DIVERSITY, SOCIAL INCLUSION AND HUMAN CAPITAL DEVELOPMENT AS FUNDAMENTALS OF FINANCIAL PERFORMANCE AND RISK MITIGATION

The objective of the research undertaken in this paper is to highlight the importance of gender and cultural diversity, social inclusion and both personal and professional development of the employees, in order to mitigate the risks faced by companies, such as to improve the profitability and, correspondingly, to increase their financial performance. The research methodology is based on two modern analysis procedures, namely: multifactorial econometric models, processed by robust regression with Huber and biweight iterations, alongside with structural equation models, configured to highlight global influences in a pre-settled frame of interdependencies among variables. The analysis is performed for a number of 1722 companies with the headquarters in Europe, using data extracted from the Thomson Reuters Eikon (2020) database. The results obtained highlight significant direct influences, both favorable and unfavorable, on the financial performance of European companies, generated by incorporating the fundamental elements and processes of human capital management, diversity and inclusion. At the same time, the empirical analysis reveals that there are risks related to the sustainability of the financial performance of the European companies, whose mitigation requires the adoption of complex strategies to reconsider the efforts of inclusion, but also of those dedicated to reduce the controversies regarding the diversity of personnel, wages, promotion and working conditions.


Introduction
The importance of including the Environmental, Social and Governance dimensions (ESG) for measuring, monitoring and controlling the risk of their business has received a recognition from managers in order to design long-term investment strategies (Thomson Reuters, 2017). Diversity and inclusion (D&I) at the workplace have become distinct components within the ESG dimensions, within numerous studies and methodologies developed in the literature, mostly by focusing on their measurement (Thomson Reuters, 2017), but also on illustrating their implications on the financial performance and, correspondingly, on the risks associated with specific activities of organizations (Choi and Rainey, 2010;Sabharwal, 2014).
A deep examination of the implications of diversity and inclusion on the financial performance and risk of organizations has led to the deployment of strategies, such as: offering alternative working programs for employees, namely flexible programs, mentoring activities and "telework" (Sabharwal, 2014, p. 202). The diversity (gender and cultural) and inclusion at the workplace have led to high performances for managers, through the competitive advantage that they have created and exploited, namely, the enhancement of their skills and job satisfaction (Sabharwal, 2014;Cho, et al., 2017). However, there are studies that, on the contrary, acknowledge that diversity may lead to the reduction of financial performance through the increasing risk associated with the major differences between distinct categories of employees or management, due to their conflicting ideas (Choi and Rainey, 2010). As such, there is a tendency for those categories of vulnerable persons (with disabilities or incurable diseases, women, ethnic minorities, different sexual orientation) to be excluded from the decision-making and/or implementation process.
Based on these controversial findings in the scientific literature, the main objective of this paper is to assess the impact of the diversity and inclusion dimensions, supplemented by other economic indicators, on the financial performance sustainability of the companies and their risk management, in order to adopt specific strategic measures. The analysis was undertaken on companies from Europe, using data extracted from the Thomson Reuters Eikon (2020) database for 1722 companies. The research methodology consisted of applying two techniques/procedures, namely, multifactorial econometric models (to measure the direct impact of the D&I pillars on financial performance and their associated risks), and, correspondingly, the structural equation models (SEM), in order to capture the global influences and interdependencies among selected variables.
The paper is structured as follows. After a brief introduction, there are briefly presented the corresponding terminology of the analyzed dimensions and, respectively, the literature review on the implications of the ESG dimensions related to diversity and inclusion on the financial performance of organizations and associated risks. The data are afterwards introduced, the sample extracted from the Thomson Reuters Eikon database, and the indicators used in the empirical analysis, together with the research methodology, based on two modern econometric procedures (multifactorial models, processed by robust regression, and SEM models, estimated using the maximum likelihood method). It follows further a brief presentation of the results obtained for each econometric procedure, associated with each research hypothesis, accompanied by discussions. The conclusions and a series of additional information are included in the Annexes, encompassed at the end of the paper.

