The Bottom Line: Why Diversity Matters

Article By Ross Johnson

  "Group Photograph" by Rawpixel. CC0

If we already know it is the right thing to do, it is also increasingly clear that diversity remains a clear competitive differentiator amongst businesses. The bottom line of diversity? It directly affects your bottom line.

While several reports have evidentially established the benefit of diversity within companies, the most famous is McKinsey’s 2015 study Diversity Matters. The first to measure the relationship between diversity and profitability, the report confirmed that, from a business point of view, diversity was worth a lot more than the simple fulfilment of Corporate Social Responsibility (CSR) targets.

Examining data from 366 companies, from a wide range of sectors, in Latin America, Canada, the UK and the US, the study looked at the relationship between diversity (a greater share of women and more mixed ethnic composition in leadership), and financial performance (average earnings before interest and taxes over 3 years). With such a large study, the results remained defining, and statistically significant.

Companies in the top quartile for gender diversity were 15% more likely to post financial returns above the industry average. With ethnic diversity, the trend remained the same, although increasing dramatically to 35%. Most significant, however, was the revelation that companies in the bottom quartile for both gender and ethnic diversity were far less likely to post above-average financial results. It follows that not only is diversity linked to improved financial returns, but companies who lag behind in diversity actively damage the likelihood of their posting financial returns above their industry average.

The results from this study indicate that diversity remains a competitive differentiator that shifts market share towards more diverse companies over time. This was further established by the larger, follow up, study by the Peterson Institute for International Economics (PIIE), which examined gender diversity in executive positions. This report concluded that companies in which senior leadership roles were comprised of at least 30% females could improve their bottom line by up to 15% compared to those without female leaders.

Analysing 21,980 companies in 91 countries, this study built upon the McKinsey report by looking at specific roles within leadership. Companies in which women held senior positions were the ones statistically most likely to post above-average financial results. The other remarkable conclusion drawn is the fact that companies with female CEOs without other women in senior leadership roles did not perform better or worse than companies with a male CEO.

“Women in positions of leadership are associated with superior corporate performance,” said Marcus Noland, PIIE’s Executive Vice President and Director of Studies. Noland went  on to conclude that “the most important finding of the study is the importance of having a pipeline of women at the top”. And it is the importance of this pipeline that was the PIIE report’s most serious acknowledgement; gender diversity is one thing, but ensuring a successful pipeline of females is the most crucial in determining whether such diversity actively influences the bottom line.

Why do diverse companies consistently outperform others? A prime advantage is talent recruitment. According to McKinsey’s 1997 report, The War for Talent, one of the significant ways in which companies gain competitive advantage is through attracting the best talent. The problem being, in an economic climate which continues to advance and change rapidly, talent has become more expensive and harder to find, in emerging as well as developed markets, and the competition to recruit and retain this talent has subsequently intensified. Diversity in leadership can help a company secure access to more sources of talent, gain a competitive recruitment advantage, and improve its global relevance. Besides this, a company with a culture of diversity is most attractive to new employees.

Another advantage is team dynamics; diversity has been shown to lead to improved decision making and innovation. A team dynamic sufficiently diversified influences its members in a way that encourages innovation and creativity, through a greater variety of problem-solving approaches, perspectives and ideas. As the McKinsey study also points out, diverse groups often outperform experts.

The bottom line is that diversity makes a difference. It drives improved performance, creativity and innovation, and translates directly into the bottom line—improved financial results.