International Journal of Association for Management Systems Vol. 12 No. 1 December 2020, pp. 87-91

Fact Findings on the Synergy Effect between Diversity Management and Japanese Corporate Profitability

Motohiro HAGIWARAa*, Hiroshi YAMASHITAa, Yasutami NOJIRIa

aSchool of Commerce, University, 1-1 Kandasurugadai Chiyoda-ku, Tokyo, 101-0062, Japan

Abstract

The increasing labor shortages in Japan and the country’s need to enhance its international competitiveness, necessitate an increase in the participation of diverse human resources, including women, in the labor force. Therefore, this study examines three research issues: the interaction between diversity management and corporate performance, the qualitative and quantitative effects of the promotion of diversity, and the negative effects of promoting diversity on corporate performance. The study aims to confirm the bidirectional effects between diversity and corporate performance, and identify the possibilities resulting from these interactions. Using Toyo Keizai’s CSR database from FY 2010 to FY 2017, we conduct ordinary least squares estimations and confirm that regardless of job rank, diversity encourages good corporate performance, particularly in companies that face a labor shortage or operate in industries where diversity is low. Furthermore, the effects of a high return on assets (ROA) are stronger in companies with a lower duration of overtime, and those with a high take-up rate of paid leave. Our findings have implications for policy change, and provide suggestions to improve the quality of management.

Keywords: Diversity management, Corporate performance, Promoting diversity, Ratio of female employees

1. Introduction However, the promotion of diversity is influenced by several factors. The extent to which diversity is promoted This section explains social background of this study to varies vastly depending on the industry and the company. manifest usefulness and timeliness of this study. Diversity Thus, success of the promotion of diversity is not easy to management of human resources, a strategic process that achieve, even with clear policy and management support. Japanese companies have been promoting recently, in part As most recent related studies, positive or negative effects due to policy incentives, is expected to bring about two by diversity management on corporate performance are outcomes, referred to in this study as the “quantitative verified within limited sector by [1][2][3][4][5] and [6]. effect” and “qualitative effect.” Firstly, with regard to the Especially, increasing labor shortages in Japan make it quantitative effect, the combination of low birth rate and difficult to realize the diversity of sources of excellent aging is causing a definite and rapid shrinkage in the labor labor force and imposes conditions on good corporate force. Therefore, encouraging diverse human resources, performance through diversity management. The findings including Japanese women, whose labor force of these conditions in Japanese companies are one of main participation rate is the lowest among OECD member purposes and uniqueness of this study. countries, to participate in the labor market is the only Therefore, this study proposes that it is impossible to solution to achieve sustainable economic growth. assign which is the cause and which is the effect between Although Japan’s female labor force participation rate has diversity management and corporate performance, and improved recently, in part due to policy incentives, it that there is the interaction between the two. Furthermore, remains lower than the international standard. Secondly, the study attempts to verify this interaction in the period with reference to the qualitative effect, the international following the collapse of Lehman Brothers until very competitiveness of Japanese companies is clearly recently, when the economy has been relatively stable. declining due to emerging economies such as Based on this, the study aims to provide suggestions that catching up rapidly. Therefore, Japanese companies need could be beneficial for management. to achieve greater value addition through fundamental This study focuses on gender diversity. Diversity technological innovation and new business developments. encompasses various aspects including nationality The positive interaction between diverse new human (ethnicity), disability, job tenure, background, and the resources and existing employees, many of whom are form of ; however, adequate data pertaining Japanese men, is expected to improve corporate only to “women” and “nationality” have been procured performance and enable sustainable economic growth in and quantitatively analyzed in a meaningful manner. Japan. Furthermore, the studies on the effect of the promotion of diversity with reference to nationality have been *Corresponding author: [email protected]

