Diversity can boost financial performance of business by more than 30%

23 January 2018 Authored by Consultancy.uk

Diversity in the upper echelons of businesses is correlated with an improved likelihood of financial performance above industry medians, according to new figures. For gender diversity, the premium was found to be 21% between 1st and 4th quartile companies, while for ethnic/cultural diversity, the premium was 33%.

Media focus on diversity in the workplace is increasingly shifting the spotlight onto ways of enabling change, whether in terms of tackling violence against women, implicit biases or discriminatory ways of working. The change of pace remains relatively slow however, even while programmes, certifications and policies to help reduce inequalities among people, continue to be rolled out.

While there are strong ideological norms which still need stamping out in order to enable workplace parity, ethical arguments are not the only ones to consider when making the case for equality, however. The ideological perceptions of times past ultimately enabled businesses to pay their staff from different ethnic groups or gender identities a lower wage than white male counterparts – something that, despite itself being wholly unethical, would have been viewed as a cost-saving measure. However, even in this sense, discriminatory business practices are demonstrably illogical – something which might well spur today’s bosses to take swifter and more decisive action on the matter.

New analysis from McKinsey & Company, has identified a major correlation between improving diversity at the top of business, and various key business indicators, including EBIT margin and long-term value creation. The consultancy’s research involved a considerably larger sample than in previous years, with almost 1,000 business participants responding to their survey.

Correlation between diversity and performance

Researchers considered the median difference between financial performances above the national industrial median by diversity quartile, as well as comparing the firm’s own previous research, from 2014, to its most recent numbers for the current report.

Again, there is a correlation between the financial performance of 1st and 4th percentile groups in terms of diversity, relative to the median for both gender and ethnic/cultural outcomes. In terms of ethnic/cultural differences, a 33% increase in performance was note between 4th and 1st quartile performers, with the latter scoring well above the industry median and the latter below it by a significant margin.

Gender, has a relatively large impact on financial performance, with a 21% premium for 1st quartile businesses compared to their 4th quartile counter parts. This is a solid increase on the 2014 report, with a difference of 15% in favour of 1st quartile businesses was noted.

Gender diversity correlates with financial performance

The research also considered the difference in diversity within executive teams and the correlations between the likelihood of financial performances above the industry median for profitability and value creation.

Companies in the 1st quartile were 21% more likely than their 4th quartile counterparts to have better profitability figures (EBIT margins), while in terms of long-term value creation, the difference was a solid 27%.

The research also found there to be a statistically significant correlation between the makeup of executive teams and board of directors, and profitability. When considering the likelihood of financial performance above national industry medians by diversity quartile, the impact of being in the 1st quartile compared to the 4th came in at 33% - reflecting the wider impact of a broad array of backgrounds on the broader staffing and knowledge of key customer segments, among others.

The impact of a broad board of directors was even more significant, with a 43% increase in the likelihood of financial performance above national industry medians, at 59% for 1st quartile companies and 41% for 4th quartile companies.

Variance across the pipeline

The study continues to highlight that gender diversity at executive and board of director level remains relatively lacklustre in major economies, including the US and UK – with actual executive roles often also not strategic in nature.

In the UK for instance, the executive team is 15% female on average, while the board of directors is 22% female on average – well below parity in both cases. As it stands the company wide representation comes in at 32%, reflecting wider term difficulties for boosting executive attainment for women, as there are fewer to draw from.

Despite the clear benefits of diversity, pay disparity also remains a major hurdle for recruiting skilled female staff. Female workers for example remain disadvantaged, with wage disparity in the UK standing at £85 billion in lost wages. Individual women are reportedly deprived an average of £6,100 per year, thanks to gendered salaries.

The US too has a relatively poor performance, with 19% of the executive team female and 26% of board of director spots in the hands of women. In Australia, while there are more women throughout the organisation 40% on average, the ultimate number of executive team members female, comes in at 21% average.

Variance across the pipeline, ethnicity

When it comes to ethnic/cultural minorities, the research continues to find that there are relatively significant differences between diversity levels in the respective countries, and executive level representation – although, the reasons for the disparity may be more complex than statistics.

In the UK the number from a minority ethnic/cultural background for the executive team stood at 11%, slightly behind the share of the population of 13%. The number on the board of directors was slightly lower, at 7%. However, the research notes that the average is buoyed by a relatively small number of companies with high-performances, with 56% of executives sporting no minorities and 59% of boards with no minorities.

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