from 19 percent in 2000 to 34 percent in 2050, and in medium-income countries, from 8 percent to 20 percent.³⁹ Even China—because of its onechild policy—will face similar demographic shifts and will no longer be able to rely on a supply of hundreds of millions of young, inexpensive workers. India won’t be caught in a labor shortage, but neither will it have workers to spare. That country’s modestly declining birth rates will result in a population structure that’s balanced across the generations.

Which brings us back to women. The multifaceted demographic crunch outlined in this chapter describes an urgent challenge: an emerging talent void different in scope and scale from anything we’ve faced before and anything we could have anticipated. Who would have thought that at the beginning of the twenty-first century, sixty-two countries would be contending with shrinking populations and weighty dependency ratios. We spent a good deal of the latter part of the twentieth century worrying about overpopulation! But however you position the problem, female talent needs to be a central piece of the solution. Indeed, women are splendid candidates to fill the talent void.

First, they’ve got the intellectual goods. Across the globe, the educational achievement gap between women and men is steadily widening—with women taking 55 percent of college degrees worldwide.⁴⁰ In the United States women now earn 59 percent of bachelor’s degrees, 60 percent of master’s degrees, and slightly more than half of all professional degrees.⁴¹ They lag behind men in doctoral degrees but are catching up quickly. Fifty-three percent of law degrees go to women, as do 78.5 percent of graduate degrees in the health sciences.⁴²

Second, women have an impressive amount of spare capacity—under the current rules of engagement women are not able to bring their full energies to bear. As we saw in chapter 2, 37 percent of highly qualified women take an off-ramp—they voluntarily quit their jobs for a period of time. Child-care issues (44 percent) and elder-care issues (24 percent) are the main triggers. But here’s the rub. Although women spend fairly short amounts of time off-ramped (on average, two to three years), they experience huge difficulty reconnecting with their careers. The vast majority (93 percent) of off-rampers would like to return to work, but only 74 percent manage to do so, and only 40 percent succeed in returning to full-time, mainstream jobs.⁴³ In short, a great deal of talent is lost on reentry. If career trajectories were less rigid, if women were allowed to off-ramp or ramp down and then get a second chance to be ambitious, a great many more would succeed in staying in the labor market over the long haul. The potential here for expanding the talent pool is enormous.

LINKS TO PERFORMANCE

Let’s say that you are a naval officer with a seemingly impossible task: a submarine has disappeared—somewhere. You have the coordinates for the last known position, but you have no idea how far or in what direction it traveled after that. Would you call in a few top experts on submarines, or would you assemble a team with a wide range of knowledge—mathematicians, marine biologists, and salvage workers, along with the submarine experts? Common sense would seem to favor the first option, but when this scenario actually played out in May of 1968—the USS Scorpion disappeared on its way back to its base at Newport from a tour of duty in the North Atlantic—John Craven, the man in charge, chose option number two. Craven figured that if a lot of people had a lot of different pieces of information and created a composite, they would end up with a pretty good idea of the submarine’s location. And that, indeed, is what happened. The submarine was finally located 220 yards from the spot Craven’s large and diverse team picked.⁴⁴

The idea that there is “wisdom in crowds” is a notion developed by business writer James Surowiecki. His basic premise is that diverse teams make better decisions. Surowiecki assembles a great deal of evidence to show that homogeneous groups become progressively less able to investigate alternatives. Bring new and different people into an organization, and, even if they are less experienced, they actually make the group as a whole smarter, simply because what they know is not the same as what everyone else in the group knows.⁴⁵ A woman who grew up on the wrong side of the tracks and attended a small Baptist college has had very different life experiences from an upper-class white male who attended Yale. Introduce this woman into a group of Ivy League–educated men and the thinking will change. Any kind of difference—race, class, or gender—can have this kind of effect.⁴⁶

According to Surowiecki, diversity expands the set of solutions and “allows the group to conceptualize in novel ways.” Diversity also counterbalances what psychologist Irving Janis has called “groupthink”—the tendency of a homogenous group to staunchly put forth a wrongheaded set of ideas simply because everyone in the group thinks the same way.

