Why Diversity – And the Organizations that Embrace it – Wins

Last year, McKinsey & Company unveiled Diversity Wins, the third report in the management consulting firm’s series investigating the business case for diversity, following Why Diversity Matters (2015) and Delivering Through Diversity (2018).

McKinsey’s latest report shows not only that the business case for diversity remains robust but also the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time. These findings emerge from McKinsey’s largest data set so far, encompassing 15 countries and more than 1,000 large companies. By incorporating a ‘social listening’ analysis of employee sentiment in online reviews, the report also provides new insights into how inclusion matters.

The analysis shows that companies should pay much greater attention to inclusion, even when they are relatively diverse. Companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile — up from 21% in 2017 and 15% in 2014. Furthermore, the data shows that the greater the representation, the higher the likelihood of outperformance.

By following the trajectories of hundreds of companies in its data set since 2014, McKinsey found that the overall slow growth in diversity often observed in fact masks a growing polarization among these organizations. While most have made little progress, are stalled or even slipping backward, some are making impressive gains in diversity, particularly in executive teams. It was discovered that the diversity winners are adopting systematic, business-led approaches to inclusion and diversity (I&D).

The research predates the outbreak of the global pandemic, but the study’s authors believe the findings remain highly relevant. The latest analysis reaffirms the strong business case for both gender diversity and ethnic and cultural diversity in corporate leadership, which shows that this business case continues to strengthen. The most diverse companies are now more likely than ever to outperform less diverse peers on profitability, finding that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile — up from 21% in 2017 and 15% in 2014.

Moreover, McKinsey found the greater the representation, the higher the likelihood of outperformance.

Companies with more than 30% women executives weremore likely to outperform companies where this percentage ranged from 10 to 30, and in turn these companies were more likely to outperform those with even fewer women executives or none at all. A substantial differential likelihood of outperformance – 48% – separates themost from the least gender-diverse companies.

In the case of ethnic and cultural diversity, business-case findings are equally compelling: In 2019, top-quartile companies outperformed those in the fourth one by 36% in profitability, slightly up from 33% in 2017 and 35% in 2014.

Consistently, the likelihood of outperformance continues to be higher for diversity in ethnicity than for gender.

1 Likelihood of financial outperformance vs national industry median; p-value <0.05, except 2014 data where p-value <0.1. 2 n = 383; Latin America, UK, and US; earnings before intrest amd taxes (EBIT) margin 2010-13. 3 n = 991; Australia, Brazil, France, Germany, India, Japan, Mexico, Nigeria, Singapore, South Africa, UK, and US; EBIT margin 2011-15. 4 n = 1,039; 2017 companies for which gender data available in 2019, plus Denmark, Norway, and Sweden; EBIT margin 2014-18. 5 n = 364; Latin America, UK, and US; EBIT margin 2010-13. 6 n = 589; Brazil, Mexico, Singapore, South Africa, UK, and US; EBIT margin 2011-15. 7 n = 533; Brazil, Mexico, Nigeria, Singapore, South Africa, UK, and US, where ethnicity data available in 2019; EBIT margin-18. Source: Diversity Wins Data Set

Yet progress overall has been slow. In the companies from McKinsey’s original 2014 data set, based in the United States and the United Kingdom, female representation on executive teams rose from 15% in 2014 to 20% in 2019. Across the global data set, for which it starts in 2017, gender diversity moved up just one percentage point — to 15% from 14% — in 2019. More than a third of companies in our data set still have no women at all on their executive teams. This lack of material progress is evident across all industries and in most countries. Similarly, the representation of ethnic minorities on U.K. and U.S. executive teams stood at only 13% in 2019, up from just 7% in 2014. For the global data set, this proportion was 14% in 2019, up from 12% in 2017.

Key findings include:

The most diverse companies are now more likely than ever to outperform less diverse peers on profitability.

• The relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time.

• Top-quartile companies outperformed those in the fourth one by 36% in profitability.

• The likelihood of outperformance continues to be higher for diversity in ethnicity than for gender.

Best practices for diverse companies who are outperforming financially and taking a systematic approach and bold steps to strengthen inclusion:

• Ensure the representation of diverse talent.

• Strengthen leadership accountability and capabilities for I&D.

• Enable equality of opportunity through fairness and transparency.

• Promote openness and tackle microaggressions.

• Foster belonging through unequivocal support for multivariate diversity.