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HUM0010.1177/0018726718812602Human RelationsSmulowitz et al.

human relations

human relations
2019, Vol. 72(10) 1671­–1696
Racial diversity and its asymmetry © The Author(s) 2018
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performance

Stephen Smulowitz
IMD Global Board Center, International Institute for Management Development, Switzerland

Manuel Becerra
University of Queensland Business School, Australia

Margarita Mayo
IE Business School, Spain

Abstract
The benefits and drawbacks of diversity inside organizations have been the focus of
attention for researchers and practitioners for several decades. In our article, we
investigate the business case for racial diversity across different hierarchical levels. More
precisely, we ask: How does racial diversity within organizations and its asymmetry
across hierarchical levels affect their financial performance? From a sample of 143 US
law firms from 2008 to 2012, we provide strong support for the business case and show
that greater racial diversity for the entire organization is positively associated with firm
financial performance. However, contrary to our initial expectations, the benefits of
diversity are not more pronounced at the top of the organization, where its effects
should arguably be more clearly observable. Diversity seems to have a similar effect
across the three levels in law firms: associates, mid-level and partners. Furthermore, we
find that the most profitable firms actually have their racial diversity heavily concentrated
at the associate level. We discuss alternative explanations for this surprising finding and

Corresponding author:
Stephen Smulowitz, IMD Global Board Center, International Institute for Management Development, Ch. de
Bellerive 23 PO Box 915 Lausanne, Vaud 1001, Switzerland
Email: ssmulowi@gmail.com
1672 Human Relations 72(10)

why the top-performing law firms have both overall higher degree of racial diversity and
more concentration of its diversity at the lower level.

Keywords
financial performance, law firms, organizational hierarchical levels, racial diversity

Introduction
On 11 August 2011, President Obama, the first African American US President, signed
an Executive Order establishing a coordinated, government-wide initiative to promote
diversity and inclusion in the federal workforce. The Executive Order succinctly encap-
sulated the so-called ‘business case’ for diversity, namely that promoting racial diversity
is both the right thing to do and good for business. In the words of the Executive Order,

Our Nation derives strength from the diversity of its population and from its commitment to
equal opportunity for all. We are at our best when we draw on the talents of all parts of our
society, and our greatest accomplishments are achieved when diverse perspectives are brought
to bear to overcome our greatest challenges.1

The US government is not alone in promoting the business case for diversity. Large mul-
tinational firms have also strongly encouraged, and sometimes mandated, greater demo-
graphic diversity among their organizations, often including top management (Miller
and del Carmen Triana, 2009).
But while the business case for diversity is widely popular with politicians and com-
panies, it is also controversial. It has been criticized for providing a weak basis of support
for, or even undermining, equal opportunity: ‘Once the debate is conducted in the lan-
guage of what is in the interests of business, then a business case can be articulated
against [equal opportunity] action’ (Dickens, 1999: 10). It has also been criticized for
making equal opportunity dependent on economic efficacy, thereby undermining moral
arguments for promoting diversity (e.g. Noon, 2007).
This last point is particularly important owing to the mixed empirical evidence for the
economic efficacy of racial diversity, thereby potentially undermining support for greater
racial inclusion. Though research on the effects of demographic diversity, especially
racial diversity, has grown in recent years (Jonsen et al., 2013; Mayo et al., 2017), this
research has been mostly at the individual (Elfenbein and O’Reilly, 2007), team (van
Knippenberg and Schippers, 2007), or the top management team (TMT) level (Certo
et al., 2006). There is also research from economists and economic geographers, who
have developed a rich body of research examining the effect of increasing diversity
owing to migration on the economic performance of cities (Nathan, 2015) and countries
(Kerr, 2013; Kerr and Kerr, 2011; Nathan, 2014). In contrast, ‘relatively little attention
has been devoted to the firm-level consequences of firm-level diversity in the past litera-
ture’ (Joshi et al., 2011: 531), and the empirical findings at the firm level that do exist are
inconsistent (Joshi et al., 2011).
These inconsistent empirical findings are not surprising. Theoretically, there are
strong reasons to believe that diversity could have either a positive or a negative
Smulowitz et al. 1673

effect on firm financial performance. On the one hand, based on the information-
processing and decision-making perspective (van Knippenberg and Schippers, 2007),
diverse groups should outperform homogeneous groups because they are likely to
elaborate on task-related information and generate more creative ideas and solutions
(Pelled, 1996). On the other hand, based on social categorization theory (Brewer,
1979; Tajfel and Turner, 2004) and the similarity/attraction paradigm (Byrne, 1971),
homogenous groups could outperform heterogeneous groups, because in-group/out-
group behavior limits the development of a team identity in racially diverse teams
(Brodbeck et al., 2011).
Given this debate about the performance implications of racial diversity, it is
important to examine the organizational contingencies that may influence the diversity–
performance relationship (Joshi and Roh, 2009; van Knippenberg and Schippers, 2007).
One contingency that remains underexplored is the effect of diversity across hierarchical
organizational levels (Nathan, 2016). In this article, we ask: How does racial diversity
within organizations and its asymmetry across hierarchical levels affect their financial
performance? In doing so, we extend existing research to study not only the effect of
diversity at the firm level, but also the hierarchical levels within the organization at
which racial diversity is most likely to have a positive effect.
We examine these effects in a setting uniquely well suited to observe the potential
effects on firm financial performance, namely large US law firms. Because of their soci-
etal importance, professional services organizations, like law firms, accounting firms
and consulting firms, are a particularly important context for studying the performance
effects of diversity (McGinn and Milkman, 2013). Moreover, as suggested by earlier
research on human capital (Hitt et al., 2001) and racial diversity (Richard, 2000), law
firms are an especially appropriate context to study diversity because of the critical role
that human resources and workgroup dynamics play in their operations and organiza-
tional performance, as we discuss more fully later in this article. Using a sample drawn
from the largest law firms in the United States, we examine the effect of racial diversity
on firm financial performance in the workforce as a whole and, most critically, within
and across organizational levels, that is, from the lower-level associate and mid-level
attorneys to the partners at the top of law firms.
Buttressing previous research that racial diversity can indeed be a strategic firm
resource and in line with the business case for diversity (Andrevski et al., 2014; Richard
et al., 2003, 2007), we find that racial diversity at the firm level is indeed positively asso-
ciated with financial performance in law firms, including when we account for potential
endogeneity of both racial diversity and firm performance. However, we do not find
empirical support for our expectations regarding the hypothesized greater effect of diver-
sity at the partner level on firm performance. Instead, our results indicate that racial
diversity is valuable across all three of the organizational levels in law firms. However,
organizations with the highest performance have a greater percentage of their racial
diversity concentrated at the associate level rather than at the partner level, which is
contrary to our initial predictions. In the Discussion section, we elaborate on our main
findings, especially the positive effect of diversity across all organizational levels and the
greater concentration of racial diversity at the lowest level for law firms with the highest
financial performance.
1674 Human Relations 72(10)