Suroweicki’s perspective is echoed in the Hudson Highland Group’s recent study The Case for Diversity: Attaining Global Competitive Advantage, which stresses the importance of gender and racial diversity for companies operating in a global environment where clients and customers are unlikely to be either male or white.⁴⁷

In this area of customers and markets, there is some interesting new thinking. Management guru Tom Peters recently declared himself to be an UTTER LUNATIC (his capitals) about the importance of women as customers. The data is dramatic. According to Peters women “are instigatorsin-chief” of most purchases making 83 percent of all consumer decisions, including 50 percent of traditionally male categories such as cars, consumer electronics, and PCs; 80 percent of healthcare products; and 92 percent of vacations.⁴⁸ The conventional wisdom that management consultants urge on companies that “the customer is king” is actually dead wrong. The customer isn’t king, she’s queen.⁴⁹

Companies that wish to be market-driven need to be woman-driven. Which is not to say that men are unable to understand women (many of the leading hairstylists and fashion designers are men, after all), or that male-dominated businesses have no access to information about women’s needs and wants. Consumer products companies do bring women in for consultation and go to elaborate lengths to adapt their products to a woman-dominated marketplace. But this is not nearly as effective as having a significant number of women managers on the inside. Carlie Hardie, national marketing manager for Toyota’s commercial vehicles and Camry in Australia, relates the reaction male management had to a concept her creative team presented for a Sienna advertising campaign. The campaign line was “take the family business class,” and the story board showed a preschool locker room with backpacks hanging in the cubbies. Two of the backpacks sported “business class” tags. “I looked at it, and it hit me in the gut. It was perfect. But the guys, they didn’t get it and didn’t want it—even though 70 percent of car-buying decisions in Australia are made by women.”⁵⁰

As Peninah Thomson and Jacey Graham point out in their 2005 book A Woman’s Place Is in the Boardroom, recruiting and promoting women to key positions allows companies to gain a competitive advantage because it leads to “deeper cultural adaptation to the marketplace.”⁵¹ Getting women in for consultation outsources female input. Getting women in top management embeds the feminine in the company’s culture by feminizing the corporate persona. To use the words of management expert George Day, it’s hard to weave “pervasive market orientation into the fabric of the organization” when the dominant gender of the market is unrepresented in the company’s leadership.⁵²

IMPACT ON THE BOTTOM LINE

One of the strongest arguments for gender diversity is, of course, the strongest argument for everything companies do: gender diversity links directly to a robust bottom line. Companies that increase the number of women in leadership positions perform better with respect to profits and shareholder value; companies that build diverse management teams have an edge on the client- and customer-development front; and finally, companies with a proven track record on the diversity front have an easier time attracting investors.

The link between gender diversity and corporate financial performance has been firmly established by Catalyst.⁵³ In a study that examined the financial performance of 353 Fortune 500 companies between 1996 and 2000, Catalyst found that both in the sample as a whole and across major industry categories, companies with the highest representation of women in their top management teams significantly outperformed competitors with the lowest representation of woman managers.⁵⁴

For example, companies in the top quartile in terms of women’s representation boasted a return on equity that was 4.6 percentage points higher than that of those in the bottom quartile (17.7 percent, compared with 13.1 percent). And companies in the top quartile posted a total return to shareholders that came in 32.4 percentage points higher than those in the bottom quartile: 127.7 percent versus 95.3 percent. These trends played out across all five industries analyzed. Within the categories of consumer discretionary, consumer staples, financials, industrials, and information technology/telecommunication services, the companies whose female management representation ranked them in the top quartile outperformed those in the bottom quartile, sometimes to an impressive degree. Top-quartile consumer staples and financial companies demonstrated a total return to shareholders that bested bottom-quartile companies by at least 80 percentage points.⁵⁵

Catalyst is careful in its study not to posit a causal connection between gender diversity and financial performance. The study notes that a variety of initiatives interconnect and together create traction. For example, a leadership team that is “knowledgeable enough to leverage diversity is likely to be creating effective policies, programs, and systems, as well as a work culture, that maximize a variety of its assets and create new ones.”

