Does Your Company's Diversity Match Your Customers?

8th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

Global companies demand an understanding of the diversity of their customers, employees and suppliers. As confirmed by Catalyst.org data, more diversity at the Board level and on the executive team is correlated with higher financial performance.

Alan Lafley, the former CEO of Procter & Gamble (NYSE: PG), the top-rated company in the HIP 100 Index in 2007 and 2008, is on the record for equality enabling even more innovation and competitive advantage. P&G is one of the most diverse enterprises both in the United States and worldwide—a contributing factor to its 100-plus year history of consumer products leadership. According to Lafley, “Diversity is a key business strategy that enables P&G to be ‘in touch.’"

“Diverse organizations will out-think, out-innovate and outperform a homogeneous organization every single time,” was Lafley’s mantra when he oversaw P&G.

HIP Equality Metrics

The HIP metrics in Equality look across the spectrum of customers, employees, and suppliers. So, let’s examine how to count quantifiable metrics in equality that can create competitive advantage and drive business performance:

1. Customer diversity 2. Board diversity 3. Employee diversity 4. Supplier diversity

1. Customer Diversity

A core HIP metric that every company can count is revenue by geography. It’s easy enough to imagine the diversity of the world and how we are different. Successful companies discover what makes its products unique to customers, and then build on that to grow revenue and income in new markets.

International revenue helps to diversify financial performance across countries with varying growth rates, currency values, and business cycles. International diversification stabilizes revenue variations. An added value of selling in another country is that it typically provides new jobs there—in sales, service, and accounting. These jobs create local wealth and begin a path toward including the locals.

In fact, the 500 largest companies based in the United States do this very well. Approximately half of the total revenue generated by S&P 100 firms, and one-third of revenue from S&P 500 firms, is outside the U.S. In addition, some U.S.-based firms generate more than 80 percent of their revenue internationally. Qualcomm (NASDAQ: QCOM) generally gets about 87 percent of its revenue internationally, and has enjoyed average revenue growth of over 25 percent for the past 10 years.

Firms with strong international revenue typically understand more about diversity than ones that are just serving local markets. With a world that will soon total 7 billion people, there is tremendous opportunity for growth, if you understand what human problems you can solve.

2. Board Diversity

Most consumer-focused companies serve a wide variety of customers across gender and ethnicity. However, the management of those companies is not always representative of the customer base that it serves, nor the workforce it represents. Individual investors holding stocks directly tend to be less diverse than the overall population and workforce; this ratio may shift if pension funds are taken into account.

A HIP tenet is that the leadership, and especially the fiduciaries, of an organization should be representative of those it serves and is accountable to. From its high perch, the Board of a company seeks to understand its customers and where future growth will come from, connect with employees as to how the company operates, and obtain multiple stakeholders’ perspectives that highlight new opportunities or challenges for the enterprise. One company with surprisingly high diversity on its board in 2008 was Eastman Kodak (NYSE: EK), with 2 women and 5 ethnic board members out of 10 (1 member is both female and ethnic), and not coincidentally, its international revenue was steady and strong.

The HIP measure of Board Diversity is a first step in balancing the multicultural nature of society. Leaders with high Board diversity tend to be well managed, open to new innovations, and producers of increased shareholder value beyond those that lag in this metric.

3. Employee Diversity

HIP investors know that diversity in the workforce adds great value. A HIP portfolio will give weight to those companies that intentionally build a workforce that reflects its customer base (both actual and potential). Several areas of diversity within the workforce deserve special attention: women, ethnic minorities, and gays and lesbians.

“We are not the old-fashioned manufacturing company my friend works for,” says Ann H.S. Nicholson, the director of investor relations for Corning (NYSE: GLW), a materials company that has pioneered innovations like heat shields for spaceflight, optical wires that run under the ocean to carry Internet traffic, and ceramic bakeware for your oven.

Nicholson is referring to two elements of its equality results. First, Corning’s overall diversity in terms of gender and ethnicity is highly global, covering over 27,000 staff across 70 locations worldwide. Second, Corning takes a systematic approach to ensure its diversity is reflective of both the societies it operates in and the customers it serves. Both reflect the HIP approach, because as Catalyst Inc. analysis shows, the more women that sit on a company’s Board and executive team, the higher profit, return on capital and return on equity the company delivers.

4. Supplier Diversity

Supplier diversity can be a source of innovation for large corporations. A HIP investor will look for companies that foster and encourage supplier diversity. This is good business that spreads jobs and wealth among many communities.

When growing up in the Southern U.S., a certain young African-American woman sold ear piercings to her friends for $2 per person, which included three follow-up visits. Her passion for people led to tremendous business success. Today, she employs thousands of people.

You are likely thinking it’s Oprah Winfrey, right? No, it’s Janice Bryant Howroyd. Her company, ACT-1, has revenues of $750 million, according to Black Enterprise magazine, twice as much as Oprah’s Harpo Inc. Though you may not have heard of her, many Fortune 1000 corporations have. ACT-1 provides corporate services from staffing to background checks on job candidates to accredited distance learning and electronic document management, as well as a travel agency.

IBM’s chair Sam Palmisano views the advantages as a compelling business case. He recognized ethnically-owned business as the “mainstream of the global economy . . . driving global growth.” He went further to acknowledge that IBM’s (NYSE: IBM) decision to work with those suppliers comes from the opinion that “Such companies bring a new dynamism and spirit, and offer new ideas and points of view—providing innovative alternatives and aggressively filling niches being abandoned by larger suppliers.”

In our next feature, we will address the fifth category of metrics, Trust. Then we will explain how these metrics can be directly implemented into a company’s decision making process. With Trust, we will discuss how transparent communication with the public, shareholders, and stakeholders not only positions a company as a lower risk investment for potentially higher return, but is also indicative of strong leadership and resiliency.

To navigate this series, please use this table of contents.

R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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