Theory and hypotheses

Racial diversity and financial performance
The existing literature on diversity identifies both positive and negative performance
effects for racial diversity, usually at the team level (Harrison and Klein, 2007; Polzer
et al., 2002; van Dick et al., 2008). On the one hand, diverse groups may be expected to
outperform homogeneous groups because they are more likely to elaborate on task-
related information (e.g. van Dick et al., 2008; van Knippenberg and Schippers, 2007).
This means that diverse groups will be less likely to engage in groupthink, and more
thoroughly analyze all available information before coming to a decision. This positive
view of diversity as variety (Harrison and Klein, 2007) suggests that diverse groups will
have more cognitive resources (i.e. distinct knowledge, skills and abilities), and will thus
be able to bring differing opinions and perspectives to problem solving. This is particu-
larly important for critical thinking and developing innovative solutions in challenging
tasks, such as designing strategies in a complex legal case.
A key benefit of diverse groups is the necessity to elaborate on conflicting viewpoints,
which facilitates friction that enhances deliberation and reduces conformity, groupthink
and errors (Levine et al., 2014; Mayo, 1999). In this sense, a diverse configuration of
individuals provides the team with different levels of skills, information and perspectives
that can make it more productive (Horwitz and Horwitz, 2007). Indeed, several studies
confirm that exposure to diverging and potentially surprising perspectives may lead to
more creative and innovative ideas and solutions in management teams (Ancona and
Caldwell, 1992; Bantel and Jackson, 1989; De Dreu and West, 2001; Miller and del
Carmen Triana, 2009). Moreover, a more diverse workforce may also raise firm perfor-
mance through allowing better matching of people to tasks (Peri and Sparber, 2011).
Thus, racial diversity may be associated with better organizational performance, espe-
cially when effective team dynamics are highly relevant (Srikanth et al., 2016), such as
in law firms.
On the other hand, there is also a more pessimistic view of the effect of racial diver-
sity, which is that it makes diverse teams more difficult to coordinate, and potentially less
effective. Individuals in diverse groups may have negative reactions to racially diverse
members, thereby negatively affecting team performance. As noted by Harrison and
Klein (2007), diversity as separation can be indicative of differences in deep beliefs and
values among team members and, as a result, it may invite social categorization dynam-
ics within the team. Social categorization theory holds that similarities and differences
are used as a basis for categorizing like and unlike into groups, with the resulting catego-
rizations distinguishing between in-groups and out-groups (Brewer, 1979). People tend
to like and trust in-group members more than out-group members, and thus generally
tend to favor in-groups and discriminate against out-groups (Tajfel and Turner, 2004).2
From this perspective, we could expect lower performance in organizations that make
greater use of racially diverse teams, especially when team dynamics are most critical for
performance.
This debate has not been settled yet by empirical research (Harrison and Klein, 2007),
though we believe that the positive effects of racial diversity are likely to predominate in
Smulowitz et al. 1675

the context that we are investigating. Workforce-related resources, for example, their
racial diversity, should be particularly important in professional service firms, such as law
firms, because a firm’s competitiveness depends almost entirely on the characteristics and
the skills of the firm’s workforce. Indeed, Barney (1991: 101) stated that one means of
establishing competitive advantage is through ‘the training, experience, judgment, intel-
ligence, relationships and insight’ of individuals within the organization. In this sense, the
racial composition of a workforce can be a strategic resource to the extent that it is indeed
rare, difficult to substitute or imitate, and enables firms to pursue valuable opportunities
(Barney, 1991). The presence of minority members can enhance the organization’s ability
to reach different market segments, especially those more concerned with racial equality.
Furthermore, racial diversity would also be valuable if it can serve to foster an organiza-
tion’s creativity and improve decision making, thus providing a source of competitive
advantage that may lead to superior performance (Cox and Blake, 1991).
Based on these arguments, our first hypothesis suggests that we should observe a
positive relationship between racial diversity and financial performance for law firms as
a whole. Legal work is intellectually challenging work where creativity and better prob-
lem solving are crucial. Law firms create value by protecting the interests of their clients
by, for example, crafting persuasive and novel legal arguments in court. Assuming that
law firms capture some of this value, the superior creativity and better problem solving
found in previous literature should be reflected in law firm profits (Andrevski et al.,
2014; Richard et al., 2007). Thus, despite the existence of conflicting results (see Kochan
et al., 2003), we formulate our baseline hypothesis based on the benefits of having a
racially diverse workforce as a strategic resource in law firms. Accordingly:

Hypothesis 1: Racial diversity for the entire organization will be positively related to
financial performance for law firms.

Effects of diversity across hierarchical levels

Though we argue above that greater racial diversity for the entire organization is likely
to increase financial performance, the distribution of racial diversity throughout the hier-
archy in the organization could also affect firm financial performance, though no prior
research has been conducted on this issue. We analyze now how racial diversity may not
necessarily have the same positive effect on financial performance across different
organizational levels. Building on the ideas presented above about racial diversity as a
strategic resource in law firms, we hypothesize that racial diversity at the partner level
could be expected to have the greatest effect on performance.
There are several reasons behind our expectation that racial diversity at the top of the
organization should have greater consequences on firm performance. First, though all the
tasks that lawyers perform should benefit from the increased debate, decision compre-
hensiveness and creativity that diversity could facilitate, these effects could be more
beneficial for some tasks than for others. For example, decisions relating to strategy,
such as whether to expand into new practice areas or regions, are made by partners.
Partners are the ultimate owners of the firm, and decide issues such as expansion, hiring
and mergers. Accordingly, any potential benefits and drawbacks deriving from greater
1676 Human Relations 72(10)

diversity in making these types of strategic decisions should be most critical at the part-
ner level, and they should be more clearly observable when partner diversity increases.
Second, greater diversity at the partner level could benefit the firm financially by
providing greater motivation to lawyers lower in the hierarchy. Lower-level employees
in law firms may make social comparisons with their superiors (McGinn and Milkman,
2013), and these comparisons with demographically similar superiors who serve as role
models are likely to create a positive self-image (Brewer and Weber, 1994). Such a
demographic match between a subordinate and superior could signal to lower-level eth-
nic minority employees that success is possible (Barker et al., 1999), leading to greater
effort as they work their way towards promotion (McGinn and Milkman, 2013). Because
effort, in the terms of hours billed, should directly translate to financial performance, this
should mean greater profitability for firms.
An example of this effect is the experience of the US military during the Vietnam War.
Following the Second World War, the number of African American enlisted men had
increased greatly, but the number of African American officers was extremely low.
Owing to this discrepancy, the military experienced, ‘increased racial polarization, per-
vasive disciplinary problems, and racially motivated incidents in Vietnam and on posts
around the world’ (Wilkins, 2007). In response, the US military launched a strong
Affirmative Action program to increase the number of African American officers. The
success of this program is one example of the effectiveness of increasing the racial diver-
sity of higher-level managers.
Third, important stakeholders could reward firms that conform to desired social
norms and promote racial diversity. Institutional theory holds that firms can gain socio-
political legitimacy through the value that cultural norms and political authorities place
on an activity (Aldrich and Fiol, 1994). Important institutional actors, such as regulators
and multinational corporations, encourage the development of such norms. These actions
by stakeholders provide institutional pressure on firms to hire and promote diverse attor-
neys, and also provide strong signals to law firms that they will benefit from doing so.
Indeed, much legal work involves representing clients before these various agencies that
are promoting diversity. For example, the Office of Diversity and Inclusion (ODI) was
specifically established to ‘ensure that Federal departments and agencies recruit and
retain talented individuals from all communities.’3 More specifically, agencies of the
United States Federal Government, such as the Federal Deposit Insurance Corporation
(FDIC), provide preferential contracting and legal referrals to so-called ‘Minority and
Women Law Firms,’ that is, those majority-owned by racial minorities and women.4
These agencies also regularly report on the number of referrals to minority-owned firms.
Following the edicts of these agencies by promoting diversity could give diverse law
firms a competitive advantage when dealing with these important institutional actors.
Other important stakeholders, such as large corporations, also provide incentives for
firms with greater diversity at the partner level. Wal-Mart provides an example as to the
importance of diversity at the partner level to important stakeholders. Wal-Mart required
that at least one person of color and one woman must be among the top five relationship
attorneys handling its business (Wilkins, 2007).
Overall, the positive performance consequences of racial diversity should be most
critical and noticeable for the highest level of the hierarchy, which are in charge of the
Smulowitz et al. 1677