The specific terminology of the analyzed dimensions
In order to quantify the risks associated with the sustainability of the companies' performance, which could occur due to the social, economic and environmental dimensions, Thomson Reuters (2017) has entailed the assessment of the corporate social responsibility (CSR), analyzed separately on each of its three dimensions, namely Environmental, Social and Governance (ESG pillars). Among them, the dimensions of diversity and inclusion in the workplace (D&I) include four components (Thomson Reuters, 2017): the gender and cultural diversity of both management (board), and employees; the inclusion at the workplace of particular categories of persons (such as, persons with disabilities or those affected by incurable diseases), the implementation of flexible working programs and healthcare services; professional development of employees, by providing training services, skills training and assessing their satisfaction; the controversies follow-up within the companies, regarding the three previous components.
In order to measure the financial performance of organizations, acknowledged as value creators, the literature outlines a number of indicators, such as (Pirtea, et al., 2014;Galant and Cadez, 2017): Return On Assets (ROA); Return On Equity (ROE); Earnings Per Share (EPS); profit under its multiple facets, economic or accounting profit, Earnings Before Interests and Taxes (EBIT) or Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA); labor productivity; profit rate.

Implications of the D&I dimensions on the financial performance of organizations and associated risks
The specialists' investigations of the diversity and inclusion implications on the financial performance of organizations was undertaken, in the most part, only for the diversity component or, in some cases, together with the inclusion at the workplace, D&I. The favorable influence of diversity on the organizations' performance has emerged from the studies of many specialists (Richard, et al., 2004;Sacco and Schmitt, 2005;Pitts, 2009;Choi and Rainey, 2010;Müller, et al., 2014;Cho, et al., 2017). Thus, the diversity of employees and managers, analyzed from the perspective of "diversity in gender, race/ethnicity, education, and sexual orientation", has allowed the illustration a significant favorable impact on the organizations' performance in the United States of America (USA), due to management diversity, respectively of its interest and ability to apply long-term strategies (Cho, et al., 2017). The favorable relationship between diversity and the organization performance is disclosed by the fact that, through the diversity of the personnel, the company benefits by competences and ideas, which generate varied solutions to solve problems (Choi and Rainey, 2010;Mamman, et al., 2012;Müller, et al., 2014). For appraisal the relationship between diversity (appreciated by ethnicity and gender) and organizations performance (valued by ROE and productivity), Richard, et al. (2004) deemed two scenarios: one for the degree of innovation of the organizations, and the other for the degree of risk taking. The results showed the following: the more innovative the company and the greater the racial diversity, the productivity of the organization increases, and vice versa; the more the willingness of the company to take risks and the greater the diversity of gender, the curve reflecting the dynamics of productivity is U-reversed shaped, and vice versa.
On the other hand, the relationship between diversity and the organization performance may be unfavorable, determined by the conflicts that can arise between the created groups, but also within them (Ely, 2004;Mamman, et al., 2012). By including only the controversy component within the ESG dimensions, Rodríguez-Fernández, et al. (2019) highlighted the existence of a favorable influence on the financial performance (measured by ROA and ROE) of tourism companies (data extracted from the Thomson Reuters database in 2017).
Studying the implications for different types/groups that compile the diversity of the organization's staff (racial diversity, age and gender), Choi and Rainey (2010) highlighted their positive influences on the organizations performance, only when their management administrates them properly. When employees are feeling important through their perception on the interest given by the management of the organization in their needs, "diversity can be a source of growth, learning, and intuition, thus enhancing organizational performance" (Choi and Rainey, 2010, p.116). Assuming that diversity and the ensuring of an inclusive environment for particular groups of employees are a whole, these cannot be treated separately and might lead to the increase of public companies' performance only when the management diversity is considered (Sabharwal, 2014). For the inclusion of individuals to be considered as a competitive advantage for organizations, they have to be committed in this direction, proving to have the ability to take proactive decisions, and to apply a fair treatment to all employees. A key strategy in sustainability of the increasing financial performance and risk mitigation is when "diversity management is coupled with support from leaders and when employees are empowered in making decisions" (Sabharwal, 2014, p. 212).
Making a review of the main results obtained in the literature in the field (a number of 96 investigated articles, of which 30 articles met the processing criteria), Mor Barak et al. (2016) showed that, when diversity is apart analyzed, both positive and negative influences on the organizations' results might be obtained, while the efforts orientation of a heterogeneous/diverse management for the inclusion of particular employees' categories might lead to positive organization' outputs. These results support the approach specific to the "social identity theory", developed by Tajfel (1982), who considers that each person refers to and adheres to the group/persons with which he/she has identified similar characteristics. Thus, people from certain groups respond to the directions/strategies drawn up by the managers from the same category with them, leading to the tasks performance, with a higher efficiency as in the case of the ordinary groups. The limitations of the research undertaken by specialists consist in either including only one D&I dimension (Ely, 2004;Choi and Rainey, 2010;Mamman, et al., 2012;Müller, et al., 2014;Cho, et al., 2017;Rodríguez-Fernández, et al., 2019), either in the shortcomings of the research method, by the subjectivism of the answers received in interviews (Cho, et al., 2017) or questionnaires (Choi and Rainey, 2010), with a low response rate (Sabharwal, 2014) or possible measurement errors (Galant and Cadez, 2017).
Within the relevant literature, the following variables/dimensions were considered to assess the financial performance of organizations: employees' perception of the organization's financial performance, measured by applying a scale based on the answers received to the questionnaires (Choi and Rainey, 2010;Sabharwal, 2014); a performance score, assessed by new sales, customer satisfaction and sales productivity (Ely, 2004); labor productivity and Return On Equity (ROE) (Richard, et al., 2004;Rodríguez-Fernández, et al., 2019); turnover and profit rate (Sacco and Schmitt, 2005); Return On Assets (ROA) (Müller, et al., 2014;Rodríguez-Fernández, et al., 2019).

