Delivering through diversity
·
Our
latest research reinforces the link between diversity and company financial
performance—and suggests how organizations can craft better inclusion
strategies for a competitive edge.
Awareness of the business case for inclusion and diversity is on the rise. While
social justice typically is the initial impetus behind these efforts, companies
have increasingly begun to regard inclusion and diversity as a source of
competitive advantage, and specifically as a key enabler of growth. Yet
progress on diversification initiatives has been slow. And companies are still
uncertain about how they can most effectively use diversity and inclusion to
support their growth and value-creation goals.
Our latest study of diversity
in the workplace, Delivering through diversity, reaffirms the
global relevance of the link between diversity—defined as a greater proportion
of women and a more mixed ethnic and cultural composition in the leadership of
large companies—and company financial outperformance. The new analysis expands
on our 2015 report, Why diversity matters, by drawing on an enlarged data set of more than 1,000
companies covering 12 countries, measuring not only profitability (in terms of
earnings before interest and taxes, or EBIT) but also longer-term value
creation (or economic profit), exploring diversity at different levels of the
organization, considering a broader understanding of diversity (beyond gender
and ethnicity), and providing insight into best practices.
Diversity and financial performance in 2017
In the original
research, using 2014 diversity data, we found that companies in the top
quartile for gender diversity on their executive teams were 15 percent more
likely to experience above-average profitability than companies in the fourth
quartile. In our expanded 2017 data set this number rose to 21 percent and
continued to be statistically significant. For ethnic and cultural diversity,
the 2014 finding was a 35 percent likelihood of outperformance, comparable to
the 2017 finding of a 33 percent likelihood of outperformance on EBIT margin;
both were also statistically significant.
Several other findings
on gender diversity, ethnic diversity, and diversity around the world are also
interesting.
Gender diversity
Gender diversity is
correlated with both profitability and value creation.
In our 2017 data set, we
found a positive correlation between gender diversity on executive teams and
both our measures of financial performance: top-quartile companies on
executive-level gender diversity worldwide had a 21 percent likelihood of
outperforming their fourth-quartile industry peers on EBIT margin, and they
also had a 27 percent likelihood of outperforming fourth-quartile peers on
longer-term value creation, as measured using an economic-profit (EP) margin.
For gender, the
executive team shows the strongest correlation.
We found that having gender
diversity on executive teams, specifically, to be consistently positively
correlated with higher profitability across geographies in our data set,
underpinning the role that executive teams—where the bulk of strategic and
operational decisions are made—play in the financial performance of a company.
Executive teams of
outperforming companies have more women in line roles versus staff roles.
We tested the hypothesis that
having more women executives in line roles (typically revenue generating) is
more closely correlated with financial outperformance. We know from research,
such as our Women in the Workplace 2017 report, that women are underrepresented in line
roles. In our data set, this holds true even for top-quartile gender-diverse
companies experiencing above-average financial performance. Yet these
top-quartile companies also have a greater proportion of women in line roles
than do their fourth-quartile peers: 10 percent versus 1 percent of total
executives, respectively.
Ethnic and cultural diversity
Top-team ethnic and
cultural diversity is correlated with profitability.
In our 2017 data set, we looked at
racial and cultural diversity in six countries where the definition of ethnic
diversity was consistent and our data were reliable.1As in 2014, we found
that companies with the most ethnically diverse executive teams—not only with
respect to absolute representation but also of variety or mix of ethnicities2—are 33 percent more
likely to outperform their peers on profitability. That’s comparable to the 35
percent outperformance reported in 2014, with both figures being statistically
significant.
The penalty for not
being diverse on both measures persists.
Now, as previously, companies in the fourth
quartile on both gender and ethnic diversity are more likely to underperform
their industry peers on profitability: 29 percent in our 2017 data set.
Ethnic and cultural
diversity on executive teams is low.
We focused on our US and UK data sets to examine
ethnically and culturally diverse representation among US and UK companies,
considering the pipeline starting with university graduates. Black Americans
comprise 10 percent of US graduates but hold only 4 percent of senior-executive
positions, Hispanics and Latinos comprise 8 percent of graduates versus 4
percent of executives, and for Asian Americans, the numbers are 7 percent of
graduates versus 5 percent of executives. In the United Kingdom, the disparity
is even greater: 22 percent of university students identify as black and
minority ethnic, yet only 8 percent of UK executives in our sample do.
Black women executives
are underrepresented in line roles and may face a harder path to CEO.
As discussed, within our US
and UK data sets, overall representation of women on executive teams shows an
apparent bias toward staff roles. Among our US sample, not only do women hold a
disproportionately small share of line roles on executive teams but also women
of color (including Asian, black, and Latina women) hold an even smaller share.
Line roles versus staff
roles on executive teams tend to differ in their ability to propel individuals
to the CEO position, with line roles the more likely incubators of future CEOs.
In our US sample, black female executives, specifically, are more than twice as
likely to be in staff roles than in line roles, and our sample denotes an
absence of black female CEOs. Other studies have found that black women suffer a double burden of bias that keeps them from the
uppermost levels of corporate leadership. Underrepresentation on executive
teams in general, and in line roles in particular, could be an important piece
of this story.
Diversity around the world
The correlation between
gender and ethnic diversity and financial performance generally hold true
across geographies, though with some variations in certain regions. Our data
yielded some noteworthy findings concerning the country-level differences in
executive-team diversity:
Australian companies
lead the way when it comes to the women’s share of executive roles (21
percent).
