Various studies elsewhere have shown that considering diversity and conscious management of it have positive impact on corporate performance. The diversity has never been examined in Estonian businesses. The study describes the diversity in the management boards in Estonian companies and evaluates the links between diversity and economic performance.
One of the survey’s strengths is the use of diverse data – data from commercial register was combined with the data of population and housing census. The analysis included all Estonian businesses and their management boards which have two or more members in the board. In total, information of approximately 25,000 company’s management was analysed. The members of the boards of Estonian companies were characterized by using various features like gender, age, nationality, religious beliefs and existence of health problems that barrier coping with everyday activities.
The theoretical background of diversity
There are arguments in information and decision making theory that diverse teams are arguably more creative and innovative because people with different backgrounds could see things from other perspectives and thereby reach more solutions and ideas. However, it has been indicated that the decision making process can be significantly more costly and time-consuming in diverse teams than in homogeneous teams.
Psychological literature draws attention to the potential negative impact of the diversity. The perception of similarity causes more positive attitude towards each other but differences could hinder integration in the work environment and lead to higher risk of leaving. From the perspective of organizational psychology, the organizations have a natural tendency to move toward a homogeneous working environment. However, it has been found that the more employees are from different backgrounds the more difficult is their division into defined groups which makes communication more open and facilitates the engagement of different people. It is considered that to reduce the negative impact of diversity it is required to increase it.
In empirical work there is no single opinion on the expected size and direction of the connection between the diversity and company’s economic indicators. There are views which support the argument that diversity has a positive impact on company’s activity. But there are also arguments which say that diversity is a source of conflicts and it inhibits the normal functioning of the business. Above all the relationship between diversity and business success depends on the company’s strategy, corporate culture, general attitude on the diversity and the awareness of diversity management.
How does the management board in Estonia looks like?
There are more men in the management boards than women. The studied sample consists of the board members of whom 70% are men and 30% women. In the population as a whole, there are slightly more women than men. Businesses are run mostly by middle-aged people – 61% of the board members are in the age of 30-49 and there is no significant difference among men and women. Most of the board members, 59%, have higher education. As much as 70% of women have it. In the population as a whole, there are one third of the people with higher education. Long-term health problems are occurring later in life and the religious beliefs do not differ compared to the rest of the Estonian people.
Diversity in Estonian companies
The boards of Estonian companies are rather homogeneous; diversity exists only in a limited number of companies. 45% of Estonian enterprises have both man and woman in their boards. There are less than a third of companies where board members differ due to health features and 23% of the companies have board members who differ due to religious beliefs. 91% of the companies have the board of only Estonians or only of the people of other nationalities, so only 9% of companies have Estonians working with other nationalities on the board. There is usually a connection between the size and the diversity of the company, where larger businesses have more diversity on their board. The opposite can be seen only in gender diversity – there are fewer women on the boards of larger companies.
The link between diversity and economic performance
“By looking at the links between diversity and business efficiency, it was found that age and gender diversity has a positive correlation with corporate profit margins.”
Enterprises which have a board of both genders have a profit margin higher by 1.3 percentage points. Companies which have age diversity on the board have a profit margin higher by 2.3 percentage points. The sample has an average profit margin of 10%. The correlation between diversity of management board and the sizes of turnover and profit is usually negative.
How to benefit from diversity
The diversity in management board does not immediately cause higher turnovers or profits, but it can be said that age and gender diversity have positive impact on the efficient functioning. It is internationally recognized that the greatest benefits from diversity are generated by companies that actively try to create diverse working environment and make the most of the benefits of diversity.
It has been found that corporate strategy and culture can influence the impact of the diversity. Flexible working hours, non-discriminatory promoting and remuneration systems are just a few examples of things which are increasing positive and decreasing negative effects of diversity. Conscious diversity management, training for accepting the diversity and avoiding stereotypes are also important.
The study confirmed that diversity can be a competitive advantage for businesses and the opportunity to stand out, but it does not provide an answer to the question whether it is consciously used or not. How aware are the leaders of Estonian companies of opportunities offered by taking diversity into account, should be asked from them directly.