Received: August 25,2020 Accepted: November 6, 2020 - 87 - Motohiro HAGIWARA, Hiroshi YAMASHITA, Yasutami NOJIRI inconclusive, because conventionally, studies have been In addition to confirming the contribution of diversity based on broad classifications such as nationality or to corporate performance, this study further aims to white/black, and there is a need for detailed classifications identify whether this is a quantitative effect or qualitative such as African/British. While this study acknowledges effect. This is because determining whether diversity the importance of the diversity of nationality/ethnicity in among newly recruited personnel is important leads to a practice and as a subject of academic research, since more precise evaluation of diversity management. detailed data are difficult to procure, the diversity of Furthermore, this study stems in response to cynicism nationality/ethnicity has been set as a future research over the validity of recent policies that promote diversity agenda. As another stream of studies on diversity management uniformly. Discussing a case in which management, [7] pioneered many studies on the diversity uniform, policy-driven promotion led to undesirable within a management board. However, this is deemed outcomes, [11] has compared companies that were inadequate in the context of the current study, which aims affected by the gender quota with those that were not, to to examine the interaction between diversity management conclude that the mandatory introduction of a gender and corporate performance measured in terms of quota does not necessarily contribute to an increase in a profitability, across job grades, including employees company’s revenue or value, and that it is important to below the level of department head. This is based on the remove the obstacles carefully so that the proportion of assumption that while the promotion of diversity within a female executives may increase. Therefore, an attempt has management board is relatively easy to achieve through been made in the current study to examine historical data internal means, the promotion of diversity at lower grades for facts suggesting the possibility of negative effects of requires the recruitment of external human resources, and diversity on profitability. since it is influenced by factors such as performance, it is not easy to achieve. Based on recent panel data of listed companies in Japan 2. Research Methods since the 2000s, [8] states that performance may be 2.1 Data and the Analysis Procedures enhanced in companies where the following conditions are Firstly, this study investigates the bidirectional causal met: An increase in the proportion of women in regular relationship between diversity management and corporate employment to 30–40 percent; an increase in the financial performance. Thereafter, it examines this causal proportion of women in their thirties, in regular relationship in view of historical data. The following data employment; and multiple policies to promote work-life have been used: balance. Furthermore, saving on personnel cost has been ▪ Analysis period: FY (Fiscal Year) 2010 to FY 2017, the identified as a contributing factor, a tendency that was also period following the collapse of Lehman Brothers until observed in the manufacturing industry by [9]. A more very recently detailed analysis by [10] has concluded that the proportion ▪ Diversity scale: Toyo Keizai’s CSR database from the of a company’s employees who are female university end of FY 2010 to the end of FY 2017 has been used, and graduates is correlated with its profitability if the company the following variables have been set: Three variables has over 300 workers in regular employment, promotes linked to the proportion of women among all employees, work-life balance, and has a higher proportion of women middle management, and executives above the level of in middle management. This suggests that the promotion department head; five variables linked to the company size of diversity contributes to profitability only under limited and work environment: Absolute diversity level, the and diverse conditions. number of employees, staff turnover rate, monthly average Previous studies focused on examining the effects of of overtime, and the take-up rate of paid leave. Absolute diversity on corporate performance. However, no study diversity level is percentage of women in each job rank. has been conducted to examine the challenges in ▪ The companies’ profitability scale: The ROA data from promoting diversity or in the employment of capable FY 2010 to FY 2017 has been sourced from Financial female workers, to the authors’ knowledge, at least in Quest; in order to exclude small companies, only listed Japan. Consequently, one of the aims of this study is to general companies with 100 or more employees have been confirm the bidirectional effects between diversity and included. The reason why his study uses ROA is that, corporate performance, and identify the possibilities unlike ROE, ROA is not effected by capital structure. resulting from these interactions. This is based on the ▪ Adjustment for business effect: For variables on which understanding that the promotion of diversity and its different businesses were expected to indicate different contribution to corporate performance are difficult to effects, the industry average in the corresponding fiscal achieve in the labor market of Japan, and therefore, certain year has been calculated, based on the 33 industrial sectors conditions are necessary. More specifically, this study of the . With regard to proportions investigates the possibilities of positive interaction such as the ROA, the industry average in the between the promotion of diversity and the improvement corresponding fiscal year has been subtracted from each of corporate performance. When such interaction takes company’s figure; with regard to quantities such as the place, it can be said that the promotion of diversity is not number of employees, each company’s figure has been a temporary phenomenon, but a management policy that divided by the industry average. When calculating the contributes to the company’s sustainability and the industry average, all companies that had data pertaining to enhancement of corporate value. each relevant FY, were included.

