GLOBAL BUSINESS PERSPECTIVES

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BUSINESS RESEARCH YEARBOOK:

VOLUME X, 2003

Editors:

Jerry Bibennan,University of Scranton

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Abbass F. Alkhafaji,Slippery Rock University

A PUBLICATION OF TIlE INTERNATIONAL ACADEMY OF BUSINESS DISCIPLINES

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Copyright 2003 by theInternational Academy of Business Disciplines

McNaughton & Gunn Inc.Saline Michigan 48176

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This volume contains an extemduring the fifteenth annual internationaBusiness Disciplines held in Orlando, Ithe continuing efforts ofIABD to mak,contributions to practitioners and acad,All rights reserved

Printed in the United States of America

ISBN 1-889754-07-2

The International Academy of:thirteen ago as a world wide, non-profeducation in all of the functional and SlIABD are to stimulate learning and ineopportunities in the international markpractice. The IABD hopes to create aresearch, and the practice of managembusiness will be advanced. The main f.these areas to ultimately create integraMembership in the IABD is open to Slconcerned citizens who are interesteddisciplines and related fields.

Co-published by arrangement with theInternational Academy of Business Disciplines

The IABD has evolved into a ,years, thanks to immense support pro\institutions The objectives and far-re,and excitement among people tTomall

The Academy is indebted to allparticularly Krish S. Krishnan, Indianayear's Program Chair, and to those w~did an excellent job of coordinating th,Thanks also to the IABD officers and

Our appreciation also extendsconference The high quality of papclAcademy's growing reputation, and pvolume.

The editors would like to exte,the Kania School of Management, Un,acknowledgment and thanks to KristinTheresa Sandrowicz oftbe Universityvolume.

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WORKFORCE DIVERSITY: GOOD FOR MINORITIES AND WOMEN,GOOD FOR SHAREHOLDERS?

Fadel H. Mahdy, Southeastern Oklahoma State UniversityC. W. Von Bergen, Southeastern Oklahoma State University

ABSTRACT

Historically firms were told that they must increase the demographiccharacteristics of thcir employees to comply with numerous equal employmentopportunity laws and regulations. Businesses were latcr instructed that having amulticultural labor force was the equitable and fair thing to do. Today employersare increasingly bcing advised that the creation of a pluralistic workforce willprovidc a competitive advantage and has a significant impact on thc ultimateobjective of maximil:ing firm's market value. To examine the supposcdrelationship between a fiml'S commitment to divcrsity and the maxirDlzatlOnofshareholders wealth, the authors reviewed the total returns of companiesidcntified over the last five years by Fortune magazine as minority-fricndly finns.Analyscs indicate that these companies in general outperform the market in termsof total rcturn to shareholdcrs.

I. INTRODUCTION

With the increasing demographic diversity of the U.S. workforce (Jackson& Schuler, 1990), the concern for attracting qualified ethic-racial minorityapplicants to employment vacancies is sinJilarly of increasing importance andintercst. Attracting, hiring, and retaining minorities are important goals fromlegal, ethical, and organizational-performance perspectives (Gardenswartz &Rowe, 1993). Each of these perspectives has been emphasized over the years.

The legal perspective has been embodied in affirmative action and was thefirst systematic approach implemented by organizations focused on achievingequality of opportunity (Kreitner & Kinicki, 200I). Affirmative action is rooted inTitle va of the Civil Rights Act of 1964 which was a direct result of the civilrights movement of the early I960s. Although affirmative action createdtremcndous opportunities for women and minorities, it did not foster the type ofthinking that is needed to effcctively manage diversity (Thomas, 1990).

In response to the negative perception of affirmative action as amechanism to increase diversity the ethical or valuing diversity perspectivebecame more popular in the 1980s. It revolves around creating an environment inwhich everyone feels valued and accepted. From an ethical perspective, minoritieshave been the targets of prejudice and discrimination in the United States formore than 200 years, and eliminating discrimination should be a concern to thosewho hold power, especially organizational decision makers (Brief, Dietz, Cohen,Pugh, & Vaslow, 1997). Moral and ethical imperatives drive this approach toincreasing multiculturalism and it is believed that everyone benefits trom aninclusive environment. Increasing diversity in the workforce and emphasizing the

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appreciation of differences is the proper, ju,to do.