Two other studies buttress the case made by Catalyst. One, conducted over a nineteen-year period and published by the Harvard Business Review, evaluates the performance of 215 Fortune 500 companies and finds that, compared with median companies in each sector, organizations with a higher number of women executives have an edge with respect to profits—they performed 18 percent to 69 percent better.⁵⁶ A second study, undertaken by the University of California–Davis’s Graduate School of Management, surveyed the two hundred largest publicly traded companies in California and concluded that having more women in leadership roles resulted “in a more profitable business.”⁵⁷

Customer needs and demands are a second powerful link between gender diversity and the bottom line. Companies that recruit and promote women and minorities and are able to field management teams rich in female and multicultural talent have a competitive edge in business development—they are more likely to win contracts and sign deals. The number of clients and customers concerned about this issue is rapidly increasing. In 2004, Roderick Palmore, general counsel at Sara Lee, the global consumer packaged goods company, persuaded the seventy in-house lawyers who worked for Sara Lee to sign a statement promising to use their hiring clout to promote diversity at the company.⁵⁸ Palmore also started to use diversity as one of several criteria with which to select and retain law firms serving Sara Lee.⁵⁹ General Electric, Lehman Brothers, Credit Suisse, Johnson & Johnson, and Reuters have also leveraged their concerns about diversity, using performance on that front as a criterion in the selection of outside counsel.⁶⁰ At a July 2005 conference on diversity, Wal-Mart informed its top one hundred law firms that of the five primary attorneys handling its business at these firms, at least one must be female and at least one must be a person of color. There could be no twofers: a woman of color couldn’t count as two people. That same summer, Wal-Mart dropped two law firms—pulling ongoing work from them—because of unhappiness with the firms’ lack of diversity.⁶¹ In a similar vein, DuPont Corporation uses diversity as one of six criteria with which to select law firms. Recently, the company parted ways with a law firm that did not adequately support its diversity efforts. As of 2006, thirty of the thirty-nine law firms representing DuPont have either a woman or a minority as the lead lawyer in charge of the relationship.⁶² Visa International, Del Monte Foods, Pitney Bowes, and Cox Communications have also begun requiring the law firms they work with to supply proof that women and minorities are fairly represented at senior levels.⁶³

Which brings us to institutional investors, the third driver of gender diversity as a contributor to a robust bottom line. Institutional investors, especially nonprofit organizations and public employee retirement systems, are powerful financial players with an interest in promoting gender diversity. To give some sense of the scale and clout of these entities, the eighty-five largest public employee retirement systems hold assets of $2.37 trillion.⁶⁴ While some institutional investors are focused solely on financial performance and earnings, others see strong “social performance” as a critical factor in gauging the return on investment.⁶⁵ Social performance means sensitivity to issues of corporate governance and ethics, but it also means a commitment to diversity.⁶⁶ Many institutional investors also see diversity as a moral imperative that signals a firm’s adherence to sound values and fits neatly into their mission and worldview. If you’re a labor union committed to fair treatment and the “dignity” of work, it’s an easy stretch to take up the challenges posed by gender and racial diversity. The Kinder, Lydenberg, Domini corporate social database confirms that diversity is important to institutional investors. Writing in the Academy of Management Journal, Richard Johnson and Daniel Greening argue that “fund managers believe that being responsive to women, minorities and communities will enhance [their fund’s] legitimacy and reputation.”⁶⁷

CalPERS, California’s $195 billion public employee retirement system, is a bellwether for today’s activist institutional investor community, and it continues to press for gender diversity in its investment picks. On November 14, 2005, for example, CalPERS launched a strategy called Expanding Investment Opportunities Through Diversity. This initiative includes the hiring of a diversity consulting firm to help the fund reach out to women-owned and minority-owned money managers and brokerage firms.⁶⁸ The fund has a full-time staffer devoted to diversity, and an outreach program manager whose job it is to hold diversity fairs that “serve as a business and investment connection for those wishing to learn how to compete for investment opportunities with CalPERS.”⁶⁹

CalPERS is serious enough about diversity to be actively searching for women- and minority-owned firms with which to do business. Clearly, such an organization will look to place its money with a firm that can boast more gender diversity on its management team rather than less.

The association between gender equity and shareholder value, the increasing clout of diverse marketing teams, and the ways in which diversity can earn privileged access to investment funds are three factors that underscore the link between gender diversity and the bottom line. It’s the rare CEO who’s not susceptible to one of these pressures.

Business leaders do, in fact, find the business case for gender equity increasingly convincing. In a September 2006 interview, Niall FitzGerald, chairman of Reuters, put it succinctly: “This issue of diversity is newly at the core of a business. It’s no longer a question of being nice, or being politically correct. Rather, it is an urgent, strategic necessity. Unless you reach out and tap into the widest possible pool of talent (more than half of which is women), you simply won’t have the wherewithal to drive a strategy.”⁷⁰