key strategic decisions, provide motivation to lower-level employees, and bring institu-
tional support and legitimacy to the organization. Hence, we elaborate our second
hypothesis about the asymmetric effects of racial diversity across hierarchical levels on
law firm performance:

Hypothesis 2: Firms with a substantial concentration of racial minorities at the top of

the organization will outperform those in which racial minorities cluster lower down
the organizational hierarchy.

Methods
Organizational context and sample
Law firms are generally organized as partnerships based on a hierarchical pyramid struc-
ture (Hitt et al., 2001). The bottom is made up of a large number of relatively inexperi-
enced associates, who are salaried employees of the firm. The middle is made up of
counsel and non-equity partners, who are more experienced attorneys, but nonetheless
still salaried employees of the firm. The top is constituted of equity partners, who have
an ownership interest in the firm.
The hierarchical structure is reflected in the different roles of the attorneys in the firm
(Hitt et al., 2001). Lawyers are usually members of so-called practice groups, based on
their area of expertise. These practice groups vary in size, with the smallest specialties
being a few attorneys, and the largest being several dozen lawyers, sometimes well over
a hundred (such as litigation, or mergers and acquisitions). Most work in law firms is
accomplished by using groups of lawyers from these practice groups for specific projects
(deals, cases, etc.). Normally, several associates work on projects in groups, with fewer
non-equity partners or ‘of counsel’ (roughly equivalent to mid-level managers) acting as
the group leaders (Hitt et al., 2001). Also, equity partners often play multiple roles, with
their primary responsibility being to act as the ‘rainmakers,’that is, someone who excels
in generating business and attracting clients. They also act as the key contact person with
the client, building and maintaining relationships with clients (Hitt et al., 2006). To a
lesser extent, they manage attorney teams and provide legal services.
Though work is generally accomplished with teams, these workgroups are temporary,
can vary in size over time, and an attorney usually works on multiple projects simultane-
ously. For instance, a litigation associate might initially work on a case with only another
mid-level attorney. However, if that case goes to trial, numerous other attorneys, includ-
ing multiple associates, more mid-levels and possibly an equity partner, will be brought
in to handle the additional work. In sum, at each hierarchical level within a law firm,
lawyers have specific roles that they perform, and how well they perform those roles can
directly affect the firm’s financial performance.
For our study, we draw our sample from the list of the 200 largest US law firms by
total revenue published annually by The American Lawyer. We build a panel dataset
from 2008 to 2012 from different data sources, as discussed below. The final sample
comprises only 143 distinct US law firms and 444 firm-year observations over this
period, owing to missing data for some years because of acquisitions and consolidations,
1678 Human Relations 72(10)

changes in rankings, and lack of data owing to combining data from multiple sources
(Hitt et al., 2001).

Measures
Firm performance.  We measure law firm financial performance by taking the log of the
profits per equity partner (PPP), the prevailing measure of performance in the industry.
We also use the log of gross revenue for robustness purposes. Our data on firm financial
performance are derived from a profitability index reported annually by The American
Lawyer, which has been used previously by other researchers (Hitt et al., 2001, 2006).

Racial Diversity.  Race is a controversial category. According to Omi and Winant (2015:
21), ‘[t]he meaning of race is defined and contested throughout society, in both collective
action and personal practice. In the process, racial categories themselves are formed,
transformed, destroyed, and reformed.’ In this study, we rely on self-reported measures
of race and ethnicity. As we argue above, racial diversity will proxy for cognitive diver-
sity, thereby providing more cognitive resources that should improve problem solving
and decision making. This is so because people identifying with different racial groups
should ‘pull from different wells of experience,’ shaping their identity and potentially
guiding their behavior (Page, 2007: 308). We obtained these data from the Law Firm
Diversity Database (the ‘Diversity Database’) to compute several racial diversity meas-
ures. The Diversity Database was created by Vault.com Inc. and the Minority Corporate
Counsel Association (MCCA), and provides statistics and other information on diversity
at more than 300 US law firms nationwide, covering most of the same firms for which
we have financial data.5 This database is compiled from responses to the annual Vault/
MCCA Law Firm Diversity Survey.
We use Blau’s (1977) index of heterogeneity to measure racial diversity for the total
firm and for each of the hierarchical levels. This measure of diversity is the de facto
research standard to measure racial diversity (e.g. Berrone et al., 2016; Julian and Ofori-
Dankwa, 2017; Richard et al., 2007). Blau’s index is also known as the inverse Herfindahl-
Hirschman/Fractionalization Index (HHI). We calculate Blau’s index as:

Racial Diversity = (1 − ∑ Pk 2 )

where P is the proportion of group members in category k. Values of Blau’s index range
from zero to (k – 1)/k. Its maximum occurs when members of a team, Vk, are spread
equally – called ‘evenness’ or relative abundance of species in ecological literature –
over all possible k categories – called ‘richness’ of species (Harrison and Klein, 2007).
An even spread of members over the richest number of information sources corresponds
to Harrison and Klein’s (2007) definition of maximum variety.
There are seven categories of race that are included in the Diversity Database: White,
African American/Black, Hispanic/Latino, Alaska Native/American Indian, Asian,
Native Hawaiian/Pacific Islander and Multiracial. As the number of categories increases,
the maximum value of Blau’s index score also increases; for seven categories, the index
takes on a range from 0 to .86. An index of zero suggests only one category of employ-
ees, whereas a value of .86 implies that all seven categories are equally represented in the
Smulowitz et al. 1679

organization (i.e. more diversity). Following Richard et al. (2007), we created a racial
diversity variable for attorneys, which is Blau’s index for the total firm (diverse attor-
neys), and we also computed Blau’s index for each hierarchical level – diverse associ-
ates, diverse mid-levels and diverse partners – to create a variable of racial diversity for
each of these organizational levels. We calculated all measures of diversity for each firm
for each year.