Data, panel/sample, indicators
Specific data used in the empirical analysis were extracted from the Thomson Reuters Eikon (2020) database, targeting CSR indicators, environmental, social and governance dimensions (TR ESG), Gender Diversity section, report on Diversity and Inclusion (D&I). Thomson Reuters Eikon (2020) ESG universe database covers over 6,000 companies. The sample examined in our research comprises companies with the headquarters in Europe, with data for the last fiscal year (FY0) and updated for the next fiscal year (FY1), including ESG period reporting last updates from February 2020 (base year, FYO).
The initial sample was configured according to the availability of information in the Thomson Reuters Eikon database, on the criteria of the organization's headquarters in Europe, following the selection resulting in a number of 1,744 companies with data available for analysis, distributed geographically as follows: the Netherlands (68) The indicators selected for the empirical analysis cover the following categories:  Diversity and Inclusion indicators, which are scores (with values ranging from 0 to 100) attributed to the following dimensions: gender diversity (ESG_Diversity); inclusion (ESG_Inclusion); human capital development (ESG_People_D); respectively news and controversies (ESG_Controv); another important indicator calculated by Thomson Reuters in this respect is ESG_Rep_Scope, which entails the reporting purpose and degree of the elements related to gender diversity, inclusion and professional development of employees.
The dimensions of diversity and inclusion indicators, as core elements of our research, comprise, for each component, the following coordinates: the diversity pillar (ESG_Diversity), which encompasses board gender diversity (%), board member cultural diversity (%), women employees (%), new women employees (%), women executive employees (%), women managers (%), diversity process (expressed by Yes/No, Y/N), diversity objectives (True/False, T/N); the inclusion pillar (ESG_Inclusion), which comprises flexible working hours (Yes/No, Y/N), day care services, nursery and kindergarten (Yes/No, Y/N), employees with disabilities (Yes/No, Y/N), the human rights campaign (HRC) for corporate equality index (numeric), HIV/AIDS (Yes/No, Y/N); people capital development pillar (ESG_People_D), which appends internal promotion (Yes/No, Y/N), average training hours (numeric), management training (Yes/No, Y/N), career development processes (Yes/No, Y/N), employee satisfaction (%), skills training of employees (Yes/No, Y/N), training costs per employee (USD); and news and controversies pillar (ESG_Controv), which includes diversity and opportunity controversies (numeric), along with wages or working conditions controversies (numeric).
Descriptive statistics of the variables configured for the 1,722 companies with the headquarters in Europe, deployed in empirical analysis, are synthesized in table no. 1. Taking a first look at the data presented in table no. 1, we could notice that, as regards the diversity and inclusion dimensions (ESG), the central tendency indicator (mean) accounts values with ranges very close to the maximum value (100) only for the news and controversies component (ESG_Controv), while, for the other pillars, the mean is closer to the minimum values, particularly for the inclusion component (ESG_Inclusion). This situation reveals that there is a keen need to redesign strategies and policies dedicated to increase the diversity in organizations, with decision-makers giving importance to the inclusion of people in particular situations, as well as human capital development and reducing controversy (related to staff diversity, salaries, working conditions, promotion and harassment).
The variables considered as proxies for human capital, economic dimensions and financial performance have been subject to the logarithm procedure in order to cope with the nonstationarity issue, but also to provide common groundings for the analysis and interpretation of the results (elasticity coefficients), by acknowledging the differentials in measurement units for these indicators.

