Boardroom Diversity Revisited

Over the past decade the corporate world has firmly embraced the McKinsey thesis, citing its findings as proof of the financial benefits of race- and gender-aware hiring policies that cut across traditional meritocratic approaches. The new research, from professors Jeremiah Green, of Texas A&M University, and Sekou Bermiss and John Hand, of the University of North Carolina, tests the replicability of McKinsey’s findings as they apply to race and ethnicity.

Green, Bermiss and Hand address the findings of McKinsey & Co.’s first three diversity studies (2015, 2018, and 2020) by comparing these to their own analysis of individuals shown on the leadership pages of S&P 500 firms’ websites as of mid-2011, 2014, 2017, 2020 and 2021. The researchers checked if any of nine measures of the racial/ethnic diversity of these S&P 500 executives reliably predict cross-sectional variation in any of six measures of their firms’ financial performance over the next fiscal year—they found no reliable evidence that they do.

Previous academic research has found positive, negative, and neutral associations between diversity and business outcomes. On the positive side, improved information processing, creativity, and problem solving are reported and these can be amplified for senior leaders who are responsible for making the firm’s most strategically important decisions. However, there is also evidence that diversity can lead to detrimental miscommunication and misunderstanding. In a complex business world, the effect of greater or lesser diversity would seem to be nuanced and context specific.

This academic research contradicts the widely promoted view of management consultants, business leaders, and activists who have consistently argued that a strong and settled ‘business case’ exists that proves the financial benefits of greater racial/ethnic employee diversity. The Green, Bermiss and Hand study provides empirical evidence that the ‘business case’ argument is at least suspect. No doubt McKinsey & Co. will come back and challenge the professors’ study in future, but their research must cause pause for thought for those corporations that have been putting diversity ahead of meritocratic criteria when hiring and promoting employees.

None of this suggests that Diversity, Equity, Inclusion, and Belonging (DEIB) is in anyway a redundant concept. Green, Bermiss and Hand’s analysis of S&P 500 firms, exclusively focuses on firm-level financial performance—the metric behind the ‘business case for racial/ethnic diversity’ hypothesis. The professors are keen to say that their findings “do not necessarily speak to or fully overlap with the academic, business, and social constructs of DEIB.”

In her new book, Higher Ground: How Business Can Do the Right Thing in a Turbulent World, NYU Stern School of Business’s Professor Alison Taylor points out that companies too often use superficial quantitative metrics on diversity and other ESG factors to bolster their reputations, and that the true benefits of diversity can only be found if it leads to genuine organizational learning. An open, trusting, and communicative organization, where diverse voices are heard and their opinions heeded, can benefit from diversity. When this is not the case diversity can become a mere box-ticking exercise based on numbers alone.

Common sense intuitively tells us that beyond the moral case for employee diversity, a diverse workforce and senior management can improve aspects of an organization’s performance—bringing it closer to its customer base and exposing it to broader thinking and more new ideas. Common sense would also suggest that an organization that rejects meritocratic hiring and promotion in favour of overt diversity policies is likely to damage its performance.

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Read McKinsey & Co.’s 2023 Report ‘Diversity matters even more: The case for holistic impact.’

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Read ‘Does Greater Diversity in Executive Race/Ethnicity Reliably Predict Better Future Firm Financial Performance?’ Bermiss, Yerodin Sekou; Green, Jeremiah; and Hand, John R. M., (November 15, 2023). Kenan Institute of Private Enterprise Research Paper. http://dx.doi.org/10.2139/ssrn.4576173