There’s a growing trend of women being represented in business leadership ranks, a change that many may see as remedying past discrimination and furthering gender equality. But no matter how much companies care about social change, they also are locked in hard-fought competition with rival firms for customers. That’s particularly true of big U.S. corporate law firms, who survive and thrive by building a roster of major business clients with a continual need for their services—and that often means luring clients away from their current attorneys.
As a study of 167 of the biggest U.S. law firms and 1,400 buyers of legal services reveals, though, those two motivations don’t necessarily clash. To the contrary, business competition can actually be a powerful driver for law firms to increase gender diversity, if the potential clients that they’re trying to lure away from competitors are themselves creating more opportunities for women in their senior ranks. But this rivalry-based theory of gender diversity also has a downside for the promotion of women; when the opportunity to attract new buyers of legal services decreases, so do law firms’ efforts to increase their gender diversity. This also happens when law firms can use racial diversity as a substitute for promoting women.
Doing Good Isn’t Enough Motivation
In my career as a business researcher, I study professional service firms and how they create and capture value from clients, and how that affects their strategy and performance. I’m interested in the pressures that these outfits have to deal with, and the motivations that influence them. That focus led me to look at gender diversity from the perspective of competitive action.
It’s no secret that a lot of companies these days are very interested in Environmental-Social-Governance (ESG) values. There’s been a push over the last 10 to 20 years for businesses to be more socially responsible. Many people believe that it’s the right thing to do, and you’re doing well by doing good.
But evidence suggests that the motivation for diversity efforts is more complex, and not primarily altruistic. Lawyers and law firms, after all, are subject to the same pressures as other businesses. Beyond that, diversity efforts tend to focus on the bottom of the organizational chart. Firms have diversity committees that influence hiring practices, and when they recruit new associates from law schools, they often achieve a relatively even split between male and female hires.
But the acid test is, how does that translate through the rest of the organization, all the way up to senior partner level? That’s where you see a huge drop-off in diversity, going from 50 percent female associates to less than 20 percent of the partners being female. We discovered that law firms actually become diverse at a much lower rate than clients. So the question becomes, when law firms increase their female representation at the top, why is it happening? Are these firms acting strategically? Is it market-driven? And if it is, how powerful would that effect be?
A Rivalry-Based Perspective
The law profession is a good place to study how firms have to respond to diversity expectations of buyers, and how they gain competitive advantage for doing that. Law firms are dependent upon buyers of their services for revenue and market reputation, and although clients pick their firms based on a wide range of criteria—from industry expertise to track record-- increasingly they’re insisting upon diversity as well. A few years back, prominent companies even jointly published a “Call to Action ” statement to let law firms know that they intended to direct their spending to firms that took diversity seriously.
So we developed the hypothesis that gender diversity actually is, in part, rivalry-based. If you’re a law firm trying to lure a competitor’s big client to drop them and hire you instead, you’ll notice if the potential client has a lot of women in senior positions, and you’ll try to match their diversity so that you’re a better fit for them along that dimension. But if that possible customer isn’t as diverse, you won’t feel the pressure to be diverse, either. When you consider gender diversity from that perspective, it suddenly becomes strategic and instrumental.
We also had to think about what might be alternative drivers for law firms to become more or less diverse. There’s an abundant body of literature on the benefits to organizations from being more diverse. Instead of trying to look like clients, for example, there could be a human capital rationale, in which firms see having greater diversity as a way to have a better talent pool, with more varied knowledge and perspectives, and an increase in skills. But if improving human capital was the main driver, you wouldn’t see diversity influenced as strongly by whether the clients are diverse.
A key reason for becoming more diverse is rivalry. This really matters, rather than building human capital.
Indeed, what we found was that this effect—law firms trying to match clients’ preferences—is strongest when it’s the clients of the firm’s closest rivals who are indicating their preference for diversity. A key reason for becoming more diverse is rivalry. This really matters, rather than building human capital (we can assume these firms have great lawyers!).
Similarly, you wouldn’t see that strong rivalry-based effect if diversity was mostly driven by ideology. If you're trying to achieve competitive advantage, you're trying to steal clients away from other firms, and you're trying hardest to steal those clients away from your closest and strongest rivals. So the response is going to be strong.
How to Use the Insights
One of the neat things about this study is that, empirically, we’re showing a really strong association between diversity and rivalry, and aligning with the preferences of rivals’ clients. It’s a strategic maneuvering that’s been alluded to in some of the previous literature, but it had never really been demonstrated until now.
Managers should be thinking about how to use diversity as part of their strategy for improving their market position. In addition to the knowledge, skills, and capabilities that people might have, the managers should be thinking more about how to build their human capital and talent bases in a way that gives them an advantage in the market as well. If you build your pool of employees to also reflect what society is, or what society values, you’re probably going to do better.
There’s a need for additional research on the rivalry effect upon diversity. We don’t know at this point how relevant it is outside of professional services—the extent to which it would apply, for example, to manufacturing, where companies’ sense of social responsibility might be driven more by making the transition to green energy or curbing unfair treatment of workers. Or if it’s in a field or geography where white males historically have been dominant, and continue to be, so women aren’t part of the workforce.