Practical analysis for investment professionals
16 April 2019

How Culture Improves Outcomes: Cognitive Diversity

Leaders are tasked with making teams better than the sum of their parts and improving firm management decisions — for the benefit of clients, partners, employees, and investors. As an industry, finance is heavily reliant on its people, so the success or failure of our firms — and our industry — depends on our people strategies.

Most firms focus on hiring the highest skilled and most competent professionals — the proverbial “cream of the crop.” After all, in a people-driven business like ours, the team with the best human capital should achieve the best results. Once that team is built, the next step is to instill a sense of direction by imparting the firm’s mission, vision, and strategy. Or so the conventional wisdom goes.

Undeniably, these actions are critical — but they are not enough. The missing piece is culture.

Throughout my career, I’ve seen the influence corporate cultures can have. Lack of cooperation, little genuine curiosity, and lots of drama are the hallmarks of dysfunctional cultures. In contrast, cultures based on trust, respect, and a true commitment to learning encourage collaboration and improve decision making. Better decisions, combined with increased creativity and innovation, are essential ingredients for long-term collective success.

I’m not alone in these observations. Studies show that randomly selected groups outperform the group’s single most intelligent person as measured by intelligence quotient, or IQ. In fact, a well-functioning team can outperform one of all high achievers when the latter fails to work collaboratively.

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The key to better outcomes is the group’s ability to leverage its collective intelligence (CI). Just as IQ measures individual intelligence, CI describes how well a team performs varied, general cognitive tasks by applying acquired knowledge and skills.

High-CI teams do not just happen. Assembling the best and brightest does not automatically create a “smart” team. High-performing teams display diversity in reasoning and are made up of members who respect and value different — and differing — perspectives on the team. A team composed along these lines helps create a culture that promotes high levels of CI and discourages groupthink — the tendency to march in lockstep and make decisions like one individual.

Research exploring connections among culture, diversity, and enduring corporate success has highlighted the positive relationship between the quality of an organization’s culture, or its cultural norms, and long-term firm outcomes, variously measured using profitability, productivity, innovation, and ethical considerations. These findings are also consistent with the connection among cognitive diversity, inclusion, and reduced groupthink that contributes to more effective leadership and management practices and better decisions.

One compelling takeaway for me is that merely articulating an opposing perspective by, say, playing devil’s advocate is not nearly as powerful as voicing an authentic opposing view — even if that view is inaccurate. Charlan Nemeth, a professor of psychology at UC Berkeley found that minority dissenting perspectives — even when wrong — add value, because they “stimulate divergent attention and thought . . . [which] contribute to the detection of novel solutions and decisions that, on balance, are qualitatively better.”

Nemeth’s conclusion is consistent with other findings: Higher levels of CI are associated with cognitively diverse teams and cultures that value curiosity, respect, and independent — particularly dissenting — views.

But, again, achieving cognitive diversity is easier said than done. We all have a neurobiological preference for comfort and familiarity over discomfort and the unknown. Human nature inclines us toward people and ideas that confirm and reflect our views. Only when we resist and suppress our instincts can we build teams of people who think about and analyze decisions in different ways.

But forming teams along this dimension is only the first step in unlocking the benefits of CI. The firm’s culture and practice must embrace the broad differences among its people. Trust and respect for the views of others and their decision-making styles are critical. Otherwise, the team defaults to a single dominant view, or the dreaded groupthink.

Admittedly, achieving higher levels of collective intelligence has a cost. A collaborative approach slows down the process. It takes time to solicit, expose, and process dissenting feedback. Patience is essential. And collaboration isn’t easy. Letting go of prior opinions, enforcing team “equality of contribution” to expose independent views, and managing dissent are inherently uncomfortable.

Indeed, the resulting solutions may “feel” suboptimal, particularly when the process was slower than expected or the decisions run counter to the decision maker’s initial gut instinct. But this feeling is a feature not a bug: It’s a natural outcome when the team is, in fact, cognitively diverse and willing to voice and heed independent views.

In these doubt-triggering moments, leaders owe it to themselves and their firms to guard against the instinct to circumvent the collaborative process. They must remind themselves that, paradoxically, these uncomfortable moments demonstrate that cognitive diversity is present and respected. For decisions with far-reaching consequences, embracing that discomfort and relinquishing the pursuit of speed is well worth the long-term superior outcomes that result.

The evidence is clear: Leaders need to prioritize culture. The question I will examine in my next post is what approaches leaders can take to cultivate the culture that can unlock the benefits of cognitive diversity.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Katrina Sherrerd, PhD, CFA

Katrina Sherrerd, PhD, CFA, was CEO of Research Affiliates and now serves as an advisor to the firm and is a member of the Executive Committee of the board. Sherrerd managed the overall operations and resources of the firm, the communication between board and senior management, and the establishment of long-range strategy and policy to help the firm deliver on its core mission of conducting cutting-edge research and advancing innovative product development for the benefit of investors.

1 thought on “How Culture Improves Outcomes: Cognitive Diversity”

  1. Timothy Musila says:

    Great insights that apply, very importantly perhaps, to public firms and institutions

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