Asymmetry of diversity.  We also use Blau’s index to calculate asymmetry of diversity

among the various hierarchical levels, using exactly the same formula, but relying on the
percentage of diverse attorneys for each of the three levels as Pk in Blau’s index formula
above. We take the inverse of this score, such that a higher score would mean greater
concentration, that is, greater asymmetry of diversity across levels, such that the level of
diversity is unequally distributed among the three organizational levels. Thus, this meas-
ure is now fully equivalent to the Herfindahl index of industry concentration in diversi-
fication research, but applied to the percentage of diverse attorneys for each of the three
hierarchical levels in law firms. As a measure of Asymmetry of Diversity, a high value for
this variable means that the firm has a greater concentration of racial diversity at one
specific level, as opposed to having a symmetric level of diversity across the three hier-
archical levels.
It should be noted, however, that Blau’s index traditionally used by researchers on
diversity as variety (Harrison and Klein, 2007) does not capture which specific group is
more prevalent; that is, it does not tell us whether the asymmetry that may exist indeed
results from higher diversity at the higher level (partners) or the lower level (associates)
within the organization. To fully understand the performance implications of asymmetry
of diversity, we need to rely on additional data, particularly the type of asymmetry that
we observe in the best-performing firms versus the other law firms. For this analysis, we
further compute the Euclidean distance measure, as discussed below.

Euclidean distance.  To explore whether there is an optimal amount of racial diversity at

each hierarchical level specifically, we also computed diversity as separation through
the entire organization (Harrison and Klein, 2007). Thus, we calculated the mean Euclid-
ean distance for each firm (k) in our sample from an optimal point inductively derived
from the best performers (j) using the following equation (Harrison and Klein, 2007):

Euclidean Distance jk = ∑ [∑ ( Dij − Dik ) /n]/n

2

where the mean distance for each k firm from the diversity profile of the j best-per-
forming firms is computed based on Dij = the optimal percentage of diverse members
at hierarchical level i (associate, mid-level and partner) for the highest performers j,
and Dik = the percentage of diverse members at hierarchical level i for each firm k. The
mean distances for each hierarchical level are squared and then averaged among the
firms in the sample; finally, their mean for the three levels is computed to obtain the
overall distance in diversity profile for the entire firm. We estimated the optimal level
of diversity as the average level of diversity at each hierarchical level for the highest-
performing (10%) firms in our sample, and computed the distances to this level for the
remaining 90% of firms in the sample (e.g. Roth and O’Donnell, 1996). The Euclidean
1680 Human Relations 72(10)

Distance variable captures the extent to which this subsample, excluding the top per-
formers, given the total number of diverse attorneys, has a distribution of attorneys
across different organizational levels more or less similar to the optimal profile for the
best-performing law firms. A higher score for this measure indicates greater deviance
from that ideal measure.
To further interpret the direction in which the 10% top performers differ from the
remaining 90% law firms, we have to compare their descriptive statistics, which denote
the actually observed deviance from the ideal measure for the firms in our study. As we
discuss in the Results section in greater detail and given these descriptive statistics for
high performers versus the remaining firms, the sign of the coefficient for the Euclidean
Distance variable indicates what happens to firm performance as law firms deviate fur-
ther from their optimal level (empirically obtained) and reduce their concentration of
diverse attorneys at the associate level, decreasing their asymmetry of diversity across
different levels. Thus, in contrast to Blau’s index that measures diversity as variety
(Harrison and Klein, 2007), this variable provides additional insight about the perfor-
mance implications of asymmetry of diversity in the specific direction that we observe
among law firms, as they move further away from the ideal level of diversity concentra-
tion of best performers, which actually have a high concentration of diversity at the
associate level.

Control variables
We include numerous variables that may affect the overall profitability of law firms for
various reasons, and we removed their effect using these as control variables. We com-
pute these variables for each year. We include USA firm size, the total number of law-
yers in the United States in each firm, Leverage, the total number of non-partner lawyers
in a firm divided by the total number of partners, and NYC, a binary measure of the
existence of an office in New York City. Previous studies have found that these varia-
bles are correlated with law firm financial performance (Hitt et al., 2006). We obtained
these data either from The American Lawyer, or by reviewing the firm’s website. We
also controlled for Domestic and international concentration using the Herfindahl
index (Hitt et al., 2001).6 We calculate international concentration using the same for-
mula for non-USA office. We also control for time effects with year dummies, keeping
2009 as the base year.
We also created several controls for differences across firms. We controlled for
Service diversification (Hitt et al., 2001) by calculating the number of practice areas
listed by each firm on its Martindale-Hubbell profile. We reviewed the profile of each
firm individually and calculated the number of practices listed for the firm in 2013. We
also controlled for education by including the number of associates that each firm in our
sample hired from the Top 14 law schools. These are the 14 highest ranked law schools
in the US News & World Reports ranking, which is the most important ranking of law
schools in the industry. Since the beginning of the rankings, these 14 firms have been at
the top of the rankings, in one position or another, and there is generally considered to be
a significant gap between the 14th and 15th law schools on the list. We obtained these
data from The American Lawyer for the year 2013.
Smulowitz et al. 1681

Empirical analysis
To test our hypotheses, we use a pooled ordinary least square (OLS) regression model,
which takes advantage of both cross-sectional variations across firms in racial diversity
and firm performance as well as time series data. We obtained robust standard errors to
compute the significance tests, clustering the observations that belong to the same law
firm. We use a one-year lag between our performance variables and the diversity inde-
pendent variables (Hitt et al., 2001, 2006) to reduce the possible effect of the changes in
performance that could affect the firms’ hiring decisions, which would change the com-
position of the workforce and its racial diversity. Thus, values for the dependent varia-
bles refer to 2009–2012, and values for the independent variables, 2008–2011.
We do not control for fixed effects because this estimation requires significant within-
panel (i.e. law firm) variation of the variable values to produce consistent and efficient
estimates; however, racial diversity within each law firm does not change much during
the 4 years under investigation. When the variable of interest does not vary much over
time, the fixed-effects estimates would be imprecise (Wooldridge, 2002). Attorneys are
generally hired with the expectation of staying with the firm for a significant period of
time, such that racial diversity changes very little through 2008 to 2011, which makes
fixed-effects regression inappropriate for our short panel.
As a robustness check, we use instrumental variables to explicitly test for endogeneity
of diversity across organizations and carry out 2SLS regression estimation.7 For this
analysis we use the percentage of minority attorneys in three committees (partner review,
hiring and diversity committees) that should not be expected to be systematically associ-
ated with financial performance, beyond the effect that may occur through the overall
relationship between racial diversity for the overall firm and financial performance.
Because these committees do not affect performance, and similarly performance does
not affect these committees, they should be reasonably exogenous for our analysis of the
overall firm diversity–performance relationship. Similar results were obtained when we
use the three instruments separately, although we use all of them at once to test for their
validity through the Sargan test.