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To a large extent the goals of equethical perspective are being overtaken by dlof markets (Dessler, 2002). As a result, comfor racial, ethnic, and sexual workforce baethical] imperatives, but as a matter of enli)& Rice, 1993, p. 547). What is argued tromorganization's dcmographic diversity can I.Cox & Blake, 1991). Effectively malorganization's costs and employee attitud,sales and market share, creativity and .

productivity-and ultimately profits (Kreitn,beginning to examme the effects ofdemographic charJ.cteristics on an orgJ.;;example, a 1997 study of 1,000 comrManagement Association and the Businesssuggested that a diverse TMT can contr;:1999). Current thinking points out that d',ideas and a variety of perspectives, \' hi,decision making (Miller, Burke, & Glick, I'

What this review suggests, then, is [1

withboostingworkforcediversitybecauscI

but also increasingly because of the b,productivity, creativity, and performancebenefits should have a significant impact 0maximizing a finn's market value or owner'study examines total returns to shareholder,five years by Fortune magazine as minorit, I'

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II. SAMPLE AND DATA

Our sample of minority friendly fin,of America's SO Best Companies for MUjl2002), Forllllle magazine has conducted ;"in large fimls. Using thesc results, a Ii,tcompanies was compiled. In this study we i

all publicly traded finns that were includedthe derivation of our sample involved the cwere included in the top fifty lists. After l

contained a total of 97 companies, inchsubsidiaries with no publicly traded equit2000, and government agencies. After dr<agencies, our full sample comprises a total,

This study uses monthly total rlappreciation yield) to examine any abnonhence, to measure the contribution to sh,

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RITIES AND WOMEN,i{S?

late University"tate University

ncrease the demographic\crous equal employmentr instructed that having a~to do. Today employers>Iuralisticworkforce will

Impact on the ultimateexamine the supposcd

and the maximization of! returns of companies; minority-friendlyfirms.form the market in tenns

. U.S. workforce (Jacksonied ethic-racial minoritycreasing importance andre important goals from:tives (Gardenswartz &sized over the years,13tive action and was the

" focused on achievingnative action is rm>ted indirect result of the civil

irmative action created

lid not foster the type ofhomas, 1990).,ffirmative action as a

Ig diversity perspective~ating an environment intl perspective, minoritiesin the United States forlId be a concern to those

crs (Brief, Dietz, Cohen,; drive this approach toryone benefits from anrce and emphasizing the

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appreciation of differences is the proper, just, and decent thing for organizationsto do.

To a large extent the goals of equitable and fair treatment driving theethicalperspective are being overtaken by demographic changes and globalizationof markets (Dessler, 2002). As a result, companies today are increasingly strivingfor racial, ethnic, and sexual workforce balance, "not because of legal [and/orethical] imperatives, but as a matter of enlightened economic self-interest" (Coil& Rice, 1993, p. 547). What is argued from this perspective is that increasing anorganization's demographic diversity can lead to a competitive advantage (e.g.,Cox & Blake, 1991). Effectively managing diversity can influence anorganization's costs and employee attitudes, recruitment of human resources,sales and market share, creativity and innovation, group problem solving,productivity-and ultimately profits (Kreitner & Kinieki, 2001). Researchers arebeginning to examine the effects of a top management team's (TMT)demographic characteristics on an organization's financial performance. Forexample, a 1997 study of 1,000 companies conducted by the AmericanManagement Association and the Business & Professional Women's Foundationsuggested that a diverse TMT can contribute to corporate profits (Thompson,1999). Current thinking points out that diversity promotes the sharing of uniqueideas and a variety of perspectives, which, in turn, leads to more effectivedecision making (Miller, Burke, & Glick, 1998; Lawrence, 1997).

What this review suggests, then, is that firms should not only be concernedwith boosting workforce diversity because it is the lawful and ethical thing to do,but also increasingly because of the benefits of increased morale, profit,productivity, creativity, and performance-bottom lirte considerations. Thesebenefits should have a significant impact on achieving the ultimate objective ofmaximizing a firm's market value or owners' wealth. To explore this premise, ourstudy examines total returns to shareholders of companies identified over the lastfiveyears by Fortune magazine as minority-friendly firms.

n. SAMPLE AND DATAOur sample of minority friendly firms (MFFs) comes from the Fortune list

of America's 50 Best Companies for Minorities. For the past five years (1998-2002), Fortune magazine has conducted an annual survey of workforce diversityin large firms. Using these results, a list of the top 50 most minority-friendlycompanies was compiled. In this study we use a sample that comprises essentiallyall publicly traded firms that were included in those top fifty lists. The first step inthe derivation of our sample involved the creation of a master list of all firms thatwere included in the top fifty lists. After eliminating any double entries, the listcontained a total of 97 companies, including several privately owned firms,subsidiaries with no publicly traded equity, new firms incorporated after year2000, and government agencies. After dropping the aforementioned firms andagencies,our full sample comprises a total o£16 MFFs.

