Diversity, equity and inclusion (DEI) has been at the top of nonprofit agendas, for good reason. It is not just about governance and board representation. It’s about ensuring the good work that the organization does represents the community that it serves with its own mission, operations and even investment results.
Through my research and my experience as a board member who recently went through a formal DEI process, I have learned the way in which investment committees incorporate diversity can vary. Sometimes they can miss important considerations. When we take a closer look at a committee's purpose, we find that the benefits of DEI can fit into two core categories:
1. Governance and operations benefits
How your organization is structured, the processes in place and guidelines to follow are all critical for DEI. Step one is to determine what matters to your organization and develop a DEI statement or bylaws around that.
The Council on Foundations poses key questions to ask yourself1 while setting up your statement. Reflect this statement in the operations of the organization and hold the board accountable. Then, determine success metrics. Think about whether you want your DEI commitments to be inward facing, outward facing or both. Do you expect your partners to uphold the same DEI values?
When setting your statement, consider these areas:
- Background: Staff and committee background may be the first thing you think of, but DEI goes beyond demographic diversity. Cognitive diversity, brought with varied experience, thought processes, and ways of working truly promotes better decision making, prevents blind spots and gains access to different community resources and perspective. A study through Northwestern University2 agrees. The research finds that, “socially different group members do more than simply introduce new viewpoints or approaches. Diversity triggered more careful information processing that is absent in homogeneous groups.” In fact, it can make us smarter, according to an article in Scientific American.3
- Leadership: Inclusive leadership requires courage and initiative. You're looking to create opportunities by listening to voices speaking directly from your community grassroots organizations, young leaders in low-income and underserved populations. A collaborative leader needs to empower others and leverage diverse thinking. A curious leader listens without judgement and inherent biases.
- Collaboration: Engagement is better with strong relationships, at any level. Provide opportunities for board members to get to know each other and welcome new members, interact with staff, donors and grantees.
2. Investment benefits
DEI is a key differentiator that many investment committees and investment management providers alike might overlook. Incorporating diversity into the investment process can bring similar benefits to that of your governance structure. Over the past several decades, it's been shown that diversity within a group is a key component of effective decision-making, which is crucial to successful investment management.
Investment success takes into consideration a seemingly infinite number of factors, but decision-making ability is a big one. Better decisions are executed and better outcomes are delivered when diverse inputs are used in all aspects of the investment management process, including manager selection and replacement.
The investment team itself is at the head of the decision-making process. Three findings describe the benefits of diversity within the team:
- Morningstar research showed that mixed-gender investment teams performed better than all-male investment teams.4
- Harvard Business Review found that companies across industries whose leaders exhibited at least three “identity diversity” traits and three “experiential diversity” traits out-innovated and out-performed others.5
- McKinsey & Company’s 2020 research showed that companies in the top quartile for gender diversity are 15% more likely to outperform; while the top quartile of racially and ethnically diverse companies are 35% more likely to outperform.6
The investment team should have a set strategy to capture the many elements of diversity incorporated in the decision-making process. Some investment teams use scoring systems, while others use a matrix to evaluate diversification. Whatever system they use, the important part is to quantify how DEI works in their process.
As these conversations about DEI start to become more and more prevalent, it encourages more awareness and changes in behavior that research shows is beneficial.
I hope that these highlights and resources help ignite a discussion with your nonprofit organization or help continue those that have already started.
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1 Council on Foundations; Why Diversity, Equity, and Inclusion Matter for Nonprofits https://www.councilofnonprofits.org/tools-resources/why-diversity-equity-and-inclusion-matter-nonprofits
2 Kellogg Insight (2010), October 1); Better Decisions through Diversity https://insight.kellogg.northwestern.edu/article/better_decisions_through_diversity
3 Scientific American (2014, October 1) How Diversity Makes Us Smarter https://www.scientificamerican.com/article/how-diversity-makes-us-smarter/
4 Sargis, M., & Pavlenko Lutton, L. (2016, November 28). Morningstar’s fund managers by gender: The global landscape. Morningstar. http://corporate1.morningstar.com/ResearchArticle.aspx?documentId=782040
5 Sylvia Ann Hewlett, M. M. and L. S. (2014, August 1). How diversity can drive innovation. https://hbr.org/2013/12/how-diversity-can-drive-innovation
6 Hunt, V., Layton, D., & Prince, S. (2020, February 14). Why diversity matters. McKinsey & Company. https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters