The business case for diversity just got more compelling

There is a clear link between diversity and earnings, new research shows.

Corporations that embrace greater workplace diversity are far more likely to enjoy greater financial rewards than those who don’t, new research has concluded.

The analysis, Delivering through diversity, from McKinsey & Company has re-asserted the global relevance of the link between diversity – a greater proportion of women and a more mixed ethnic and cultural composition in the leadership of large companies – and financial outperformance.

It found that the awareness of the business case for inclusion and diversity is firmly on the rise. In addition, while social justice can often be the main trigger encouraging this trend, firms have increasingly begun to regard inclusion and diversity as a source of competitive advantage and as a key growth driver.

However McKinsey’s study also found that progress on initiatives has been slow and that many corporations remain uncertain about how they can best use diversity and inclusion, to bolster growth and value-creation targets.

Gender

The report follows the consultancy’s 2015 analysis, Why diversity matters and draws on information from more than 1,000 companies covering 12 countries, measuring both profitability and longer-term value creation.

The 2018 analysis found a positive correlation between gender diversity on executive teams and both its measures of financial performance. The previous study found that businesses in the top quartile for gender diversity on their executive teams were “15% more likely to experience above-average profitability than those in the fourth quartile”. But, encouragingly, the latest report concluded that this total has since swelled.

It says: “Top-quartile companies on executive-level gender diversity worldwide had a 21% likelihood of outperforming their fourth-quartile industry peers on EBIT margin, and they also had a 27% likelihood of outperforming fourth-quartile peers on longer-term value creation, as measured using an economic-profit (EP) margin.”

Having gender diversity on executive teams consistently highlighted a positive correlation with higher profitability across geographies, “underpinning the role that executive teams — where the bulk of strategic and operational decisions are made — play in the financial performance of a company”.

McKinsey adds: “Executive teams of outperforming companies have more women in line roles versus staff roles. We tested the hypothesis that having more women executives in line roles (typically revenue generating) is more closely correlated with financial outperformance,” it added.

It said: “In our data set, this holds true even for top-quartile gender-diverse companies experiencing above-average financial performance. Yet these top-quartile companies also have a greater proportion of women in line roles than do their fourth-quartile peers: 10% versus 1% of total executives, respectively.”

But the group added that, as demonstrated by previous research such as its Women in the Workplace 2017 report, women remain underrepresented in line roles.

Ethnic and cultural diversity

McKinsey examined racial and cultural diversity across six nations – including Brazil, Singapore, Mexico, South Africa, the UK and the US. It’s analysis concluded that companies with the most ethnically diverse executive teams are 33% more likely to outperform their peers on profitability. Equally, companies in the fourth quartile on both gender and ethnic diversity are more likely to underperform their industry peers on profitability.

The report asserts that price for not embracing diversity on both measures – gender and ethnic – persists. It found that companies in the fourth quartile on both counts are more likely to underperform their industry peers on profitability.

Ethnic and cultural diversity on executive teams is also low says McKinsey. Looking at the UK and US to analyse ethnically and culturally diverse representation it found that black Americans comprised 10% of US graduates but hold just 4% of senior-executive positions. Elsewhere Hispanics and Latinos comprise 8% and 4% respectively in terms of graduates versus executives, and for Asian Americans, the tally is 7% of graduates compared to 5% of executives. In the UK, the gap is even wider where 22% of university students identify as black and minority ethnic, but only 8% of executives in McKinsey’s sample do.

You can read the full report here.

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