This study uses monthly total returns (dividends yield plus capitalappreciation yield) to examine any abnormal (negative or positive) returns andhence, to measure the contribution to shareholders wealth. Our monthly total

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return data comes from the COMPUSTATE database. However, the samplecontained several marginal firms that lack COMPUSTATE coverage. We decidedto include these firms in our sample to avoid any potential biases or inefficienciesin our results. Closing prices and dividends for those marginal firms werecollected manually and monthly total return Rt for each firm i was computedusing:

R =<P,-P,)+D.. P.~where P, is the closing price of month t, pt-! is the closing price of the previousmonth, and D, is the dividend paid in that month. In addition to the five yearperiod of Fortune surveys (60 months of years 1998-2002), we decided toexamine the full sample from two additional windows; a short-term one of the last24 months (years 2001 and 2002), and a long-term window of 120 months (1998-2002). We believed that these additional examinations lead to more reliablereadings of the sample performance. furthermore, the last window takes intoconsideration the assumption that these firnls may be well established in terms ofminorities far before the first 1998 Fortune survey.

III. ANALYSIS AND RESULTS

We examined the performance of the full sample as an equally weightedportfolio. We first calculated monthly mean returns and standard deviations forthe three periods and examined this performance relative to the S&P 500, themost widely followed benchmark of the U.S. equity market. Next, we estimatedthe portfolio Beta Coefficient fJp to account for the systematic risk using thefollowing simple linear regression:

Rpl = q, +fJp RmJ +ept

where Rptis the raw monthly return for the MFFs portfolio and Rmtis the monthlyreturn of the S&P 500. Table I sUlllffiarizesour results in this stage and revealsthat the MFFs portfolio surpass the market in all periods. The annualized averagereturn was -4.32%, 4.56, and 14.16% in each of the three periods respectivelyversus -16.80%, 1.20%, and 10.56% for the market. Meanwhile, the total riskmeasured by the standard deviations of returns and the systematic risk measuredby fJ are both less than that of the market (for all periods except the nearly equalstandard deviations for the 24 month period).

TABLEIMONTHLYRETURNANDRISK

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This data indicates potential al'

magnitude is even higher when meanare higher with less volatility compar.

significance of abnormal returns, weCARs recommended by Fama for

allowing cleaner tests (Fama, 1998)(BHARs) suggested by Barber andcompounding in long-run return. !methodological studies on the best melreturn, CARs and BHARs have thei,

complementary rather than competinl'returns (Dichev & Piotroski, 200!).

For CARs, a monthly abnonl1:

for that month minus its expectcd ret\!and the Beta for the period, or:

ARpt = Rp, -- [ R:

where ARpl is the MFFs monthly abnoiis the 3-months Treasury bells monl:from Global Finance database. The Ihadded in each period to fornl 24

portfolio's cumulative abnormal relLlliand used t-statistics to test whether mzero.

BHARs were measured as tho

minus the buy-and hold return from tinBHAR, =

The mean BHAA for each of the thr

zero. Table IT presents mean CARs.

corresponding t-test. This table revealare significantly greater than zero IIminority friendly companies as aportI',

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ABNORJ\'IAL REl

IV. CONCLUSIONSThe evidence presented in Ihi

firms, as a portfolio, significantly oUlpthese firms, in general, are good nshareholders too. However, the anal)exploratory in nature. The study didfirms have achieved significant abnolthis regard, especially to control fOI

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2 years 5 ears 10 earsMFFs S&P MFFs S&P MFFs S&P

Mean -0.0036 -0.0140 0.0038 0.0010 0.0118 0.0088Standard Deviation 0.0588 0.0574 0.0513 0.0545 0.0437 0.0451Varaince 0.0035 0.0033 0.0026 0.0030 0.0019 0.0020

fJ Coefficient 0.96 1.00 0.84 1.00 0.89 1.00

Finns outperfonn S&P 500 58 56 54Finns underperfonn S&P 500 18 20 22

2yearsCARs BAHF

Mean Abnormal Return 0.0097 0.01

t-stalestic 0.0127 000

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This data indicates potential abnonnal retums of the MFFs POI1folio Thernagnrtude is even higher when mean retums arc adjusted for risk, since returnsarc higher with less volatility compared to the market. To calculate and test thesignificance of abnonl1al returns, we used both Cumulative Abnormal Retums

CARs recommended by Fama for having better statistical prosperi tics andallowing cleaner tests (Farna, 1998), and Buy and Hold Abnomlal Retums(BHARs) suggested by Barber and Lyon (1997) because they renect thecompounding in long-run retum. Despite the disagreement of the recentmethodological studies on the best method to calculate and test long-run abnonnalreturn, CARs and BHARs have their own strengths and can bc considered ascomplementary rathcr than competing approachcs to computc and test abnonnalrc!lImS(Dichev & Piotroski, 200 I).