Results
Tables 1 through 3 contain descriptive statistics and zero-order correlations for the vari-
ables in our study, respectively, including the measures of racial diversity at the different
hierarchical levels. Although approximately 36% of the population belonged to a racial
or ethnic minority group according to the 2010 US Census data, we could see in Table 1
that law firms are overwhelmingly and disproportionately majority white. Also, no firms
in our sample were ‘minority-majority’ or minority-owned. Furthermore, the proportion
of diverse attorneys to all attorneys at each level gradually decreases moving up the
hierarchy, going from 21% of minority attorneys at the associate level to only 6% diver-
sity among law firm partners. Thus, these descriptive statistics show that racial diversity
is particularly pronounced at the lowest organizational level.
Table 3 shows positive correlations between firm performance and racial diversity
across the different levels of the organization. Firm profits are positively correlated with
1682 Human Relations 72(10)

Table 1.  Diversity across levels.

Characteristics All firms Top 10% Bottom 90% Minimum Maximum

Diverse partners 9.88 9.75 10.88 0 88
Total partners 163.42 (6.05%) 130.35 (7.48%) 173.23 (6.28%) 23 878
Diverse mid-levels 11.61 5.84 12.91 0 49
Total mid-levels 125.62 (9.24%) 59.26 (9.85%) 135.92 (9.50%) 1 427
Diverse associates 53.93 109.85 48.38 4 274
Total associates 254.93 (21.15%) 422.95 (25.97%) 237.31 (20.39%) 58 1,167
Diverse attorneys 81.08 125.44 72.17 13 362
in law firm
Total attorneys in 543.97 (14.90%) 612.56 (20.48%) 546.46 (13.21%) 163 1,860
law firm

Mean number of attorneys at each organizational level. The percentage of diverse attorneys at that level is
in parentheses. N = 444.

Table 2.  Descriptive statistics.

Variables Mean SD Min Max

1 Profits per partner (log) 13.77 .53 12.85 15.42
2 Firm size (log) 6.27 .51 5.12 7.68
3 Partner leverage 3.00 1.43 .76 12.44
4 NYC .71 .46 .00 1.00
5 Domestic concentration .34 .22 .04 1.00
6 International concentration .73 .34 .03 1.00
7 Practice areas (log) 91.30 76.79 1.00 868
8 Education 13.44 20.88 .00 106
9 Asymmetry of diversity .49 .15 .21 .96
10 Euclidean distance .05 .05 .00 .24
11 Diverse attorneys .24 .08 .07 .43
12 Diverse partners .11 .06 .00 .33
13 Diverse mid-levels .17 .08 .00 .58
14 Diverse associates .34 .09 .08 .68

N = 444.

associate racial diversity (r = .49, p < .05), partner racial diversity (r = .40, p < .05), and
mid-level racial diversity (r = .20, p < .05). All control variables were also associated
with firm performance as expected. More specifically, profits per partner were greater
for those law firms that were larger, had greater leverage, had an office in New York,
were more focused in the domestic market and more diversified in the international mar-
ket, had greater specialization in a few practice areas, and employed more attorneys from
top law schools.
Table 4 presents the results of our regression analyses, where we present the tests of
our two hypotheses. We show our results in a hierarchical fashion to better depict the
Smulowitz et al. 1683

Table 3. Correlations.

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13
1 Profits per partner  
(log)
2 Firm size (log) .25  
3 Partner leverage .43 .26  
4 NYC .47 .38 .39  
5 Domestic .55 −.31 .03 .13  
concentration
6 International −.52 −.55 −.25 −.35 −.06  
concentration
7 Practice areas (log) −.17 .19 −.02 −.01 −.20 .01  
8 Education .66 .45 .26 .35 .35 −.61 −.15  
9 Asymmetry of .55 −.03 .18 .30 .46 −.30 −.21 .56  
diversity
10 Euclidean distance −.45 −.06 −.08 −.31 −.31 .26 .20 −.44 −.79  
11 Diverse attorneys .66 .17 .36 .41 .30 −.42 −.26 .55 .47 −.41  
12 Diverse associates .49 .11 .30 .32 .16 −.27 −.21 .38 .42 −.45 .89  
13 Diverse partners .40 .17 .24 .23 .15 −.30 −.15 .31 .10 −.07 .70 .52  
14 Diverse mid-levels .20 .13 .15 .19 −.03 −.17 −.10 .15 −.24 .10 .52 .40 .35

All correlations of .10 or greater are significant at the 95% confidence level. All independent variables are
lagged by 1 year. N = 444.

variance explained by the different sets of predictor variables. Hypothesis 1 predicts that
racial diversity for the entire organization will be positively associated with firm perfor-
mance. In Model 2, the coefficient of diverse attorneys for the entire organization is posi-
tive and highly significant (β = 1.626, p < .01), thus supporting Hypothesis 1. Law firms
with greater overall racial diversity have greater financial performance.
Our second hypothesis suggests that greater concentration of racial diversity at the
higher organizational level (i.e. partners) will have a more pronounced effect on firm
financial performance. We test our hypothesis in three steps. First, we investigate in
Model 3 if firms that have the same level of racial diversity across organizational levels
have greater (or lower) financial performance than those that show differences across
levels, that is, asymmetry of diversity. In Model 3, we can see that asymmetry of diver-
sity was positively related to firm performance (β = .444, p < .01). Thus, firms with more
asymmetric levels of racial diversity have greater financial performance. However, this
variable does not reflect the specific hierarchical level at which racial diversity has
greater effect on firm performance.
Second, we investigate the effect of diversity at each hierarchical level separately. To
do so, we replace the diverse attorney variable with measures of diversity at the three
individual hierarchical levels, first separately in Models 4 through 6, and then all together
in Model 7. In Models 4–6, the coefficients for diversity at each specific level are always
positive and significant; hence, diversity matters throughout the entire organization and
not only at specific levels. To test at which level racial diversity may have a greater
 1684

Table 4.  Effect of racial diversity on firm performance (log of PPP).

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Firm size (log) .102* .146** .172** .148** .169** .159** .169** .067
Leverage .080** .061** .061** .069** .073** .067** .064** .062**
NYC .160** .099** .084* .119** .100** .106** .093** .076*
Domestic concentration 1.076** 1.053** 1.004** .982** 1.020** 1.053** 1.024** .668**
International concentration −.312** −.257** −.242** −.260** −.264** −.284** −.259** −.211**
Practice areas (log) −.077** −.046** −.038* −.052** −.051** −.053** −.045** −.003
Education .006** .003** .002† .003** .003* .003* .002† .007**
Diverse attorneys 1.626** 1.514** 1.647**
Asymmetry of diversity .444** .658** .840** .406** .650**  
Diverse partners 1.223** .687*  
Diverse mid-levels .823** .384†  
Diverse associates .976** .577**  
Euclidean distance −.871**
Adjusted R2 .709 .742 .749 .734 .733 .740 .744 .700
F 128.62 143.15 149.51 144.66 126.59 141.99 129.96 91.03
N 444 444 444 444 444 444 444 403

