Study links greater diversity to higher law firm profitability

Diversity: Meeting the demands of GCs

There is a link between greater diversity and higher law firm profits, research has found.

It said partners at the most diverse top 200 US law firms earn $260,000 more than those at the least diverse.

Law firm advisers Evan Parker and Yvonne Nath said one of the reasons was “diversity of cognition”.

Writing for the website Legal Evolution, they said their data was based on average partner income; unlike profits per equity partner, this included all the partners in a firm, equity and non-equity.

Applying this metric to the largest US law firms by revenue, they found that average earnings per partner were $661,000 at law firms where only 2% of lawyers were from diverse backgrounds, rising to $922,000 at those where the figure was 25%.

The authors said the “diversity dividend” persisted even when other factors were taken into account, such as leverage, firm size, fiscal years and “Covid-19 shock”.

They went on: “In the year 2021, a growing chorus of high-profile general counsel and industry groups is clamouring for more diversity in law firms.

“In effect, the request is for law firms to do something that, by all accounts, will make them more profitable. Thus, we struggle to understand why any law firm leader or partner would be reluctant to comply.

“Every lawyer who has tried to deflect a scientific study is familiar with the old saw ‘correlation is not causation’. Perhaps lawyers would warm to the statistical relationship between diversity and profit if they better understood the most likely causal mechanisms.”

The authors said the “most likely explanation” for the persistent relationship between diversity and higher average profits were the benefits that flowed from diversity of cognition.

“Because of the broader social dialogue on diversity and inclusion, we tend to think of diversity in terms of identity traits such as race, gender, sexual orientation, age and physical abilities.

“But there is also diversity of cognition which includes the information, education, feelings, and life experiences we have that shape how we view the world, how we think, and how we anticipate and solve problems.”

Mr Parker and Ms Nath said that, when law firms embraced the idea of diversity of cognition, they “begin to value the sliver of knowledge that each person brings to the table”, especially those who were different.

“We must take care to avoid creating teams that will reinforce confirmation bias and homogeneous thinking when trying to solve wicked problems, make predictions, uncover the truth, and innovate.

“Instead, we should assemble talent in ways that reduce the overlap of cognitive abilities to encourage unique insights for the task at hand.”

The authors concluded: “Partners at law firms with more racially diverse attorneys see higher average partner compensation. This higher financial performance may be due in part to how these firms embrace talent with diverse cognitive abilities, create highly-rated cultures, and meet client expectations around diversity.”

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