Why Diversity Matters

Recent studies continue to show that companies with more diverse teams tend to do better financially.

We all understand that diversity is important on some level. But it’s also becoming more obvious that it makes good business sense. Recent research shows that companies ranking in the top 25% for gender or racial and ethnic diversity are more likely to perform better financially than others in their industry. On the other hand, companies in the bottom 25% for diversity are less likely to beat the average. Over time, diversity may even give companies a competitive edge, helping them gain more market share.

Although correlation doesn’t prove causation (having more women or people of color in leadership doesn’t guarantee higher profits), the link is still strong. Companies that focus on building diverse leadership teams tend to do better. We believe that diverse companies are more likely to attract top talent, better understand their customers, boost employee morale, and make smarter decisions. These factors create a positive cycle that can lead to continued financial success. This also suggests that other types of diversity – such as age, sexual orientation, global experience, and cultural awareness – may offer similar advantages to companies that can bring in and keep such varied talent.

McKinsey has been studying workplace diversity for several years. In their most recent report, Diversity Matters, they analyzed exclusive data from 366 publicly traded companies across various industries in Canada, Latin America, the United Kingdom, and the United States. The study focused on things like financial performance and the makeup of executive leadership and board members. The results were clear:

• Companies in the top 25% for racial and ethnic diversity were 35% more likely to outperform their national industry average in financial returns.
• Companies ranking in the top 25% for gender diversity were 15% more likely to beat their national industry average in financial performance.
• Companies in the bottom 25% for both gender and racial/ethnic diversity were less likely to have above-average financial results, meaning they weren’t just behind the leaders – they were falling short overall.
• In the U.S., there’s a direct link between more racial and ethnic diversity and stronger financial performance. For every 10% increase in diversity among senior executives, earnings before interest and taxes (EBIT) rose by 0.8%.
• Racial and ethnic diversity had a bigger effect on financial performance than gender diversity in the U.S., possibly because earlier gender diversity efforts have already started to pay off.
• In the U.K., having more women in senior leadership showed the biggest gain in performance: every 10% increase in gender diversity led to a 3.5% rise in EBIT.
• Some industries are doing better with gender diversity, while others lead in racial and ethnic diversity. But no industry or company ranked in the top 25% for both at the same time.
• The wide range in company performance within the same country and industry shows that diversity may give more inclusive companies a competitive edge and help them grow their market share.

No one is saying that improving diversity is simple. Women still make up a small share of executive teams – only about 16% in the U.S., 12% in the U.K., and just 6% in Brazil – showing that women are still underrepresented in top leadership roles around the world. The U.K. does a bit better than other countries when it comes to racial diversity, though there’s still a long way to go. About 78% of companies in the U.K. have leadership teams that don’t reflect the racial makeup of the workforce and population. That number is even higher in Brazil at 91% and the U.S. at 97%.

These figures highlight how much progress still needs to be made, even as the argument for diversity grows stronger. We live in a global, highly connected world. It’s not surprising that organizations with more diverse teams are performing better. Most companies, including McKinsey, have more work to do to fully embrace the value that diverse leadership brings. That’s especially true when it comes to growing their talent pipelines: bringing in, developing, mentoring, supporting, and keeping future leaders at every level. Since diversity is expected to lead to higher returns, it makes sense to act now because those who lead in this area will continue to move ahead, while those who delay will fall further behind.