This paper studies the economic forces which shape the diversity of an organization over time. We introduce a direct connection between a worker’s attributes (such as gender or cultural background) and her productivity in a given firm. Specifically, we consider the training and promotion process of a single firm in a world of people of two generic “types,” where people also vary in their talent (independent of type). Know-how is transferred from managers to new employees via mentoring, which is more effective when managers are mentoring someone of the same type. Then the firm considers a worker’s type as well as her productivity in each promotion decision, because the diversity of current management affects the quality of the pool of subsequent management candidates. We find that firms will optimally bias promotion decisions by type, and we analyze the forces which lead this bias to favor or oppose diversity in management. Finally, we discuss how bias and other factors affect the dynamics of diversity.