Hypotheses and research methods
To achieve the research objective and in line with other similar studies identified within the literature review, we target the following work hypotheses (H) to be tested:  H1: There are significant direct influences induced through the incorporation of the fundamental diversity and inclusion (D&I) elements and processes by the European companies on the financial risks and financial performance, both separately (H 1.0 ), as well as jointly with the human capital development efforts (H 1.1 );  H2: There are significant global influences (direct, indirect, total) of D&I pillars on the financial performance of European companies and associated risks, together with the human capital development indicators and other economic dimensions.
The research methodology consists in applying two econometric procedures, namely: (i) multifactorial models of robust regression (with Huber and biweight iterations), patterned to measure the direct impact of D&I pillars on the financial performance and associated risks, together with several human capital development indicators and other economic dimensions; and (ii) structural equation models (SEM), designed to encompass the global influences (total, direct and indirect) between all considered variables on the financial performance of European companies and associated risks.
The general configuration of the multifactorial models was deployed to analyze, on the one hand, the direct implications of considered ESG pillars on the financial performance (equation 1), and, on the other hand, of the efforts made by the European companies for human capital development, jointly with other economic dimensions and the ESG components (equation 2). The models configured to capture the effects induced through the incorporation of fundamental aspects and processes of D&I by the European companies, along with the professional development at the workplace, on their financial risks and financial performance, are presented in equations 1 and 2. (2) where:  and parameters that need to be estimated; ε stochastic element; i  and t variables accounting for spatial and time effects.
SEM models are designed according to the equation system 3. ε error term (residuals).

Figure no. 1. General pattern of SEM-1 designed to measure the interdependencies between the D&I coordinates and the financial performance of organizations
Source: authors' conception in Stata 16.

Figure no. 2. General pattern of SEM-2 designed to measure the interdependencies between the D&I coordinates and the financial performance of organizations
Source: authors' conception in Stata 16.
The general arrangement of the SEM models follows two scenarios: (1) global implications of D&I pillars as comprised by the ESG report, along with other representative human capital indicators on the financial performance (SEM-1), on one hand (figure no. 1); respectively (2) global influences of D&I coordinates as embedded in ESG, together with

Diversity, Social Inclusion and Human Capital Development as Fundamentals of Financial Performance and Risk Mitigation
specific people development and other economic indicators on the financial performance (SEM-2), on the other hand (figure no. 2).

