Why Diversity Is More Important Than Having a Meritocracy

Look at Wall Street in 2008, and the White House right now. Diversity—of people and cognitive perspectives—is crucial for avoiding failure.

Sallie Krawcheck: In my experience, most CEOs and boards “get” the power of diversity. There may be some who are giving it lip service still out there but in my travels these individuals understand that not only is it the fair thing to do, and it’s really the tenet upon which our country was built, but it’s really the smart thing to do.Financial results, reaching different customer bases—I think they get it. Sadly, middle management is where diversity goes to die. And I’ve been thinking about this a lot recently because there’s research I’ve recently come across that says that diversity is actually worse in meritocracies. It’s really surprising, right? You’d think, you know a meritocracy, people will search out the best person, will search out the best strategy and we'll judge them later, and the capitalism, the market forces, will decide. Huh.

But it’s worse in meritocracies and I think it is exactly that sort of hands-off perspective, that if you’re a CEO you get it, you’re hiring all the time, et cetera.But if you’re in middle management, you’re hiring, what? Once a year, twice a year, four times a year? Once every few years? It’s not a regular part of the job. And the research tells us that while there are these supposed benefits to diversity that we tend to retreat to the comfortable. We tend to overvalue products that we already have. We tend to overvalue environments in which we already exist.

And by the way the longer we have it or exist in them, the more we overvalue them.And so what you see in the middle management is, "I like working with people like me. Maybe I read some research report one time that said diversity was better but gosh, I like Jim,” right? “Gosh I like him.” Compound that with that we tend to allow ourselves in this country to ask the wrong question. And the question we usually ask when hiring people is, “Can you help me find the best person for the job?”

The “best person for the job” — our cognitive shortcut is, typically, someone who reminds us so darn much of ourselves. Whereas what we should be asking is, “Can you help me fill out the best team?” Build the best team with diverse skill sets, et cetera. So as a CEO my advice is changing. My advice is to often override the meritocracy. That this desire to let your managers manage — honey, we tried it. There's nothing more meritocratic than Wall Street and look what happened there. The most homogeneous of environments and oh— financial crisis.

And so to put metrics out there, to pay managers on diversity is, I think, the only way to drive it. And as for the old diversity committee which you sort of did that ten years ago and, “Look, we’re working on diversity because we have it.” If you’ve had something in place for five and ten years and you’re diversity is not moving forward it’s time to stop it. It’s time to do something different, to change the tired mentoring program into a sponsorship program. To set those quotas—I know we hate the word quota—to set those goals. To pay people on those goals. To try to do something that’s different.

P.S. it’s not a pipeline issue. It’s not a lack of talent issue. There are plenty of women, there are plenty of professional women, there are plenty of people of all kinds of diverse cognitive perspectives out there. It’s not just bringing them in and letting the organization work; the organization is working against you.

There is no doubt in my mind that the financial crisis that the United States and the world suffered would have been less severe if we’d had more diversity on Wall Street. There’s no doubt. We know this intuitively. If all of us think about those cavernous trading floors where the individuals populating the trading desks looked the same, that if those had been incredibly diverse, sort of the United Nations of every different kind of person you could have, we intuitively know that the crisis would have been less severe. We intuitively know that if there were more women at the senior leadership tables that the crisis would have been less severe.
And not only do we know it intuitively, the research tells us this. The research tells us that homogenous teams tend to over-trust each other. We cognitively finish each other’s sentences. “Oh, she’s just like me. Or he’s just like me.” So therefore since we look and talk and act alike and have a set of shared experiences, I understand what you’re thinking and what you’ll do next. And so homogenous markets tend to be mispriced by tens of percentage points.

The other thing that the research tells us is that trading risk can be driven by testosterone. And that as gentlemen’s testosterone increases they take on more trading risk. As it reduces, less trading risk. You know who doesn’t have a lot of testosterone? Women. Women! And it’s funny because we women get that rap for being so “emotional” and so “hormone driven”. But, in fact, what the research tells us is you can track the risk with testosterone, not estrogen.

You know we are sitting here today in the early months of the Trump administration. And the pictures of the leadership are startling and striking, in that it is not unusual to see a picture of all white males. Whether that’s all white males huddled around, you know, in the oval office, huddled around the president on the telephone, or whether it’s all white males making decisions about our healthcare. Sitting here in these early months of the Trump administration I think you would be hard pressed to say that the administration is running efficiently, effectively, like a well-oiled machine, taking into account the complexity of what it’s trying to do. There have been several important missteps. And there’s no way, to my mind, those things are unrelated and the research would tell us that they are indeed related.

We need to rethink our diversity strategy, says Sallie Krawcheck. What we've been trying for the last decade hasn't been working, but what exactly is the problem? Research reveals that diversity is actually worse in meritocracies. Managers—and particularly middle managers, Krawcheck points out—fall into the cognitive trap of hiring people who "remind me of a young me" (i.e. look like them and think like them) instead of more cognitively diverse people who would bring a missing skill set to a team. This is as important now, under the almost all-white male Trump administration, as it was in the 2008 Financial Crash. Wall Street is one of the most homogenous institutions in America, and Krawcheck has no doubt that having a more diverse set of minds in finance would have lessened the severity of the global crash. In addition, risk-taking and the poor decision making that results can be tracked to fluctuations in one hormone: testosterone. Whether it's the housing bubble, America's healthcare, or foreign policy, these are mistakes that affect millions of lives. As a CEO, Krawcheck's approach and advice on diversity is changing. The current strategy has been a failure, but what if companies paid their managers, in part, based on the diversity of their hires? What if we thought of diversity as more important than meritocracy? Sallie Krawcheck is the author of Own It: The Power of Women at Work.

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