Diversity Pays Dividends: Unlocking Performance Through Inclusion

McKinsey's research on diversity in the workplace has revealed that companies with more diverse workforces perform better financially. The latest report, Diversity Matters Even More, is the fourth in a series investigating the business case for diversity. It found that companies with diverse leadership teams are associated with higher financial returns, with a stronger business case for both gender diversity and ethnic and cultural diversity. This trend holds across industries and regions, despite differing challenges and expectations.

The report also highlights the positive correlation between diversity and holistic impact, including social and environmental impact. Diverse leadership teams are linked to higher social and environmental impact scores and can help bolster community involvement, positively impacting a company's image.

While the benefits of diversity are clear, progress has been slow, and companies still need guidance on how to effectively use diversity to support their growth goals.

Gender diversity on executive teams

McKinsey's research has found that companies with more gender diversity on their executive teams are more likely to be profitable. In 2019, 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. This is up from 21% in 2017 and 15% in 2014.

The greater the representation of women, the higher the likelihood of outperformance. Companies with more than 30% women executives were more likely to outperform companies with fewer women executives. A substantial differential likelihood of outperformance (48%) separates the most gender-diverse companies from the least.

Despite this, women remain underrepresented at the top of corporations globally. In the US, women account for an average of just 16% of executive team members, 12% in the UK, and 6% in Brazil.

Women of colour continue to face significant barriers to entry into leadership roles. According to McKinsey's 2018 Women in the Workplace report, women of colour represent only 4% of C-suite positions. As of 2019, there were no Black women leading a Fortune 500 company.

To improve gender diversity on executive teams, companies should focus on advancing diverse talent into executive roles and ensure a robust business case for diversity and inclusion. They should also set data-driven targets for the representation of diverse talent and strengthen leadership accountability and capabilities for diversity and inclusion.

Ethnic and cultural diversity on executive teams

In 2019, top-quartile companies with ethnic and cultural diversity outperformed those in the fourth quartile by 36% in profitability. This is a slight increase from 33% in 2017 and 35% in 2014. McKinsey's research also showed that the likelihood of outperformance is higher for diversity in ethnicity than for gender.

The report also highlighted the growing polarization among organizations when it comes to diversity. While some companies have made impressive gains in diversity, especially on executive teams, most have made little or no progress, and some have even regressed.

McKinsey's analysis identified five cohorts based on starting points and speed of progress on executive team ethnic minority representation. The first two cohorts, "Diversity Leaders" and "Fast Movers", showed significant improvements in diversity over the past five years. For example, companies in the "Fast Movers" cohort increased their level of diversity from 1% in 2014 to 18% in 2019.

On the other hand, the "Laggards" cohort, which already had poor diversity performance, declined further. In 2019, these companies had no ethnic minority representation on their executive teams, and only 8% of their executive team members were female.

The benefits of ethnic and cultural diversity on executive teams extend beyond financial performance. Diverse teams bring a range of perspectives, experiences, and skills that can drive innovation, enhance problem-solving capabilities, and improve overall productivity. Additionally, ethnic and cultural diversity can help organizations attract and retain the best talent, leading to a more adaptable and competitive business.

However, it is important to note that diversity alone is not enough. Creating an inclusive workplace environment where all team members feel valued and empowered to contribute is crucial. This includes addressing unconscious biases, promoting open communication, and fostering a culture of mutual respect and collaboration.

By embracing ethnic and cultural diversity on executive teams and prioritizing inclusion, companies can drive financial performance, enhance innovation, and create a more resilient and successful organization.

Diversity and financial performance

McKinsey's research on diversity in the workplace has consistently shown a positive correlation between diversity and company financial performance. The latest report, "Diversity Matters Even More" (2023), is the fourth in a series of reports on this topic and is based on data from 1,265 companies across 23 countries. The report found that companies with diverse leadership teams continue to be associated with higher financial returns, with a 39% greater likelihood of financial outperformance for top-quartile companies in terms of gender diversity compared to bottom-quartile companies. Similarly, companies with greater ethnic diversity in their leadership showed a 39% increased likelihood of outperformance.

The report also highlighted the importance of inclusion and diversity (I&D) during the COVID-19 pandemic. Companies that prioritized I&D during the crisis were more likely to emerge stronger, with diverse talent and multiple perspectives enabling better decision-making and innovation. However, progress on diversification initiatives has been slow, and companies are still uncertain about how to effectively use diversity to support their growth goals.

