When companies make hiring and other decisions related to diversity, many cite the positive impact they expect it to have on the business’s performance. A 2022 analysis of Fortune 500 companies’ websites by Boston University’s Oriane Georgeac and London Business School’s Aneeta Rattan finds that about 80 percent use its impact on performance as their main justification.
But does that argument actually hold up? University of North Carolina’s Sekou Bermiss, Texas A&M’s Jeremiah Green, and UNC’s John Hand (a visiting professor at Chicago Booth since 2017) analyzed data for the full set of companies in the S&P 500, and they find no evidence of a relationship between greater diversity on executive teams and better subsequent financial performance.
Consultants, business leaders, and activists often promote what the researchers call the “business case for diversity,” or the notion that greater racial and ethnic employee diversity yields financial benefits for the employer. Management consultancy McKinsey & Company, for example, has several studies—released in 2015, 2018, 2020, and 2023—that report a large and statistically significant positive relationship between adjusted earnings at an anonymized set of large public companies and the diversity of their executives.
“What the data shows is that companies that have more diverse leadership teams are more successful. And so the leading companies in our data sets are pursuing diversity because it’s a business imperative and driving real business results,” Dame Vivian Hunt, formerly a senior partner at McKinsey, said in a 2018 interview on Bloomberg Television.
But such statements contrast with more nuanced findings in academic research about the costs, benefits, risks, and returns of greater diversity, write Bermiss, Green, and Hand, who decided to do their own investigation.
The researchers gathered information from corporate websites about the racial and ethnic makeup of S&P 500 leadership teams, as recorded midyear in 2011, 2014, 2017, 2021, and 2022. They then determined if any of nine measures of executive racial and ethnic diversity (including McKinsey’s) predicted variation in any of six measures of financial performance—sales growth, gross margin, profit margin, return on assets, return on equity, and total shareholder return—over the subsequent fiscal year.
They also included the fraction of corporate executives who are women in order to simultaneously test another commonly voiced claim: that greater gender diversity on executive teams leads to better financial performance.
Their analysis includes data from 2011 to 2022, covering the period that followed the 2020 murder of George Floyd, when many companies made a public commitment to racial diversity. Yet their research finds no positive relationship between either racial and ethnic diversity or gender diversity and financial performance over the next fiscal year.
The researchers looked at how nine measures of leadership diversity affected any of six annual performance outcomes at S&P 500 companies over five years, running 270 regressions in all. A diversity measure significantly predicted performance in only nine instances, they find.
The researchers ran 270 regressions in all—nine racial/ethnic leadership diversity measures applied to six performance measures for each of the five fiscal years studied. Diversity predicted next year’s financial performance in just under 5 percent of the regressions. “The data speaks almost exactly to what would be expected to be seen in terms of results purely by chance,” says Hand. Analysis of the gender diversity in executives produced similar results.
As such, their findings do not support the business case for either racial and ethnic or gender diversity, the researchers argue. “And with regard to racial and ethnic diversity, McKinsey’s studies are also problematic in that they measure firm financial performance over a three to four year period, and only at the end of that period do they measure executive racial and ethnic diversity,” Hand says.
McKinsey’s results, the researchers argue, indicate that higher financial performance leads to greater diversity among executives, not the other way around. “McKinsey found that those in their particular set of firms that were more profitable made the time to become more diverse,” adds Green. “The fewer existential crises a firm is dealing with, the more time and money it can spend on matters of diversity.”
Green and Hand, in a separate project, tried but failed to replicate McKinsey’s results for the S&P 500.
Reached for comment, a McKinsey spokesperson issued the following statement:
“In light of a recent study criticizing our methodologies, we have reviewed our research and continue to stand by its findings—that diversity and inclusion are associated with a higher likelihood of financial outperformance. We have also been clear and consistent that our research identifies correlation, not causation, and that those two things are not the same. For more than a decade, we have published groundbreaking research into the business and economic impact of a diverse workforce, and welcome discussion of this important topic.”
Bermiss emphasizes that the research he conducted with Green and Hand shouldn’t be interpreted as saying that companies ought not to hire diversely. “There are benefits to diversity in the workplace that are not directly related to firm-level profitability,” he says. “However, firms should be clear about the motivations to implement diversity policies.” Perhaps relying solely on the business case for diversity is a shaky justification for hiring—after all, he asks, if a company says it’s hiring diversely because doing so improves profit margins, what happens if those profit margins do not improve? “It would likely reduce support for these policies.”
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