Coefficients for year dummies not shown. All independent variables are lagged by one year.
†p < .10, * p < .05, ** p < .01.
Human Relations 72(10)
Smulowitz et al. 1685

performance effect, we include all three measures of diversity in Model 7. We found that
there was no significant difference among them, though diversity at mid-level becomes
only marginally significant. This marginal effect of diversity at mid-level seems to be
owing to its collinearity with the other two measures, given that it is significant when
introduced alone in Model 5. In sum, there is no support for our Hypothesis 2 that diver-
sity at the partner level should have a greater effect on performance than at other levels
within the organization. Yet, the actual degree of diversity observed across the three
hierarchical levels is not similar across the law firms in our sample.
To further explore the type of asymmetry in racial diversity that may be associated
with greater performance, we also examine the specific distribution of diversity of the
best performers in the industry. For this analysis, we computed the Euclidean distance
variable as explained above, which gauges the extent to which firms deviate from the
distribution of racial diversity that we observe in the 10% of firms with higher perfor-
mance in our sample. As shown in the descriptive statistics in Table 1 above, the top
performers not only have greater racial diversity across all hierarchical levels (20.48% v
13.21%), but their diversity is most pronounced at the associate level (25.97% v 20.39%).
The results from Model 8 indicate that as firms move away from the high concentration
of racial diversity at the lowest level, their performance tends to decrease systemati-
cally, as shown by the negative and highly significant Euclidean distance coefficient
(β = –.871, p < .01). Our results actually go against our Hypothesis 2 in that, even though
greater asymmetry is associated with greater performance, the firms with a greater per-
centage of their racially diverse attorneys at the associate level are the ones that have
greater performance.

Additional analyses
The results so far provide general support for the business case for racial diversity and
the positive effect of racial diversity at any organizational level on the financial perfor-
mance of law firms, though we did not find evidence for the greater effect of diversity at
the partner level that we initially expected. We further investigated the robustness of our
conclusions with additional analyses. First, we replicated our regressions using firm
gross revenue (in log form) as an alternative dependent variable, because in our theoreti-
cal development we argued that firms with greater racial diversity should be able to
attract more business. This effect should be particularly observable at the partner level.
The results, which we show in Table 5, are very similar in terms of sign and significance
of the coefficients to our results reported earlier. Greater racial diversity for the entire
organization and at any hierarchical level is positively associated with firm performance.
Diversity at the partner level also has somewhat greater effect on generating revenue
than at the associate level (.388 for associates versus .635 for partners), but the difference
between them is not statistically significant. Finally, as firms move away from the high
concentration of diversity at the associate level that we observe in the best-performing
firms, their gross revenue actually decreases (β = −1.183, p < .01; Model 16).
A possible concern is that racial diversity and firm performance may be endogenously
determined. For instance, reverse causality could still be biasing our results, despite lag-
ging the independent variables one year. If this is the case, racial diversity may not affect
 1686
Table 5.  Effect of racial diversity on firm performance (log of gross revenue).

Variables Model 9 Model 10 Model 11 Model 12 Model 13 Model 14 Model 15 Model 16

Firm size (log) .910** .948** .971** .950** .975** .959** .975** .909**
Leverage .007 −.009 −.010 −.002 .000 −.005 −.007 .001
NYC .159** .107** .093** .123** .099** .112** .093** .073**
Domestic concentration .480** .460** .417** .397** .433** .461** .431** .208**
International concentration −.522** −.474** −.461** −.476** −.475** −.498** −.468** −.469**
Practice areas (log) −.048** −.022 −.015 −.026† −.023 −.027† −.018 .007
Education .004** .002** .001 .002** .001 .002* .001 .004**
Diverse attorneys 1.407** 1.310** 1.289**
Asymmetry of diversity .383** .571** .790** .347** .665**  
Diverse partners 1.107** .635*  
Diverse mid-levels .904** .579**  
Diverse associates .868** .388*  
Euclidean distance −1.183**
Adjusted R2 .882 .897 .900 .894 .896 .896 .900 .908
F 543.12 568.51 539.86 601.02 412.8 529.95 443.5 434.22

Human Relations 72(10)

N 444 444 444 444 444 444 444 403

Coefficients for year dummies not shown. All independent variables are lagged one year.
†p < .10, * p < .05, ** p < .01.
Smulowitz et al. 1687

Table 6.  Effect of racial diversity on firm performance – 2SLS regression analysis.

Variables Model 17 Model 18 Model 19

  First stage Second stage Second stage

Diverse Attorneys Log PPP Log gross revenue

Firm size (log) −.046** .122* .953**
Partner leverage .022** .105** .017
NYC .019* .095** .053
Domestic concentration −.026 .811** .183†
International concentration −.028† −.118* −.446**
Practice number (log) −.012** .000 .005
Education .001** .006** .001
Asymmetry of diversity .086** .281* .255*
Diverse attorneys – 1.275* 1.944**
Instruments  
  Diverse diversity committee .065** – –
  Diverse hiring committee .142** – –
  Diverse partner review committee .142** – –
R2 .567 .797 .917
Test of excluded instrument 19.06** – –
Over-identification test (Sargan) – 4.58 .91
Endogeneity test (Hausman) – .79 1.63

Coefficients for year dummies not shown. All independent variables are lagged one year.
†p < .10, * p < .05, ** p < .01. N = 324.

performance, but financial performance may predict the law firms’ decisions regarding
hiring more or fewer diverse attorneys. To explore this potential concern, we use instru-
mental variables in 2SLS regression analysis and explicitly test for endogeneity (see
Table 6).
To run the 2SLS analysis, we need instruments that should be associated with the
firms’ racial diversity through the organization and at each hierarchical level, but not
with their actual performance. Law firms often have several management committees,
including a hiring committee, a partner review committee and a diversity committee.
We use as exogenous variables the percentage of diverse members in each of these com-
mittees, which was available for most of the firms in the sample. Evidently, the percent-
age of diverse members of these committees should increase as the firms become more
diverse. However, there is no theoretical reason why the percentage of diverse members
in these specific committees should be directly correlated with firm financial perfor-
mance, because these committees are created to manage certain aspects of the firm
completely unrelated to firm financial performance. If there is a correlation between
financial performance and racial diversity in these committees, it would have to happen
through the diversity–performance relationship at the firm level, but we should not
expect any direct correlation between firm performance and the racial composition of
these committees. In other words, an increase in firm performance should not directly
1688 Human Relations 72(10)

increase diversity of those committees, apart from the overall performance–diversity