Multifactorial models
The results of the multifactorial models (table no. 2) highlight that all considered dimensions of the financial performance of European companies are favorably influenced by board and employees' (gender and cultural) diversity (ESG_Diversity).
The human capital development efforts (

The results show that there are significant direct influences on the financial performance and financial risks of European companies induced by the incorporation of fundamental elements and processes of diversity and inclusion D&I (H 1.0 ), both favorable and disadvantageous.
These results imply tailored strategies targeted to overcome the associated risks.
When we have considered also the efforts made by the European companies for human capital development, along with the fundamental D&I processes (table no. 3), we could observe that the latter lose part of the statistical significance. Favorable influences are accounted in terms of management and employees' diversity (ESG_Diversity), and also as regards the inclusion efforts of particular persons (ESG_Inclusion), but only for EBIT (positive and statistically significant estimated coefficient).
Unfavorable influences are registered on ROA, as regards the inclusion dimension (negative and statistically significant coefficient). ROE is positively and statistically significant influenced by the employment creation in prior fiscal year (Empl_create). Besides the employee diversity and the inclusion efforts, EBIT (model 3) and EBITDA (model 4), are positively influenced (statistically significant coefficients) by the number of employees (No_empl_CSR) and the employment satisfaction (Empl_satisf), but they are affected by the turnover of employees (Turnov_empl) (negative and statistically significant coefficient). Therefore, there are significant direct effects on the financial performance and financial risks of European companies induced by the incorporation of fundamental elements and processes of diversity and inclusion D&I, jointly with the human capital development efforts (H 1.1 ). The results obtained after testing the H 1 hypothesis (distinctively for H 1.0 and H 1.1 ) reveal that there are risks associated with the sustainability of the financial performance of European companies induced by the inclusion efforts (flexible working programs, employees with disabilities, HIV/AIDS, HRC index) (H 1.0 and H 1.1 ), by the controversies related to employees' diversity, wages, working conditions (H 1.0 ), as well as by the turnover of employees (H 1.1 ). All these issues show the keen need to reconfigure new tailored strategies.

Models based on structural equations (SEM)
In order to establish to what extent there are global interlinkages between the D&I pillars on the financial performance and their associated risks of the European companies, jointly with the human capital development indicators and other economic dimensions (H 2 hypothesis), we have assessed two basic scenarios associated with it (SEM-1, figure no. 3, and SEM-2, figure no. 4).    Barak, et al. (2016). Regarding ROE, this is favorably influenced by the gender and cultural diversity component (ESG_Diversity), for both scenarios (figures no. 3 and 4) (p<0.05, respectively p<0.001) (opposite results to those obtained by Ely (2004), Mamman, et al. (2012 and Choi and Rainey (2010), but also by the news and controversy component, ESG_Controv) (positive coefficient and statistically significant, 0.013, p<0.001, respectively 0.012, p<0.01).
Also, salary differences (  We noticed that the employee satisfaction (Empl_satisf) strongly influences EBIT and EBITDA (positive coefficients, 2.37, respectively 2.202, p<0.001) (figure no. 4), but also  . 3 and 4). Also, net employment creation (Empl_create) and turnover of employees (Turnov_empl) negatively and statistically significant influence (p<0.001) EBIT and EBITDA (figure no. 4). There are significant global (direct, indirect, total) influences of the D&I dimensions on the financial performance and their risks, accompanied by indicators of human capital development and other economic dimensions (Hypothesis H 2 ), in both considered scenarios (SEM-1, SEM-2), which is why specific strategies associated with them are recommended. In terms of global interdependencies, for the analyzed companies, there are risks related to the sustainability of the financial performance of the companies, determined by: the inclusion efforts made through flexible programs, employees with disabilities, with HIV/AIDS, HRC index (for ROA and ROE); the controversies regarding the diversity of personnel, salaries and working conditions, but also by the net employment creation and turnover of employees, for the absolute values of financial performance (for EBIT and EBITDA); as well as by the number of employees in the CSR report (for ROA).

