thoughtleaders thoughtleaders thoughtleaders thoughtleaders The “Efficient Frontier” of Diversity By Nasser Malik
A
Managing Director Citigroup
Corporate Returns
As a senior Capital ognition of Diversity as a client opportunity. Markets banker with The “Efficient Frontier” of Diversity frames the maxilong-standing involve- mum profitability that can be generated for a given set ment in Citi’s diversity of facts and inputs (i.e., “Diversity Coefficient”). Some efforts, I am often asked firms may lie below the “Efficient Frontier” in their how one can frame the performance, for the simple reason that, for all their wellproposition around conceived human resource policies and diversity mission Diversity in a manner that generates greater resonance statements, the general employee base doesn’t sufficiently among professionals in financial markets. Narratives understand (or isn’t sufficiently incentivized to recognize) around the “Business Case” are well established, though the value proposition in diversity. in my view, often superficially understood. An example involving gay, lesbian, bisexual and transConsistent with the Business Case, if one understands gender (LGBT) employees is illustrative. A 2007 study Diversity is an important undertaking which generates long- by Catalyst concluded that gay staff who are ‘out’ and term return, one can borrow from the school of economics supported are 20–30% more productive than those who and conceive an “Efficient Frontier” of Diversity (see illus- are not. Further, firms that recognize the value inhertration). This is how I frame the core elements required to ent in the gay consumer dollar in the U.S. (estimated by translate the Business Case into an executable strategy. some sources to reach $835 billion by 2011), and have Similar to the notion of formulated specific market“Efficient Frontier” used in ing strategies around that Efficient Frontier of Diversity optimal portfolio allocaopportunity, have seen revEfficient Frontier curve based on all other tion, profitability (the reenue generated from that profitability variables held constant turn from robust Diversity consumer segment expand Talent pool composition, policies, organization culture strategies) lies on the verticonsiderably. Academic and other “soft” factors all facilitate optimal outcomes cal axis. On the horizonstudies have long demontal axis lies a “Diversity strated that diverse groups For a given Diversity Coefficient, results that lie below the curve are Coefficient” which incorproduce better products, sub-optimal due to “soft” factors that inhibit achieving maximum porates the objective data greater innovation and betpotential that underpins any successter decisions. Non-Diverse Talent Pool; few supportive H.R. policies ful diversity strategy. For Taken together, it’s clear example, composition of that an organizational culworkforce, target pools for ture that is inclusive of Diversity Coefficient employee recruiting, and LGBT employees, and recHuman Resources policies which seek to maximize worker ognizes opportunities for innovation and the customer productivity as well as attract and retain diverse talent. proposition inherent in the LGBT population, is more Thus, the relationship between the “Diversity likely to (all-else-being-equal) lie closer to the “Efficient Coefficient” and profitability is clear: a greater “Diversity Frontier” of Diversity. Coefficient” leads (all-else-equal) to higher profitability. Ultimately, understanding the Business Case is a preBut that is not the whole story. For a given “Diversity condition to reaping the rewards from an effective diverCoefficient,” some firms may generate a higher marginal sity strategy. PDJ return than others. The difference lies in important, but critical, “soft” factors, such as organizational culture, vis- Nasser Malik is a Managing Director in Capital Markets Origination at Citigroup ibility of role models, expressions of support by senior in New York and is Co-Chair of the Citi North America Markets Diversity leadership, accountability and, very importantly, the rec- Committee. 62
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