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The effects of promotion of diversity on corporate performance are not necessarily reflected within a year. In 2.3 Effects of Diversity on Corporate order to take the speed of adjustment into account, as Performance shown below, the model included a lag item as an Using the following equation, OLS estimations were explanatory variable. If the target ROA was ROA*t, the derived to determine the proportion of women by job rank actual ROA was ROAt, and the adjustment speed was δ, (categorized into employees, middle management, and then: executives above the level of department head): ROAt －ROAt-1 ＝δ(ROA*t －ROAt-1)＝－δROAt-1 ＋ ΔR_ROAt+1 ＝ b0 ＋b1R_ROAt ＋b2R_DIVt ＋b3DIVt ＋ δROA* (1)t b4EMPt＋b5R_RESt＋b6R_AOWt＋b7R_PVCt＋(b8DIVt ROA*t is unknown, but can be assumed to be determined ＋ ＋ ＋ ＋ ） by other variables, we needed to test the following: b9R_EMPt b10R_RESt b11R_AOWt b12R_PVCt ×R_DIVt (4) ROAt － ROAt-1 ＝ α0 － δROAt-1 ＋ (diversity standard t = from FY 2010 to FY 2016 during FYt)＋(variables expressing the work environment ΔR_ROAt+1 represents the change in diversity from FYt at the end of FYt). (2) to FYt+1 (as previously, “R” indicates that the variable has This expression depicts the idea of models in this study. been adjusted by the industry average in the corresponding The effects of corporate performance on diversity have fiscal year). By including R_DIVt, which represents the been examined similarly. In this study, these effects have diversity standard in the previous fiscal year, as a lag item been calculated using the OLS (Ordinary Least Squares) on the right side, we investigate the effects of the delay in model. In this case, with an infinite size of sample, the change in ΔR_ROAt+1. Here, b1 denotes the obtaining estimates of the adjustment speed δ would have adjustment speed. The main explanatory variable in the been extremely time-consuming. Alternatively, applying model, R_DIVt, represents the diversity standard adjusted System GMM ([12] and [13]), unbiased estimates for for the business time in FYt. As in the model in the adjustment speed and other explanatory variables ([14]) previous section, the adjustment variables that were could be obtained. However, this has been set as a future expected to reflect the effects of a change in diversity on research agenda. the ROA have been identified. DIVt and EMPt represent

the company’s characteristics; R_RESt, R_AOWt, and 2.2 Effects of Corporate Performance on R_PVCt adjust the insufficiency of labor supply with Diversity regard to staff turnover rates in FYt adjusted for the Using the following equation, OLS estimations were business time, the average duration of overtime, and the derived to determine the proportion of women by job rank take-up rate of paid leave, respectively. Furthermore, the (categorized into all employees, middle management, and crossover effect was examined by the cross items between executives above the level of department head): the explanatory variable and adjustment variables. The ΔR_DIVt+1 ＝ α0 ＋ α1R_DIVt ＋ α2R_ROAt ＋ α3DIVt ＋ significance of coefficient b2 indicates the direct effects of α4EMPt ＋ α5R_RESt ＋ α6R_AOWt ＋ α7R_PVCt ＋ diversity on corporate performance (qualitative effect), adjusted for the insufficiency of labor supply, while the (α8DIVt ＋ α9R_EMPt ＋ α10R_RESt ＋ α11R_AOWt ＋ significance of coefficients b , b , and b of the cross α R_PVCt）×R_ROAt (3) 10 11 12 12 items indicates the effects of insufficiency of labor supply t = from FY 2010 to FY 2016 on corporate performance (quantitative effect). “R_” indicates that the variable has been adjusted by the Variables used by models above are similar to those by industry average in the corresponding fiscal year. [1][2][3][4][5] and [6] as most recent related studies. ΔR_DIVt+1 represents the change in diversity from FYt to However, some variables are adjusted by the industry FYt+1. By including R_DIVt, which represents the average in the corresponding fiscal year in order to adjust diversity level in the previous fiscal year, as a lag item on both industry effect and effect by economic situation in the right side, we investigated the effects of the delay in each fiscal year. Most importantly, examination on the change in ΔR_DIVt+1. Here, a denotes the adjustment 1 crossover effect and bidirectional causal relationship speed. R_ROAt represents the ROA for FYt. As the main between management and performance can be asserted as explanatory variable in this model, R_ROAt indicates originality of this study. whether the corporate performance was good. Other adjustment variables that have been assumed to affect diversity include DIVt, which represents the absolute 3. Results diversity level in FYt and EMPt, and the number of Tables 1 and 2 display the results pertaining to Section employees in FYt, both of which adjust the factors that 2.2 and Section 2.3, respectively. This is followed by an affect an individual company’s characteristics, except the enumeration of the confirmed facts. industry. They also include items that adjust the insufficiency of labor supply: R_RESt, representing staff turnover rates in FYt; R_AOWt, representing the average Table 1. Effects of Corporate Performance on Diversity duration of overtime; and R_PVCt, representing the take- (Coefficient) up rate of paid leave. Furthermore, the crossover effect was examined by the cross items between the explanatory variable and adjustment variables.