The share in the
United States is 19 percent and in the United Kingdom is 15 percent. The same
holds true for board positions, with Australian companies at 30 percent, US
companies at 26 percent, and UK companies at 22 percent—and for women at the
whole company level. The disparity among these countries is interesting, given
that women’s participation in the workforce is similar in all three and given
that they dominate among top performers, representing 47 percent of the data
set but more than 70 percent of the top-quartile companies.
The picture on ethnic
and cultural diversity on executive teams is nuanced.
Among our sample, South
Africa has the highest levels of diverse representation on executive teams,
with 16 percent of executive positions held by blacks. However, this must be
understood in the context of local demographics: South Africa’s population is
79 percent black, but among large corporations, the impact of South Africa’s
complicated social history means that the large majority of global and national
corporate entities are led by white executives (69 percent in our sample). As
our work considers the local context with respect to ethnicity, we therefore
evaluated South Africa’s diversity from this perspective, defining black South
Africans as the minority. Singapore, the United Kingdom, and the United States
follow South Africa with 11 to 12 percent of ethnically diverse executives.
When considering
ethnic-minority representation in the broader population, British executive
teams seem closer to achieving a “fair share.” This, however, masks huge variations
within the UK data set, in which a large proportion of companies have no ethnic
minorities on their executive teams (or boards) and a handful of companies have
particularly international executive teams. Ethnically diverse representation
on UK and US executive teams increased by an average of six and five percentage
points, respectively, since 2014. However, this was offset by declines in other
geographies, leading to an overall lower increase of one percentage point
across regions.
Delivering impact through diversity
Our research confirms
that gender, ethnic, and cultural diversity, particularly within executive
teams, continue to be correlated to financial performance across multiple
countries worldwide. In our 2015 report, our hypotheses about what drives this
correlation were 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—all of which we believe continue to be relevant.
Companies report that
materially improving the representation of diverse talent within their ranks,
as well as effectively utilizing inclusion and diversity as an enabler of
business impact, are particularly challenging goals. Despite this, multiple
companies worldwide have succeeded in making sizable improvements to inclusion
and diversity across their organizations, and they have been reaping tangible
benefits for their efforts.
We found that these
companies all developed inclusion and diversity (I&D) strategies that
reflected their business ethos and priorities, ones that they were strongly
committed to. Four imperatives emerged as being crucial:
Articulate and cascade
CEO commitment to galvanize the organization.Companies increasingly recognize that commitment to
inclusion and diversity starts at the top, with many companies publicly
committing to an I&D agenda. Leading companies go further, cascading this
commitment throughout their organizations, particularly to middle management.
They promote ownership by their core businesses, encourage role modeling, hold
their executives and managers to account, and ensure efforts are sufficiently
resourced and supported centrally.
Define inclusion and
diversity priorities that are based on the drivers of the business-growth
strategy. Top-performing
companies invest in internal research to understand which specific strategies
best support their business-growth priorities. Such strategies include
attracting and retaining the right talent and strengthening decision-making
capabilities. Leading companies also identify the mix of inherent traits (such
as ethnicity) and acquired traits (such as educational background and
experience) that are most relevant for their organization, using advanced
business and people analytics.
Craft a targeted
portfolio of inclusion and diversity initiatives to transform the organization. Leading companies use
targeted thinking to prioritize the I&D initiatives in which they invest,
and they ensure there is alignment with the overall growth strategy. They
recognize the necessity of building an inclusive organizational culture, and
they use a combination of “hard” and “soft” wiring to create a coherent
narrative and program that resonates with employees and stakeholders, helping
to drive sustainable change.
Tailor the strategy to
maximize local impact. Top
and rapidly improving companies recognize the need to adapt their approach—to
different parts of the business, to various geographies, and to sociocultural
contexts.
Paying rigorous attention
to all four imperatives helps to ensure that inclusion and diversity will
support a company’s growth agenda. In our experience, companies tend to fall
short on leadership accountability for meeting goals, on building the business
case, and on the coherence and prioritization of the resulting action plan.
It is worth noting that
while progress on representation can be brought about relatively rapidly with
the right set of initiatives, embedding inclusion within the organization can
take many years and often requires action outside the organization. Companies
that do this well can create a strong corporate ethos that resonates across
employee, customer, supplier, investor, and broader stakeholder groups.
This work sheds light
on how companies can use inclusion and diversity as an enabler of business
impact. It is important to note, however, that correlation does not demonstrate
causality, which would be challenging to demonstrate. While not causal, we
observe a real relationship between diversity and performance that has
persisted over time and scale, and across geographies. There are clear and
compelling hypotheses for why this relationship persists including improved
access to talent, enhanced decision making and depth of consumer insight and
strengthened employee engagement and license to operate. We encourage
businesses to examine the case for inclusion and diversity at a more granular
level to craft an approach that is tailored to their business, learning from
leading diverse companies around the world as to ways to do this with high
impact.
The business case for
diversity continues to be compelling and to have global relevance. There’s an
opportunity for promoting diversity in senior decision-making roles, and
specifically in line roles on executive teams. Although levels of diverse
representation in top teams are still highly variable globally—with progress
being slow overall—there are practical lessons from successful companies that
have made inclusion and diversity work. Creating an effective inclusion and
diversity strategy is no small effort and requires strong, sustained, and
inclusive leadership. But we, and many of the companies we studied, believe the
potential benefits of stronger business performance are well worth it.
By Vivian Hunt, Lareina Yee,
Sara Prince, and Sundiatu Dixon-Fyle
https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity?cid=other-eml-alt-mip-mck-oth-1801&hlkid=10672c9bf19f4fc08e63d3b254226a03&hctky=1627601&hdpid=fdef79b6-4f45-4162-ac58-14db7193e4c6
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