Four years into the financial crisis, amidst the many questions about regulation, bailouts and executive compensation, one question has received less attention than is perhaps warranted: Would a more diverse Wall Street — which remains largely white and male — make for a more ethical Wall Street?
The assumption built into that question — that with greater diversity comes more ethical behavior — is ripe for investigation. There is no direct evidence that diverse firms are more moral than their homogeneous counterparts, although there is some research suggesting links between diversity, fairness, and equality. And other research suggests that homogeneous groups experience more conformity than diverse groups —that people in a homogeneous group are more likely to try “getting along and going along” as a way to remain part of the group and are less likely to counter questionable behavior. Recognizing a dearth of research about diversity and ethics, Professor Katherine Phillips and Sun Young (Sunny) Kim of Northwestern University conducted two simply designed experiments to look more closely at how diversity is perceived with relevance to ethics.
In one study, the researchers told participants that a 217-person firm had about 40 percent women in its ranks, and that 47 percent of its staff were black, Asian, or Latino. Researchers told a second set of participants about the same firm, but described the firm as having only about 5 percent minorities and women on staff.
Next, researchers told participants that the firm was the subject of some recent media scrutiny suggesting as-yet unproven but questionable events that negatively impacted investors and cast doubt on the firm’s ethicality. The researchers then asked participants to rate the company on a scale of one to seven for a series of questions. For example: How much do you think this company acted in its own self-interest? How much do you think this company would regret its decisions? How much do you think this company values ethics? How harshly do you think this company should be penalized?
Overwhelmingly, the more diverse company was perceived as the more ethical company. Participants were far less likely to perceive that the firm was acting in its own self-interest and were more likely to believe the firm was less at fault than a homogeneous company facing the same rumors of wrong doing. “Participants felt that the firm was in fact more ethical, that it valued ethics more, and that it regretted its decisions more, and it should be penalized less for the behavior,” Phillips says.
To see how diversity impacted the perception of how companies combat unethical behavior, the researchers introduced a twist in their second study. Once more, they randomly assigned participants to two groups, describing a very diverse firm to one group and a homogeneous firm to the other group. In each group some participants were told that a task force made up of diverse members was charged with fixing the firm’s ethical problems, while some were told that a task force of homogeneous members would be on the case.
“But we found that companies can’t really patch up an ethical lapse by slapping on a diversity Band-Aid,” Phillips says. “Homogeneous companies did get a small boost if they used a diverse task force rather than homogeneous one, but people were far more likely to perceive that a diverse firm with a diverse task force was truly interested in rooting out bad behavior.”
That suggests to Phillips that firms need to give careful consideration to their composition — making sure they have a balanced workforce and communicating that they value diversity is central to instilling confidence in consumers.
What is it about diversity that contributes to the perception of ethicality? One possibility is that diversity creates a halo effect. “People may see a firm that they perceive has gone out of its way to hire a diverse workforce and assume that it must be concerned with fairness and equality, and therefore it must be a moral company,” Phillips says. “You can say ‘oh, diversity is important, our ethics are important.’ But a company can’t control people’s perceptions if people see that the company is really homogeneous.”
There are compelling practical arguments for diversification. “When companies are too homogeneous they create environments where people are more concerned about conforming than solving problems. Consequently, people may be more likely to fall prey to unethical behaviors,” Phillips notes. “Think about what happens if the House of Representatives swings too far left or right — we start to see actions and behavior left unchecked with no counterbalance. Businesses also need the checks and balances that diversity provides.”
Katherine Phillips is the Paul Calello Professor of Leadership and Ethics in the Management Division at Columbia Business School.