The business case for diversity is strong and continues to grow stronger. Companies with more diverse workforces perform better financially, and this trend is expected to continue. Diverse companies are better able to attract top talent, improve customer orientation, enhance employee satisfaction, and make better decisions, leading to increased financial returns.

The benefits of diversity go beyond financial performance. McKinsey's research has also found a positive correlation between diversity and holistic impact, including social and environmental impact. Diverse leadership teams are associated with higher social and environmental impact scores and greater community involvement. Additionally, diverse companies are more likely to have positive press, meet regulations, and further racial justice and gender equality.

While the link between diversity and financial performance is well-established, it's important to note that correlation does not equal causation. However, the consistent findings across multiple studies and countries suggest that diversity is a key driver of financial success for companies.

Diversity winners and laggards

McKinsey's research on diversity in the workplace has identified five distinct cohorts of companies: Diversity Leaders, Fast Movers, Moderate Movers, Resting on Laurels, and Laggards. These cohorts are based on their starting points and the speed of progress on executive team gender representation and ethnic-minority representation.

Diversity Leaders

Diversity Leaders have attained gender parity and equitable ethnic representation, demonstrating that equitable representation at the top is a realistic goal. These companies have raised the bar for diversity representation in leadership, with gender representation reaching 32% and ethnic representation at 18% in 2019.

Fast Movers

Fast Movers have made rapid and significant progress in increasing diversity, with gender representation on executive teams reaching 27% in 2019. This cohort has more than tripled the representation of women on executive teams in just five years.

Moderate Movers

Moderate Movers have experienced slower improvement in diversity, with a more gradual increase in the representation of women and ethnic minorities on executive teams.

Resting on Laurels

Resting on Laurels companies started with higher levels of diversity but have become less diverse since 2014. They have not kept pace with the changing landscape of diversity representation and risk falling behind.

Laggards

Laggards have the poorest diversity performance, with low representation of women and ethnic minorities on their executive teams. In 2019, an average of only 8% of executive team members at these companies were female, and there was no ethnic minority representation at all. Laggards are more likely to underperform financially and are at risk of falling further behind Diversity Leaders and Fast Movers.

The widening gap between winners and laggards underscores the importance of a systematic, business-led approach to inclusion and diversity (I&D). Companies that prioritize I&D and take bold action to create an inclusive culture are more likely to outperform their peers and achieve long-term success.

Diversity and inclusion strategies

CEO Commitment and Accountability

Articulating the CEO's commitment to diversity and inclusion is crucial. This involves publicly declaring their support for an inclusive agenda and ensuring that this commitment permeates throughout the organization, especially in middle management. Holding executives and managers accountable for meeting diversity goals is essential to driving meaningful change.

Define Inclusion and Diversity Priorities

Understanding the specific strategies that support the business's growth priorities is vital. This includes attracting and retaining a diverse talent pool and strengthening decision-making capabilities. Advanced business and people analytics can help identify the mix of inherent and acquired traits that are most relevant to the organization's success.

Craft a Targeted Portfolio of Initiatives

Leading companies prioritize their diversity and inclusion initiatives to align with their overall growth strategy. They recognize the need to build an inclusive culture and use a combination of approaches to create a coherent and impactful program.

Tailor the Strategy for Local Impact

Strengthen Leadership Capabilities

Placing core-business leaders and managers at the heart of the diversity and inclusion effort is crucial. This involves strengthening their inclusive leadership capabilities and holding them accountable for progress.

Enable Equality of Opportunity

Promoting transparency and fairness in advancement and opportunity is essential. Companies should utilize analytics tools to ensure that promotions, pay processes, and criteria are unbiased and aligned with diversity targets.

Promote Openness and Address Microaggressions

Fostering a culture of openness and zero tolerance for discriminatory behavior is vital. Companies should actively help managers and staff identify and address microaggressions and establish norms for welcoming behavior.

Foster Belonging and Support Diversity

Building a culture where employees feel they can bring their authentic selves to work is essential. Managers should visibly embrace their commitment to multivariate forms of diversity and actively support employee resource groups to foster a sense of community.

Act on Feedback

Creating a culture of feedback on diversity and inclusion strategies from employees and stakeholders is vital. This includes listening to dissenting voices to identify root causes of any roadblocks and optimize the impact of the diversity and inclusion strategy.

These strategies, informed by McKinsey's research, provide a framework for organizations to create inclusive environments and drive business success.

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