Since Why Diversity Matters was published in 2015, McKinsey’s researchers have seen growing awareness of the business case for inclusion and diversity.
Widely cited, the report has influenced inclusion and diversity policy-setting and transformation efforts by corporations, the public sector, and third sector organizations worldwide. While social justice, legal compliance, or maintaining industry-standard employee environment protocols is typically the initial impetus behind these efforts, many successful companies regard inclusion and diversity as a source of competitive advantage, and specifically as a key enabler of growth.
Yet progress has been slow.
The 346 companies in its 2015 research (mostly based in the US and UK) have increased average gender representation on their executive teams only 2 percentage points, to 14%, and ethnic and cultural diversity by 1 percentage point, to 13%. What’s more, many companies are still uncertain as to how they can most effectively use inclusion and diversity to support their growth and value creation goals.
Delivering through Diversity both tackles the business case and provides a perspective on how to take action on inclusion and diversity to impact growth and business performance. This latest research reaffirms the global relevance of the correlation between diversity (defined here as a greater proportion of women and ethnically/culturally diverse individuals) in the leadership of large companies and financial outperformance.
The research is based on a larger dataset of over 1,000 companies covering 12 countries and using two measures of financial performance – profitability (measured as average EBIT margin) and value creation (measured as economic profit margin). As importantly, we studied the inclusion and diversity efforts of 17 companies representing all major regions and multiple industries to have a more granular view of where in the organisation diversity matters most, and crucially, how leading companies have successfully harnessed the potential of inclusion and diversity to help meet their growth objectives.
Re-examining the business case for inclusion and diversity, the Delivering through Diversity researchers found:
The relationship between diversity and business performance persists.
The statistically significant correlation between a more diverse leadership team and financial outperformance demonstrated three years ago continues to hold true on an updated, enlarged and global dataset.
Leadership roles matter.
Companies in the top quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to have superior value creation. The highest performing companies on both profitability and diversity had more women in line roles (i.e., typically revenue-generating) than in staff roles on their executive teams.
It’s not just gender.
Companies in the top quartile for ethnic/cultural diversity on executive
teams were 33% more likely to have industry-leading profitability. That this relationship continues to be strong suggests that inclusion of highly diverse individuals – and the myriad ways in which diversity exists beyond gender (e.g., LGBTQ+, age/generation, international experience) – can be a key differentiator among companies.
There is a penalty for opting out.
The penalty for bottom quartile performance on diversity persists. Overall, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to achieve above-average profitability than were allother companies in our data set. In short, not only were they not leading, they were lagging.
Local context matters.
On gender, while there is plenty more to do, some companies lead the way in both absolute average diversity and representation in top quartile – Australia, UK, and US companies make up over 70% of this group. On ethnicity, there is less global progress, but South African and Singaporean companies have a higher representation in the top quartile vs overall representation in dataset, suggesting material progress on ethnic diversity.
Lessons learned from the 17 leading companies that were studied – among those that are engaging effectively with inclusion and diversity – support the earlier perspective on what likely drives the relationship with performance: that more diverse companies are better able to attract top
talent; to improve their customer orientation, employee satisfaction, and decision-making; and to secure their license to operate.
While progress has been slow on average, individual companies have made real strides in improving their inclusion and diversity outcomes and
in effectively using these results to influence business outcomes. From their experiences, the researchers identified four imperatives for delivering impact through inclusion and diversity:
- Commit and cascade: CEOs and leaders must articulate a compelling vision, embedded with real accountability for delivery, and cascade down through middle management.
- Link inclusion and diversity to growth strategy: The I&D priorities must be explicitly defined based on what will drive the business growth strategy. Leading companies do this in a data-driven way.
- Craft an initiative portfolio: Initiatives in pursuit of the I&D goals should be targeted based on growth priorities, and investments made to both hard- and soft-wire the programs and culture of inclusion required to capture the intended benefits.
- Tailor for Impact: I&D initiatives should be tailored to the relevant business area or geographic region context to maximize local buy-in and impact.
This work sheds light on how companies can use diversity as an enabler of business impact. It articulates a clear opportunity for companies to promote inclusion and diversity in senior decision-making roles, and specifically in line roles on executive teams. As was the case with Why Diversity Matters, correlation does not demonstrate causation. However, the statistically significant relationship observed between greater levels of diversity in the leadership of a large corporate organization and financial performance does prompt action.
The researchers are keen to encourage companies to examine the case for inclusion and diversity and how it is directly relevant to their business, as leading companies are already doing.
Designing a truly effective inclusion and diversity strategy is no small undertaking. But McKinsey and the many companies studied believe the potential benefits of stronger business performance are well worth the effort.