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Executives ④R_RESt 0.069 0.111 0.283 Middle above the ⑤R_AOWt 0.114 0.076 0.097 All Variables managemen level of ⑥R_PVCt 0.004 0.003 0.003 employees t and above department ①×② 1.695 0.000 0.001 head ①×③ 0.000 -0.000*** -0.000** α0 -0.008** -0.527*** -0.260** ①×④ -1.272 -0.006 -0.088 R_DIVt -0.218*** -0.280*** -0.337*** ①×⑤ -2.108*** -0.027* -0.036* ①R_ROAt 0.002* 0.065* 0.094*** ①×⑥ -0.006 0.000 0.000 ②DIVt 0.027** 0.066*** 0.069** adj-R2 0.070 0.071 0.071 ③EMPt 0.000 0.000** 0.000 N 2613 2595 2582 ④R_RESt 0.001 0.318 0.135 (*, **, ***: Significant at the 10, 5, and 1 percent levels, respectively) ⑤R_AOWt 0.000 0.069 0.014 ⑥R_PVCt 0.000 -0.004 0.003 A comparison between a1 and b1 has revealed that the ①×② -0.012*** -0.011*** -0.011*** adjustment speed was lesser in diversity than in corporate performance. The lower the job rank, the stronger was the ①×③ 0.000 0.000 0.000 effect of promotion of diversity on improvement in ①×④ 0.001 0.035 -0.107 corporate performance. A positive qualitative effect has been confirmed with regard to the proportion of women ①×⑤ 0.001* 0.014 -0.031 among all employees and in middle management. In ①×⑥ -0.000** 0.001 0.001 contrast, the significant results with regard to the cross adj-R2 0.193 0.190 0.216 items have not indicated that the promotion of diversity enhanced profit by solving the problem of labor shortage N 2493 2545 2511 i.e., the quantitative effect. The shorter the duration of (*, **, ***: Significant at the 10, 5, and 1 percent levels, overtime, the greater was the improvement in corporate respectively) performance, leading to a negative quantitative effect. Additionally, with regard to the proportion of women in The results reveal that regardless of job rank, good middle management and among executives above the level corporate performance encouraged diversity, and the of department head, it has been found that the fewer the effect was observed to be stronger in higher job grades. employees, the stronger was the effect of the promotion of Furthermore, it was found that regardless of job rank, the diversity on the improvement of corporate performance. historical level of diversity promoted diversity in the future. However, the effect of a high ROA leading to the promotion of diversity was seen to be stronger in industries 4. Discussion and Conclusions where the level of diversity was low. With regard to the In summary, this paper has examined three research proportion of female employees, the effects of a high ROA issues: the interaction between diversity management and were particularly strong in companies with a long duration corporate performance, the qualitative and quantitative of overtime, and those with a low take-up rate of paid leave. effects of the promotion of diversity, and the negative In other words, when good performance coincided with effects of the promotion of diversity on corporate labor shortage, the proportion of female employees performance. The key findings are discussed below in increased. order to provide suggestions to managers. Addressing the first research issue of the interaction Table 2. Effects of Diversity on Corporate Performance between diversity management and corporate performance, (Coefficient) an increase in the ratio of female employees to all Executives employees, compared to the industry average, leads to an Middle above the improvement in the ROA. All manageme Increasing the proportion of women in middle Variables level of employees nt and management, compared to the industry average, has an department effect of improving the ROA, particularly in companies above head with relatively fewer employees. With regard to the proportion of female executives b -0.128 -0.150 -0.188 0 above the level of department head, the interaction is R_ROAt -0.154*** -0.155*** -0.153*** similar to that of the proportion of women in middle ①R_DIVt 2.508* 0.040* 0.007 management, except that in this case, diversity contributes to profit only if the company is small. ② DIVt 0.218 0.026* 0.041 The low take-up rate of paid leave and long duration of ③EMPt 0.000 0.000 0.000* overtime have been identified as factors that can prevent

International Journal of Japan Association for Management Systems - 90 - Fact Findings on the Synergy Effect between Diversity Management and Japanese Corporate Profitability the emergence of a positive interaction between the We would like to thank Editage (www.editage.com) promotion of diversity and corporate performance. for English language editing. Therefore, it has been concluded that the implementation This work was supported by JSPS of policies that reduce work hours is an effective measure KAKENHI(C) Grant Number JP18K01810. to make the promotion of diversity sustainable. 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