New research from McKinsey makes it increasingly clear that companies with more diverse workforces perform better financially.
We know intuitively that diversity matters. It’s also increasingly clear that it makes sense in purely business terms.
McKinsey’s latest research finds that companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians.
Diversity is a Competitive Differentiator
Companies in the bottom quartile in these dimensions are statistically less likely to achieve above-average returns. Diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time.
More diverse companies, we believe, are better able to win top talent and improve their customer orientation, employee satisfaction, and decision making, and all that leads to a virtuous cycle of increasing returns.
This in turn suggests that other kinds of diversity — for example, in age, sexual orientation, and experience (such as a global mind-set and cultural fluency) — are also likely to bring some level of competitive advantage for companies that can attract and retain such diverse talent.
McKinsey has been examining diversity in the workplace for several years. Its latest report, Diversity Matters, examined proprietary data sets for 366 public companies across a range of industries.
The Report’s Key Findings
Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians.
Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians.
Companies in the bottom quartile both for gender and for ethnicity and race are statistically less likely to achieve above-average financial returns than the average companies in the data set (that is, bottom-quartile companies are lagging rather than merely not leading).
There is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent.
Racial and ethnic diversity has a stronger impact on financial performance in the United States than gender diversity, perhaps because earlier efforts to increase women’s representation in the top levels of business have already yielded positive results.
Achieving Greater Diversity Is Not Easy
McKinsey is not suggesting that achieving greater diversity is easy. Women — who account for just 16 percent of the members of executive teams, remain underrepresented at the top of corporations.
“It should come as no surprise that more diverse companies and institutions are achieving better performance,” the report concludes. “Organizations must do more to take full advantage of the opportunity that diverse leadership teams represent.
“That’s particularly true for their talent pipelines: Attracting, developing, mentoring, sponsoring, and retaining the next generations of leaders at all levels of organizations. Given the higher returns that diversity brings, we believe it is better to invest now, since winners will pull further ahead and laggards will fall further behind.”
Barbara Wallace is the Managing Director, Finance and Accounting Search in Reston, VA. Since joining in 2002, Barbara has been an integral part of the evolution of HireStrategy’s key client relationships. She is an expert in the recruitment of finance and accounting professionals and has executed numerous C-level searches for prestigious companies in the Washington, DC area.