The middle market, which by some measures amounts to just 3% of U.S. companies yet accounts for one-third of private sector GDP and employment, is a vital driver of the economy. As vaccination rates rise, the RSM Middle Market Business Index reports mid-market firms are poised to go on a hiring spree in the near term. Such optimism bodes well for a swift return to pre-pandemic days.
It also makes for an opportune time to address an issue that pre-dates COVID-19: For all the ways in which this market segment leads, it has fallen off the pace when it comes to diversity—by gender and by race/ethnicity—in the leadership ranks.
The benefits of having different viewpoints around the decision-making table are no longer up for debate: studies by the Wall Street Journal and McKinsey, for example, conclusively show that companies with diverse leaders and inclusive cultures outperform their peers. And they show it is the larger companies—with more diverse leadership, management and boards—that are reaping the benefits while small- and mid-cap companies with more homogenous teams miss out.
If the case in favor of diversity is so strong, why do middle market firms, especially those in heavy industry, lag behind?
Perception and Reality
There is a perception that manufacturing—as well as other businesses, like private equity and finance—is inhospitable to women and minorities. That perception is based in the reality that these companies’ leadership posts and boards are mainly filled by men who are themselves mostly white. If that’s what the company sees as leadership material, what does it say to someone on the outside looking at that company?
Unconscious bias steers leaders into grooming and promoting those who are familiar to them, whether it’s through school ties or golf club memberships. In a nutshell, like hires like. This closed loop is reinforced when outsiders are screened to ensure they “fit in” with the pervading culture. Again, if you’re not of the majority, it’s not unreasonable to think “this place isn’t for me.”
In the past, a company may have successfully mined talent at the alma maters of its leaders, and the next generations kept the business ticking. But the way things worked before doesn’t mean they’re working now—or that they will in the future.
There is a new reality to confront: The working population is getting younger by the day; by 2030, virtually all leadership roles will be filled by Gen Xers or millennials (who are now hitting their 40’s). Behind them, Gen Z—the most racially and ethnically diverse generation in history—will comprise 30% of the American workforce by the end of this decade.
These cohorts have come of age in, or grown up since, the passage of the Dodd Frank Act, which was the dawn of the corporate social responsibility movement. They demand that their employers pay more than lip service to environmental, social and governance (ESG) issues, which include diversity and inclusion.
Take the High Ground
To tap into the benefits of inclusion and avoid being drowned by the coming wave of demographic change, middle market firms can take a number of steps—including benefiting from learnings gleaned by other companies’ failures on the diversity front.
1. Lead from the top.
The performance boost that comes with diverse leadership teams is manifold: creativity, innovation, disrupting group-think. It’s not simply a function of quotas or numbers, however; the benefits of diversity will only come through top-down belief in inclusion. CEOs and their boards must embrace diversity and inclusion for it to have a chance of permeating the organization.
The Wall Street Journal’s report found that one reason small- and mid-cap companies haven’t yet felt the heat on diversity is due to the lack of representation at the board level where there are fewer women and minority directors. Consider building in different viewpoints and perspectives when setting criteria for new corporate directors as well as new operations executives.
2. Prepare the way.
Diversity, equity and inclusion (DEI) is itself a multi-billion dollar industry, so there are lessons to be learned from others. The most important of which is that firms seeking to design and place a diversity program atop an existing company culture are doomed to failure. As one consultant found, progress in inclusion has been stymied by one main factor: “Organizations bring diversity into work cultures that are unprepared for it.”
For DEI work to take hold, it must be championed from the top, but pushed down and throughout the organization by engaging management at all levels; creating and empowering employee resource groups (ERGs); and addressing, then unpacking, bias. Anti-bias training is especially important in largely homogenous work environments.
3. Measure, test & repeat.
Data-heavy businesses like engineering, manufacturing and finance are used to hoovering up and analyzing information. Treat DEI as you would another business or operational issue and tackle it from a data perspective. Undertake an assessment to see where the firm stands today; create employee surveys to track workforce perceptions over time; review and assess where the problems lie; create metrics that work for you and your business to incentivize change.
4. Go outside.
The work to create an inclusive environment that will support a diverse workforce is not easy, nor will it be quick. But one place where you may have immediate effect is with outside providers: suppliers, accountants, lawyers, consultants. Take a look at the makeup of your existing vendors and consider a supplier diversity program that places priority on seeking bids from and placing work orders with minority- and women-owned businesses.
Research new pools of talent to draw from, be it entry-level at historically Black colleges and universities or diverse fraternities/sororities; mid-career professionals aligned with the Society for Women Engineers, the National Society for Black Engineers or the Society of Hispanic Professional Engineers; or for executive and board-ready candidates who are members of Ascend/Pinnacle, the Executive Leadership Council, the Latino Corporate Directors Association or the Women Corporate Directors Foundation, among many examples.
As we emerge from our lost pandemic year, with time to think and retool, mid-market firms would be well-served to be intentional when refreshing their talent base by embracing diversity and working to foster an inclusive workplace going forward so that they too can reap the rewards of a diverse business.Ryan Whitacre is a partner at Bridge Partners LLC, a minority-owned executive search firm with a focus on leading inclusive searches.