Few things in American life are more hotly debated than the virtues of diversity -- in the workplace, in education, and in communities. Now, a recent survey by New York City-based American Management Association and the Business and Professional Women's Foundation in Washington, D.C., a women's business advocacy group, suggests there might be a correlation between performance and diversity. It came to that conclusion after comparing small business and large business performance and diversity.

The groups claim that the presence of minorities in senior management produces superior corporate performance, primarily because a diverse management is better equipped to deal with a population that's fast becoming less white, and more Hispanic and Asian, with changing tastes and cultural frames of reference.

Certainly, businesses large and small have known for a long time that hiring people from the communities they serve improves their image and their marketing success. But, how did the AMA and BPW conclude that there was a direct causal relationship between diversity and economic performance?

They surveyed top management -- chief executives, executive directors, and other top positions -- at 1,087 businesses, ranging in size from less than $10 million in annual sales to over $1 billion in 1998. Their study showed first that the small businesses surveyed grew faster than large ones -- companies under $10 million in annual sales grew 19.4% in 1997, compared to corporations of $1 billion or more, which grew 8%. It also found that small businesses had more diverse senior management than large companies. The conclusion: "Where senior management teams are mixed in terms of ethnicity and gender and age, those with that nature of diversity tend to outperform companies whose management teams are more homogenous,"  says Eric Rolfe Greenberg, director of management studies for AMA.

However, the AMA and BPW's figures are hardly conclusive. They show that three-quarters of the companies managed by whites of both genders saw gross revenues increase in 1997. In contrast, less than half the firms managed by non-whites of both genders, saw revenues increase. On the other hand, nearly three quarters of the companies with some non-white representation in management increased their revenue.

Companies managed by whites had an average net increase of 15% in revenues for 1997, while those managed primarily by nonwhites saw an average gain of 3.2%. Businesses with some nonwhite management saw an average net gain of 20.2%.

Was the diversity of the management teams a reason for faster revenue increase? Why did non-white firms do worse? A recent U.S. Federal Reserve Board conference on small-business lending presented studies indicating that banks discriminate against non-white borrowers for reasons that don't reflect credit. Do those problems go away when the management team is diverse?

The AMA and BPW's assertion is problematic, says Raymond Friedman, associate professor of management for the Owen Graduate School of Management for Vanderbilt University in Nashville. He says it's impossible to paint this issue with so broad a brush. In some instances, having a diverse management may work to a company's advantage, and in others it may not. Moreover, he adds, it's hard to determine the accuracy of such studies, because the issue is so highly politicized. "It's not popular to claim diversity for social reasons," Friedman says. "So people are looking for business reasons."

So what else did the study find? It seems that in 17% of the small businesses surveyed, most senior management positions were filled by women, compared to 3.2% in companies with revenues from $50 million to $249 million, and just 2% in companies with revenues of $1 billion or more. Another calculation showed that 86% of companies with revenues of less than $10 million primarily had men in senior management positions, compared to 95% of companies with revenues from $50 million to $249 million, and 96% with revenues over $1 billion.

Still, the picture of small businesses was not one of wild diversity. While small businesses tended to have more ethnic minorities in management positions, most are white-dominated. Only 3% of the small companies surveyed had top management dominated by African Americans. None of the largest corporations did. Likewise, Latinos made up the majority of senior management in 2% of the small businesses but weren't in the majority at all in the largest businesses. Asian American senior managers, on the other hand,  dominated none of the small companies surveyed. Instead they led about 3% of the largest businesses.

Smaller businesses offer more opportunities to minorities and women, says Gail Shaffer, chief executive officer of  BPW. "The obstacles are a bit less daunting for people of diverse backgrounds," says Shaffer. Since the culture at larger corporations tends to be dominated largely by white men, women who find themselves reaching the so-called "glass ceiling" tend to leave and start their own businesses, she adds.

In a recent Harvard Business Review article by Peter F. Drucker, professor emeritus at Claremont Graduate University in Claremont, Calif., writes: "Managers have known for a long time that demographics matter, but they have always believed that population statistics change slowly. In this century, however, [population statistics] don't." That means managers won't have another hundred years to adapt to the shifts afoot now. The BPW and AMA study poses more questions than it answers. But presumably, as the population changes -- and with it the pool of clients and managerial talent, small companies' management will evolve with it, making such studies beside the point.

By Jeremy Quittner in New York
jeremy_quittner@businessweek.com

To: MANAGEMENT