correlation for the entire organization that we are trying to assess. Because we use more
instruments than exogenous variables, we can test the validity of our instruments
(Semadeni et al., 2014).
Table 6 shows the results for the first and second stages of our 2SLS analysis and the
key tests. The first column presents the first-stage regression results for diverse attorneys
in the entire organization as an endogenous variable for both models reported later. In
Model 17, the significant test of excluded instruments (19.06, p < .01) shows that the
three instruments are positively correlated with diverse attorneys and thus may be used
as predictors. We also use Sargan’s over-identification test to determine whether the
three instruments are indeed exogenous and, thus, not correlated with the error term
(Semadeni et al., 2014). The non-significant result for this test (4.58 and .91, p > .10)
from the second-stage regressions confirms that the three instruments are valid.
Furthermore, the non-significant result for the Hausman endogeneity test (.79, p > .10)
suggests that the diverse attorneys variable is not endogenous. Consequently, the OLS
results that we previously reported do not seem to be biased by endogeneity. In fact, OLS
estimation is preferable to 2SLS when there is no presence of endogeneity, owing to its
greater efficiency (Wooldridge, 2002),
Despite rejecting the threat of endogeneity using good instruments, we report for the
sake of completeness the second-stage results with the predicted values obtained from
the first stage in Models 18 and 19 for our two dependent variables based on profits and
revenues, respectively. The two models provide very similar results for the coefficients
for diverse attorneys, which are significant and positive in both 2SLS models (β = 1.275,
p < .05, Model 18; β = 1.944, p < .01, Model 19). Whereas our short panel does not allow
the use of fixed effects and we cannot definitively rule out that unobservable variables
could be driving the results, our 2SLS analysis gives greater confidence in the validity of
our conclusions about the positive effect of racial diversity on financial performance.

Discussion
While extremely popular among politicians and managers, the business case for increas-
ing racial diversity has been criticized for providing an insufficient basis, or even under-
mining, calls for greater racial diversity based on equal opportunity (Dickens, 1999;
Noon, 2007). Here, our results provide strong empirical support for the idea that racial
diversity can indeed be a strategic resource of a firm that improves profitability, aside
from social and ethical considerations. However, in contrast to our initial predictions, we
also find that racial diversity is not most valuable to law firms when it is concentrated at
the partner level. In fact, our results point in the opposite direction to the extent that we
observe the best-performing firms having greater concentration of their diversity at the
associate level. Overall, the results for the positive effects of racial diversity are robust,
using different dependent variables (log of PPP and log of gross revenue), even after
checking for potential endogeneity, though not always as expected.
We contribute to the management literature through our novel analysis of racial diver-
sity at different organizational levels within law firms. Our article responds to the call of
researchers to better explore the contingencies of diversity effects (Joshi and Roh, 2009;
Smulowitz et al. 1689

van Knippenberg and Schippers, 2007), specifically across organizational levels. The
results confirm that racial diversity influences firm financial performance, not only for
the entire organization, but also across the differing hierarchical levels of the organiza-
tion. The positive effect of racial diversity was clearly observable for all three hierarchi-
cal levels in law firms, that is, associates, mid-level and partners, and in any of them
racial diversity can indeed be a strategic resource for a firm (Andrevski et al., 2014;
Richard et al., 2003, 2007).
Contrary to our second hypothesis, however, the benefits of racial diversity are not
greater at higher organizational levels. In fact, we find that the firms with greater per-
centages of their racial diversity concentrated at the associate level actually have higher
financial performance. Though we do find a positive effect of racial diversity at the three
hierarchical levels inside law firms, the top-decile-performing firms show substantially
greater concentration of their racial diversity at the bottom of the organization (86% of
diverse attorneys are associates). In contrast, the remaining firms have much more bal-
anced distribution of diversity across all levels (only 65% their diverse attorneys are
associates), and the more the asymmetry is further reduced, the lower their performance.
We would like to elaborate on this important and unexpected finding.
One possible explanation is that firms may be able to increase profits by decreasing
personnel costs of ethnic minorities, essentially paying minority associates less than their
white counterparts or having harder promotion guidelines for their ethnic minorities. We
believe that this is very unlikely to be the case, particularly for law firms. This would be
considered illegal racial discrimination, and firms would subject themselves to civil law-
suits and possible federal criminal prosecutions if they attempted to pay less to their
racial minority employees. Similarly, law firms can hardly sustain a record of being
tougher on the promotion of racial minorities, especially among lawyers, who have the
training and means to legally fight this potential sort of bias. In fact, law firms generally
follow a ‘lockstep’ compensation structure for associates; that is, associates are paid
based on their years of seniority, not individual factors. In general, all associates at the
firm graduating from law school the same year will be paid the same amount, irrespec-
tive of race, gender and other possible individual differences that may be regarded as
discriminatory.
A second explanation is that racial diversity may bring more value to the organization
at lower levels – exactly the opposite to our initial expectations. For instance, despite the
clear benefits of diversity, racial identity may somewhat dilute through time as minority
partners could become more similar to other majority partners owing to identifying more
strongly over time with their firms and profession. In fact, tenure has been shown to be
associated with higher strength of organizational identification (Bartel, 2001; Mael and
Ashforth, 1992; Schneider et al., 1971), and partners (and mid-levels) will have much
longer tenure with their firms and the legal profession. Whereas associates are relatively
young, inexperienced attorneys, mid-level attorneys and partners have almost uniformly
spent many years in the profession and at a particular firm. They will generally not be
promoted until 8 or 10 years after graduation from law school, and are almost never
promoted before spending several years at the target firm.
Instead, we suggest a third interpretation for our unexpected results. Keeping in mind
that racial diversity has positive performance effects across the three hierarchical levels
1690 Human Relations 72(10)

in law firms, high performers may be the first organizations to realize and act upon the
benefits of increasing racial diversity, which in law firms starts from the bottom. In other
words, top-performing law firms may be actively hiring more diverse associates in recent
years, as most new attorneys enter the organization at that level. This explanation is con-
sistent with the greater relative number of associates for the top 10 percent performers in
the industry, as shown in Table 1 (20% for high performers versus 13% for the remaining
firms). If the best performers are actively engaged in hiring more diverse associates, this
practice may expand to the rest of the industry and eventually also permeate to higher
organizational levels, as these associates gain tenure. Thus, racial diversity is not more
valuable at the top as we expected, but it may not be more valuable at the bottom either,
considering that the OLS regression coefficients for associates were not greater than for
partners. In this sense, the asymmetry of diversity variable may essentially reveal that
growing racial diversity starts from the bottom in law firms, such that the greater number
of associates of the top performers reflects that they are indeed early adopters in the
value-generating decision to increase their diversity.

Implications for research and practice

Our results have clear implications for research on diversity as well as managerial prac-
tice, particularly regarding the positive performance implications of racial diversity and
the business case for diversity. One of the main criticisms of the business case is that its
arguments are contingent and variable (Dickens, 2000). That is, the business case ‘will
have relevance for some organizations and not others, it is likely to change over time, and
it might benefit some disadvantaged groups but not all’ (Noon, 2007: 778). Accordingly,
organizational self-interest may sometimes run counter to, rather than supporting,
increased racial inclusion. However, in our study we found strong support for the posi-
tive performance implications of racial diversity across all levels in law firms, notwith-
standing any considerations about social justice that may also be valid.
Some law firms, particularly underperformers, could be making a suboptimal deci-
sion when it comes to recruiting and managing diverse human resources – ‘wasting
resources,’ in the words of Dickens (2000). This effect has been documented in other
settings (e.g. UK Davies Report, 2011; see Vinnicombe et al., 2018). To the extent that
changes in human resources are slow and the potential benefits from increasing racial
diversity are realizable years into the future, managers might neglect these benefits in
favor of short-term financial targets (Noon, 2007). Our clear results in favor of racial
diversity may be useful for those who want to rebuild the workforce to be more in line
with the large and growing degree of racial diversity in our society. Law firms in the US
seem to be behaving sub-optimally, as the penetration of racial minorities in their organi-
zations (approximately 14.9% in our sample) is well below the level of diversity that
exists in their society (approximately 37.9% of the US population in 2014, according to
the US Census8).
Our results also have implications for promotion decisions. Previous research has
shown that law firms often promote attorneys with a certain type of ‘cultural capital,’
irrespective of aptitude, because it signals quality (Ashley and Empson, 2013). As a
result, ethnic and racial minorities will only be promoted if they are culturally similar to
Smulowitz et al. 1691

