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Diversity Matters

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McKinsey & Company

Vivian Hunt, Dennis Layton, Sara Prince

For several years McKinsey & Company has been developing research and initiatives on the topic of diversity in the workplace. The “Diversity Matters” research looks at the relationship between the level of diversity and company financial performance.

Our “Diversity Matters” research looked at the relationship between the level of diversity (defined as a greater share of women and a more mixed ethnic/racial composition in the leadership of large companies) and company financial performance (measured as average EBIT 2010–2013). The research is based on financial data and leadership demographics compiled for this purpose from hundreds of organisations and thousands of executives in the United Kingdom, Canada, Latin America, and the United States. The size of the dataset allows for results that are statistically significant and the analysis is the first that we are aware of that measures how much the relationship between diversity and performance is worth in terms of increased profitability.

The analysis found a statistically significant relationship between a more diverse leadership and better financial performance. The companies in the top quartile of gender diversity were 15 percent more likely to have financial returns that were above their national industry median. Companies in the top quartile of racial/ethnic diversity were 30 percent more likely to have financial returns above their national industry median. Companies in the bottom quartile for both gender and ethnicity/race were statistically less likely to achieve above-average financial returns than the average companies in the dataset (that is, they were not just not leading, they were lagging). The results varied by country and industry. Companies with 10 percent higher gender and ethnic/racial diversity on management teams and boards in the US, for instance, had EBIT that was 1.1 percent higher; in the UK, companies with the same diversity level had EBIT that was 5.8 percent higher. Moreover, the unequal performance across companies in the same industry and same country implies that diversity is a competitive differentiator that shifts market share towards more diverse companies.

Variations by country show that the bar for competitive differentiation continues to rise. For example, in the US there continues to be a linear relationship between ethnic/racial diversity and better financial performance. In fact, in the US, ethnic/racial diversity has a stronger impact on financial performance than gender diversity, with earlier pushes to increase women’s representation in the top levels of business having already yielded positive results. By contrast, in the UK, increased gender diversity on the executive team corresponded to the highest performance uplift in the global dataset. From an industry perspective, certain industries perform better on gender diversity and others on ethnic/racial diversity. No industry or company was in the top quartile for both dimensions.

The relationship between diversity and performance highlighted in the research is a correlation, not a causal link. This is an important distinction, but the findings nonetheless permit reasonable hypotheses on what is driving improved performance by companies with diverse executive teams and boards. It stands to reason—and has been demonstrated in other studies, as we indicate—that more diverse companies are better able to win top talent and improve their customer orientation, employee satisfaction, and decision making, leading to a virtuous cycle of increasing returns. That in turn suggests that diversity beyond gender and ethnicity/race (such as diversity in age and sexual orientation) as well diversity of experience (such as a global mindset and cultural fluency) are also likely to bring some level of competitive advantage for firms that are able to attract and retain such diverse talent.

Moving the needle on diversity is harder than completing a typical transformation. This makes it even more important that companies have a robust transformation programme that explicitly addresses unconscious bias, and that there is visible commitment from the leadership team. This may require challenge from within or beyond the company: data-driven diversity programmes can often highlight unconscious biases that impair the exercise of good judgement throughout the organisation, even when best practices are systematically followed and best intentions are assumed and exercised. However, case studies from the emerging field of behavioural economics and what is known as “nudge theory”, as well as our own experience in working with clients, provide evidence that such change is possible.

Diversity matters because we increasingly live in a global world that has become deeply interconnected. It should come as no surprise that more diverse companies and institutions are achieving better performance. Most organisations, including McKinsey, have work to do in taking full advantage of the opportunity that a more diverse leadership team represents, and, in particular, more work to do on the talent pipeline: attracting, developing, mentoring, sponsoring, and retaining the next generations of global leaders at all levels of the organisation. But given the increasing returns that diversity is expected to bring, it is better to invest now, as winners will pull further ahead and laggards will fall further behind.