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Equality, diversity and inclusionLatest NewsEthnicity

Study linking ethnic diversity with performance questioned by academics

by Ashleigh Webber 12 Apr 2024
by Ashleigh Webber 12 Apr 2024 Shutterstock
Shutterstock

Academics have questioned the robustness of a widely-quoted study that links ethnic diversity in leadership with financial performance.

In an article for Econ Journal Watch, accounting professors Jeremiah Green and John Hand said that McKinsey & Company’s studies that report a relationship between a company’s profit and the ethnic diversity of executives should not be relied upon.

Management consultancy McKinsey has published four reports which are widely cited as evidence of the value of ethnic diversity. The most recent, published in December 2023, claimed that organisations in the top quartile for ethnic representation at senior level were 39% more likely to outperform their competitors than those in the bottom quartile.

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However, Green, from Mays School of Business at Texas A&M University, and Hand, from Kenan-Flagler Business School at UNC–Chapel Hill, applied McKinsey’s methodology to large public US companies in the S&P 500 and found no statistically significant links between its measures of diversity and either industry-adjusted earning before interest and tax, or sales growth, gross margin, return on assets, return on equity and total shareholder return over the prior five years (2015 to 2019 – the same pre-Covid time window used in McKinsey’s studies between 2015 and 2020).

“Our results indicate that despite the imprimatur often given to McKinsey’s 2015, 2018, 2020, and 2023 studies, McKinsey’s studies neither conceptually (in terms of the correct direction of causality) nor empirically (in terms of their set of large US public firms) support the argument that large US public firms can expect on average to deliver improved financial performance if they increase the racial/ethnic diversity of their executives,” the research finds.

The academics said that further research into the presence and magnitude of any casual relations between diversity and performance would be valuable around the world, not just for US-based companies.

“Such longitudinal and causality-oriented studies may also help bring into sharper focus the identities and sizes of the costs and benefits, as well as the risks and returns, that are associated with higher or lower racial/ethnic diversity, not only in firms’ executives, but in their boards of directors and rank-and-file employees,” they said.

“While our results do speak to the lack of robustness of McKinsey’s studies vis-à-vis large public US firms, they do not speak to the connections between racial/ ethnic diversity in employees and/or boards and either firm financial performance or non-financial firm goals, nor to intrafirm activities. Nor do they speak to any social or moral contributions that racial/ethnic diversity in US executives provides.

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“Such research is worthwhile and important, and we hope that it will be undertaken and well so by business scholars.”

McKinsey & Company has been contacted for comment.

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Ashleigh Webber

Ashleigh is a former editor of OHW+ and former HR and wellbeing editor at Personnel Today. Ashleigh's areas of interest include employee health and wellbeing, equality and inclusion and skills development. She has hosted many webinars for Personnel Today, on topics including employee retention, financial wellbeing and menopause support.

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