the majority group. If firms truly recognize the benefits of diversity, they should promote
larger numbers of minority attorneys to higher levels, and those firms would secure (at
least) similar benefits from this diversity at the partner level, for which we found clear
evidence in our analyses. However, it is not entirely clear why the most profitable firms
indeed have greater concentrations of their minorities at the associate level, and future
research may be necessary to explore this issue further.

Limitations and future research

As with all studies, ours faces several limitations. First, our sample is confined to one
industry, the legal services industry in the United States, which limits its generalizability
to other settings. This limitation is partly a result of our research design. Because theories
predicting the effect of diversity on performance generally look at group dynamics, it is
more appropriate to study industries in which group dynamics have greater potential to
influence financial performance, either positively or negatively. Thus, though our results
should apply to other large professional service firms in other countries, such as account-
ing and consulting firms, they may overstate the effects of racial diversity on financial
performance in other industries where human capital and group dynamics may be some-
what less important. Future research should attempt to clarify the consequences of racial
diversity in other contexts.
Second, though we argue that asymmetry of diversity will be important for law firm
performance, it could be argued that the effect of having ethnic minority attorneys at
senior levels and all (or mostly) white associates would be different than in a firm where
the partners are white and all (or most) of the associates are ethnic minority. Our theory
does not distinguish between these two possibilities, though we cannot empirically test
this alternative supposition because all of the firms in our sample are majority-white at
the partner and associate levels. A possible extension of our research would be to exam-
ine this possible effect in another cultural context that would allow differentiation
between the two.
Finally, we only studied the performance implications of racial diversity. However,
our theoretical arguments could be applicable to other types of demographic diversity,
such as gender, age and experiential or cognitive differences. We fully agree that future
research should explore how these other types of diversity, both throughout the organiza-
tion and across organizational levels, may affect firm financial performance. Moreover,
racial issues are controversial and highly sensitive, and they can be studied from a vari-
ety of perspectives, ranging from equality and social justice to performance and market
valuation.
Despite these limitations, our article provides strong and novel evidence about the
positive effect of racial diversity on the financial performance in law firms. Most criti-
cally, we show that this effect can be observed across different organizational levels.
Though we expected that the benefits of racial diversity should be particularly important
for partners in law firms, we found that racial diversity is similarly important across all
three levels, even though firms with higher performance actually have greater concentra-
tions of racial diversity at the lower organizational level.
1692 Human Relations 72(10)

Funding
This research was partially supported by the Spanish Ministry of Economy and Competitiveness
(grant number: ECO2012-33081).

Notes
1 See Executive Order 13583, https://obamawhitehouse.archives.gov/the-press-office/2011/08
/18/executive-order-13583-establishing-coordinated-government-wide-initiativ (accessed 9
November 2018).
2 An implicit assumption of the information/decision-making perspective and, indeed, all theo-
ries regarding diversity, is that different members of a group will behave differently. If this
were not the case, then diverse groups should behave the same as non-diverse groups. This
assumption has been strongly supported in the literature (e.g. Mayo et al., 2017).
3 See https://www.opm.gov/policy-data-oversight/diversity-and-inclusion/about-us/ (accessed
9 November 2018).
4 See https://www.fdic.gov/about/diversity/mwop/ (accessed 9 November 2018).
5 The majority of firms that were omitted from our sample because of missing data had not
responded to the Diversity Database surveys. These firms were also significantly smaller
and less profitable. Given the institutional pressure to support diversity, we assume that these
firms would be relatively less diverse. Accordingly, omitting these firms from our sample
may bias our sample against finding a significant effect of diversity on firm financial perfor-
mance. Also, during our time period, there were two mergers affecting firms in our sample.
In 2012, Faegre Baker Daniels was formed by merging Faegre & Benson LLP and Baker
& Daniels LLP. In 2010, Hogan Lovells was formed by the merger of US-based Hogan &
Hartson and London-based Lovells. As a robustness check, we re-ran our analysis omitting
these firms. Omitting these firms did not substantively change our results.
6 We calculate domestic concentration as: HHI = ∑ (Pk/P)2, where Pi was a firm’s number
of lawyers in domestic office location k = 1, and P equals the total number of lawyers in
the firm. HHI takes on a value greater than zero and less than or equal to one, with a value
approaching one indicating greater concentration and a value approaching zero indicating less
concentration (Hitt et al., 2006). The Herfindahl index is simply the inverse of the Blau index.
7 We rely on a 2SLS analysis because a natural experiment was not available. See, for example,
Ahern and Dittmar (2012).
8 See Sanburn J (2015) U.S. steps closer to a future where minorities are the majority, Time
Magazine, http://time.com/3934092/us-population-diversity-census/ (accessed 9 November
2018).

ORCID iD
Stephen Smulowitz https://orcid.org/0000-0002-3935-8013

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Stephen Smulowitz is a research fellow at the IMD Global Board Center in Lausanne, Switzerland.
He is a graduate of the University of Pennsylvania Law School, and received his PhD from IESE
Business School in Barcelona, Spain. His research interests include Corporate Governance, risk,
executive compensation incentives and community embeddedness. [Email: ssmulowi@gmail.com]
Manuel Becerra is Professor of Strategic Management at the University of Queensland Business
School, Brisbane, Australia. His research investigates issues of trust, risk and corporate strategy,
and it has been published in journals such as Academy of Management Journal, Academy of
Management Review, Journal of Finance, Journal of Management, Journal of Management
Studies, Organization Science and Strategic Management Journal. He is also the author of the
book Theory of the Firm for Strategic Management. [Email: m.becerra@business.uq.edu.au]
1696 Human Relations 72(10)

Margarita Mayo is Professor of Organisational Behaviour at IE Business School, Spain, and a

Fulbright Alumni of Harvard University. Her research interests revolve around authentic leader-
ship, diversity, change management, and identity processes in organizations. Her work has been
published in Human Relations, Journal of Applied Psychology, Academy of Management Journal,
Academy of Management Learning & Education, Organizational Research Methods, Leadership
Quarterly, Journal of Vocational Behaviour, Human Resource Management and Harvard Business
Review. She is also the author of the book Yours Truly: Staying Authentic in Leadership and Life
(Bloomsbury, 2018). Margarita has been recognized as finalist for the 2017 Thinker50 Leadership
Award. [Email: margarita.mayo@ie.edu]