For CARs, a monthly abnomlal return cquals the portfolio-specific returnI()r that month minus its expected return lIsing thc S&P 500 return for that month:lIhlthc Beta for the period, or:

ARp, = Rp,-- [ RF, + {3p(R""- RFJIwhere ARpr is the MFFs monthly abnornlal return, Rp,the monthly raw return, RF,IS the 3-months Treasury bclls monthly rate or rdurn (risk-free rate), obtained

liOlll Global Finance database. The portfolio monthly abnonnal rctums ARI" areaddcd in each period to fonn 24 months, GO months, and 120 months of

portfolio's cumulative abnonnal returns. We calculated the mean for each periodand used t-statistics to test whether means CARs are significantly different fromzero.

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the BHARs were measured as the portfolio buy-and hold monthly retumsminus the buy-and hold retum from the market portfolio, or:

SHARe = RpI- R""

The mcan BHAR, for cach of the three periods is calculated and tested against

zcro. Table II presents mean CARs and GAl! Rs for the threc periods and thecorresponding t-test This table reveals th:\t 111.: ,\HTs pOl1folio ahnnrm:d l"ClUrns

arc significantly gredler than zero in all !)'JI0(L; which IS an IIJdl(,'lIIOn that

minority friendly companies as a portfolio consistently outperfonncrl the market

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IV. CONCLUSIONS

The evidence presented in this paper suggests that the nllnonty friendlylinns, as a portfolio, significantly outperfonned the market. This may indicate thatthese finns, in general, are good not only for minority employees,but forshareholders too. However, the analyses and results presented in this paper areexploratory in nature. The study did not attempt to explain why these minorityfinus have achieved significant abnonnal retums. Further studies are needed inthis regard, especially to control for finn size and book-to market equity in

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2 years 5 ears 10 earsCARs BAHRs CARs BAHRs CARs BAHRs

Mean Abnormal Return 0.0097 0.0104 00024 0.0028 0.0036 0.0030t-statestie 0.0127 0.0088 0.0387 0.0346 0.0145 0.0395

addition to the market factors which have been used here in computing long-runreturns (as suggested by Fama & French, 1992). More research is needed toaccount for industry classification, kinds of minorities, and their manageriallevels.

V. REFERENCES

Barber, 8., & Lyon, J. "Detecting Long-Run Abnormal Stock Returns: TheEmpirical Power and Specification of Test Statistics." Journal of FinancialEconomics, 43 (3), 1997,341-372.

Brief, A.; Dietz, J.; Cohen, R.; Pugh, S.; & Vaslow, J. "Just Doing Business:Modern Racism and Obedience to Authority as Explanations ForEmployment Discrimination." Organizational Behavior and HumanDecision Processes, ~ (1),1997,72-97.

Coil, J., & Rice, C. "Management Workforce Diversity in the 90s: The Impact ofthe Civil Rights Act of 1991." Employee Relations Law Journal, 12 (4),1993,547-565.

Cox, T., & Blake, S. "Managing Cultural Diversity: Implications ForOrganizational Competitiveness." Academy of Management Executive, ~(3), 1999,45-56.

Dessler, G. Human Resource Management (8th ed.). Upper Saddle Ridge, NJ:Prentice Hall, 2000.

Dichev, 1.,& Piotroski, J. "The Long-Run Stock Returns Following Bond RatingChanges." Journal of Finance, 56 (10), 2001,173-203.

Fama, E. "Market Efficiency, Long-Term Returns, and Behavioral Finance."Journal of Financial Economics. 49 (3), 1998,283-306.

Fama, E., & French, K. R. "The Cross-Section of Expected Stock Returns."Journal of Finance, 47 (2), 1992,427-465.

Gardenswartz, L., & Rowe, A. Managing Diversity: A Complete Desk Referenceand Planning Guide. Homewood, IL: Business One Irwin, 1990.

Jackson, S., & Schuler, R. "Human Resource Planning: Challenges ForIndustriaVOrganizational Psychologists." American Psychologist, 45, 1990,223-239.

Kreitner, R, & Kinicki, A. Organizational Behavior (5th ed.). Burr Ridge, IL:Irwin McGraw-Hill, 2001.

Lawrence, S. "The Black Box of Organizational Demography." OrganizationalScience, 8,1997,61-72.

Miller, c., BU;ke. L., & Glick, W. "Cognitive Diversity Among Upper-EchelonExecutives: Implications For Strategic Decision Processes." StrategifManagement Journal,.12, 1998,39-58.

Thomas, R. "From Affirmative Action to Affirming Diversity." Harvard BusinessReview, 68 (2),1990,107-117.

Thompson, R. "Diversity Among Managers Translates Into Profitability." !lliMagazine. April 1999, 10. .

Triandis, H., Hall, E., & Ewen, R. "Member Heterogeneity and DyadiCCreativity." Human Relations, il., 1965, 33-55.

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GLOBAL ENVIRON'

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