Conclusions
We consider that, through the main objective of our research and the importance assigned to the CSR implications on the sustainability of the companies' activity, their profitability and risks mitigation, this study upholds the debates development in the literature, especially through the advanced results in the field and new empirical evidence enhanced from the research conducted at the level of European companies. The research endeavour reiterates, through an original, innovative approach, the decisive importance of human capital for the company, respectively the diversity, professional development and inclusion of employees to reduce risks and improve the financial performance of companies. The added value generated by the employees of the companies with headquarters in Europe (employee turnover), salary incentives, flexible work programs, employee satisfaction, gender and cultural diversity are key factors, highlighted by this research, with a significant positive impact on the financial performance of companies.
The multifactorial models based on the robust regression have led to the assessment of the hypothesis that there are significant direct influences, both favorable and unfavorable, on the financial performance and their associated risks, engendered by the inclusion by the European companies of the fundamental elements and processes of D&I (H 1.0 ). However, by including in the same time of the direct influences associated with human capital development efforts, the influences have not been entirely verified (H 1.1 ). The SEM models, aimed at assessing the global (direct, indirect, total) interdependencies between the efforts undertaken by the European companies to include the D&I dimensions, associated with indicators of human capital development and other economic dimensions, and the financial performance, in order to identify the associated risks, have attested the existence of these keen interdependencies.
The results of the two econometric procedures reveal that there are risks related to the sustainability of the financial performance of the European companies that need strategies and policies aimed primarily at: rethink the inclusion efforts through flexible programs, diversifying the inclusion of employees with disabilities or affected by HIV/AIDS, by redesigning the jobs for their skills/competences, but also appropriate insertions for equal human rights (HRC equality index), engendered both in their direct influence on financial performance (hypothesis H 1 ) and cumulatively, as a whole (hypothesis H 2 ), but only for the financial performance in relative size (ROA and ROE); alleviation and analysis of controversies regarding the diversity of staff, salaries and working conditions, but also those of adapting employment creation and, implicitly, the contribution of the turnover of employees to the financial performance sustainability (with implications on performance in absolute values (EBIT and EBITDA), both in the case of direct links (H 1 ) and global connections (H 2 )); a special attention must also be paid to correlating the number of employees in the CSR reports, due to the unfavorable influences on the financial performance associated with the assets (ROA) (hypothesis H 2 ).
We consider that the empirical evidence revealed by our study contributes to the decisionmaking process regarding the investments made by companies. Emphasis is placed on the importance of the social dimension (with an accent on the diversity and inclusion component) and, respectively, on corporate governance in improving the financial performance of European-based companies. Thus, integrating investment on the ESG component, dedicated to diversity and inclusion, into companies' long-term strategy becomes essential to ensure a sound financial performance. Other policy implications, which can be taken into account by decision-makers to increase the diversity and inclusion of the employees in companies, with positive spillover effects on the financial performance, include: active recruitment of minorities to apply for job vacancies; mandatory/optional professional training sessions/programs for employees; mentoring programs developed especially for employees that are under-represented within the company, for career guidance and promotion; clear identification of barriers that diminish the manifestation of diversity and inclusion of employees, through coherent policies and diversity offices/committees with a special configuration within the organization in this regard, and concerted efforts to remove them.
However, our research has its own limitations, mainly residing on the missing data in CSR specific reports, but also to the degree of relevance of binary data. For future studies and research, we aim to address, separately, the structural influences of each dimension of CSR, environmental, social and governance, on the financial performance, accompanied by other economic and social factors, but also other dimensions of financial performance of companies.