Studies demonstrate a positive correlation between the diversity of a company’s employees and its returns. A McKinsey study in 2018 suggested that firms in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability and 27% more likely to have superior value creation than companies in the fourth quartile. The same report suggested that companies in the top quartile for ethnic and cultural diversity on executive teams were 33% more likely to have industry-leading profitability.1 In a similar study, Boston Consulting Group analysed management boards, focusing on factors such as gender, age, birthplace, career path, industry background and education. It found that profit margins were 9% higher for companies with diverse management teams. The same study also suggested that diverse leadership teams boost innovation, with nearly half the revenue of companies with more diverse leadership coming from products and services launched in the preceding three years.2
There are many similar studies which show a positive correlation between profitability and diversity. Yet some caution that correlation should not be confused with causation in such studies. Could enhanced returns be the product of superior corporate governance and a diverse workforce the outcome of the latter rather than a profit generator in and of itself? With the limited data currently available, scepticism remains.
Nevertheless, there are intuitive reasons why diversity may boost financial returns.3 Diversity encourages collaboration between individuals who think differently and approach problems in different ways. This can reduce the risk of groupthink, thereby enhancing decision-making. Consider a business expanding to target a new region or customer base. A company whose employees come from a narrow pool of individuals may struggle to adapt. On the other hand, a diverse workforce means a company is more likely to have the knowledge and skills necessary to understand a new market.
In addition to strengthening financial performance, diversity has also been linked to higher employee retention and job satisfaction. The more diverse the workforce, the less employees feel obliged to fit a particular mould. Indeed, young people entering the workforce say a diverse environment is an important factor when choosing a place to work.4 Thus, in a diverse working environment, key talent may be retained for longer, building stability and reducing operational risks. Furthermore, diversity has been linked to lower reputational risk. This is because companies that actively include diversity in their governance policies reduce their exposure to lawsuits based on discrimination.5