A just published online article in the ChicagoBooth Review [READ IT HERE] challenges the idea that there is a good business case for diversity in organisatinal leadership. Many companies justify diversity initiatives by citing their positive impact on business performance. A 2022 analysis by Boston University’s Oriane Georgeac and London Business School’s Aneeta Rattan found that about 80 percent of Fortune 500 companies use this justification. However, recent research by University of North Carolina’s Sekou Bermiss, Texas A&M’s Jeremiah Green, and UNC’s John Hand suggests that this argument may not hold up.
Analyzing data from S&P 500 companies, Bermiss, Green, and Hand found no evidence linking greater diversity in executive teams to improved financial performance. Despite popular beliefs, their study indicates no consistent relationship between executive racial and ethnic diversity and financial outcomes like sales growth, profit margins, return on assets, and total shareholder return. Their research also found no positive correlation between gender diversity in leadership and financial performance.
The study included data from 2011 to 2022, encompassing the period following the 2020 murder of George Floyd, when many companies publicly committed to racial diversity. The researchers ran 270 regressions, examining nine measures of diversity against six performance metrics over five years, but found diversity predicted better performance in less than 5 percent of cases. This outcome suggests that the results were statistically insignificant and could have occurred by chance.
McKinsey & Company’s previous studies, which reported a positive relationship between diversity and financial performance, were also scrutinized. The researchers argue that McKinsey’s results may show that profitable firms can afford to focus on diversity rather than diversity driving profitability. Green and Hand's separate project failed to replicate McKinsey’s findings for the S&P 500.
Despite these findings, Bermiss emphasizes that the research should not be interpreted as an argument against hiring diversely. He acknowledges benefits of workplace diversity unrelated to profitability and suggests that companies should be clear about their motivations for diversity policies. Relying solely on the business case for diversity might be problematic, as firms could reduce support for these policies if they don’t see the anticipated financial benefits.
McKinsey stands by its research, emphasizing that their studies identify correlation, not causation, between diversity and financial performance. They welcome ongoing discussions on this critical topic.