More diversity equals more profit? A fact check on diversity in companies

For Women’s Day, companies post tiles on LinkedIn; during Pride Month, company logos appear in rainbow colors. Is it all just “diversity washing” or genuine commitment? It turns out that it depends.

Many companies have departments whose job it is to communicate both internally, with employees, but also externally. This external communication is the company’s shop window: outsiders are given insights, but these are chosen deliberately. For example, what is said in job interviews and written down in value agreements is part of external communication. So is the rainbow-colored company logo.

However, external communication also has an impact on the inside of the organization – just like the shop window of a business. Companies communicate values such as diversity precisely because the term is open. Many people can be enthusiastic about it: the workforce but also potential customers and applicants.

It becomes critical if the external image does not match the company’s reality in the long term. This can become apparent internally and quickly lead to problems. For example, when employees no longer believe the diversity successes communicated by management, as revealed by the EY European DEI Index published in 2024. The study analyzed the impact of diversity and inclusion initiatives on companies. Surveys have shown that while managers claim their companies are diverse and inclusive, many employees disagree. Where does this discrepancy come from? One conclusion of the EY European DEI Index is that managers underestimate the task and are themselves too optimistic about their inclusion and diversity performance.

These varying perceptions can lead to frustration, which in turn can severely disrupt the well-being of the organization, as a vision with a common starting point is missing. Does this mean there is no point in positioning yourself in an attention-grabbing way? Of course not. Decorating the company shop window with diversity is indeed important. This is how companies signal to the outside world whom they want to be enthusiastic about. But this is only the first step.

In the mid-1960s, the USA passed a revolutionary anti-discrimination law. This enshrined equal opportunities, inclusion, and diversity in law, and companies had to fear waves of lawsuits if they were unable to guarantee accessibility, for example. In the meantime, diversity in companies in the USA is to some extent on the retreat. Nevertheless, the USA has been able to gather experience for more than half a century, as documented in studies. In Germany, the General Act on Equal Treatment (AGG) did not come into force until 2006. This is another reason why research in this area is less extensive in Germany – but it does exist.

In 2023, together with colleagues, organizational sociologist Julia Gruhlich published a handbook on diversity and organizational research that provides an overview for academics and practitioners. In it, the authors describe “that the win-win promise of diversity as a ‘business case’ reaches its limits when it is not expected to deliver direct gain or is associated with high costs [...]’. Anything that is not profitable from a corporate perspective is easily ignored.

At the same time, it is often unclear exactly what diversity means. If this definition is missing, no structures that are important for the further development of organizations cannot be put in place. The focus on individuals and their potential or discriminatory behavior means that structures for diversity receive little attention: “This has earned the concept the reputation of being a neoliberal management strategy that is primarily geared toward wanting to exploit diversity economically,” write Gruhlich and her colleagues in the handbook.

A study by McKinsey found that diverse management teams lead to increases in turnover. A misconception, says Jutta Rump, Professor of General Business Administration at the Ludwigshafen University of Business and Society: “In order to be able to seriously establish that there is a unicausal relationship between diversity and increased turnover, a study would have to be conducted over a long period of time, ideally under laboratory conditions and with the inclusion of a control group.”

In contrast, the costs of diversity can be very easily determined. Promoting diversity would mean equalizing wages, implementing objective evaluation systems, and offering training for employees. Last but not least, structural changes would sometimes have to be implemented to make companies barrier-free. All of this is expensive. “You can calculate quite well what diversity costs. But not what it yields,” confirms Gruhlich.

A 2016 study by the London Business School compares the advantages and disadvantages of diverse teams: The wider range of knowledge, more intensive discussions of decisions, and more creative idea development are cited as positive points. The disadvantages would primarily lie in communication: Teams would find it more difficult to exchange ideas with each other, for example due to language barriers or varying levels of qualification. According to the study, this would lead to an increase in conflicts and team members supporting each other less. In the worst-case scenario, the consequence would be that employees change companies more frequently, fall ill more quickly, or contribute less often and less productively to individual processes.

Organizational sociologist Maja Apelt from the University of Potsdam puts it in concrete terms and uses the example of hospitals to explain the challenges that arise when massive staff shortages force companies to diversify. Applicants from abroad, for example, often come to Germany with only initial language skills: “These new workers encounter stress and understaffing in German hospitals. Colleagues on-site don’t have time to induct them into their new job or adapt to their often inadequate language skills. Reservations and contradictions arise in the workforce. Ultimately, diversity is not the problem, but the generally difficult staffing conditions.”

Formal structures help. Onboarding processes must be adapted to the situation and language barriers must be taken into account and supported. Even if time and resources are precisely the things that companies with a shortage of skilled labor lack, nothing else will help.

Asserting that a corporate culture is diversity-friendly does not create a new culture. The opposite is the case: Instead of short-term assurances, a diversity-friendly corporate culture requires a sustainable strategy with a concrete plan of action. Diversity management helps with this. According to the University of Kassel, it not only helps to achieve corporate goals, but also has an impact on mindsets and qualifications within and between companies.

Establishing a corporate culture is not that easy, because it is like a footpath in a public park. The official, formal path leads around the outside of the green space. Because this is inconvenient, people walk diagonally across the meadow and gradually wear a path into the grass. In companies, this path is known as a short official channel. Corporate culture includes how people treat each other, what they laugh about, and who goes to the canteen with whom.

As a corporate culture can only be influenced indirectly through formal rules, it is important that organizations establish formal responsibilities for diversity. If appointed diversity officers have to carry out their work in their free time alongside their job, this allows conclusions to be drawn about how important the desired diversity really is: not that much. “Diversity officers need power and resources,” explains Gruhlich. If they have no decision-making powers, the accusation of diversity as pure showmanship activism will be fulfilled and they will have a hard time.