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McKinsey Report on Diversity Summarized

As noted in a response to comments on an InfoQ article in August, the editors present here a summary of the "Diversity Matters" report.

The study used data from 366 public companies in the United Kingdom, Canada, the United States, and Latin America. They represented a broad range of industries, categorized into the following:

  • Finance, insurance, and professional services
  • Heavy industry
  • Healthcare and pharmaceuticals
  • Telecom, media, and technology
  • Consumer goods and retail
  • Transportation, logistics, and tourism
  • Energy and basic materials

The study evaluated the composition of top management and boards, and financial data (EBIT), using the Herfindahl-Hirschman index to evaluate market concentration and competition. This evaluation showed a positive correlation between financial performance and diversity in leadership, with statistically significant correlations between increases in EBIT margin and increases in diversity of the board or executive team (see chart below). The authors of the study note that the connection they identified is one of correlation, not necessarily causality. However, they state that "companies that commit to diverse leadership are more successful," implying some amount of causality.

Of note, there is no statistically significant correlation in the US between gender diversity and performance until the overall makeup of senior leadership is comprised of 22% women. Once that level is attained, additional increases in gender diversity correlate to an increase in the EBIT margin (10% increase in diversity results in .3% EBIT margin increase).

With this data and other research on diversity, the authors extrapolated a number of specific factors where diversity would benefit the bottom line:

Talent recruitment - In the population of the countries examined, minorities represent a growing percentage of the overall population. "For example," the report states,  "in the US, half of all infants under the age of 1 in 2010 were members of a racial or ethnic minority group. In the UK, the percentage of workers of European ancestry within the total workforce has fallen by almost 10 percentage points in the past decade. In both the US and the UK, women make up almost half the workforce." Additional evidence suggests that diversity is an important factor in increasing levels of engagement for the working cohort born after 1980.

Customer orientation - An organization is more likely to retain customers who feel represented within the company. "By committing to diversity as a strategic imperative, companies align their own organisation more closely with an increasingly heterogeneous customer base." This helps organizations reach key decision makers - for example, 80% of purchasing decisions are made by women in the UK, and similar numbers in the US. Buying power of LGBTQ community reached $790 Billion in US in 2012. African Americans are estimated to have buying power of  $1.1 Trillion by 2015 (estimated in 2013).

Employee satisfaction - "Workplace diversity increases job and life satisfaction for women and members of minority groups provided the workforce is diverse enough. For minority workers, for example, the boost in satisfaction kicks in when representation exceeds 15 percent of the workforce. Where diversity recruitment is a token effort, psychological outcomes are poorer." Employee satisfaction is a known factor supporting retention, thus providing the organization savings in the hiring process.

Decision-making and innovation - Variation in thought produces innovation, through discussions and disagreements. Paul Block, the CEO of Merisant, notes that "Diversity creates dissent, and you need that. Without it, you're not going to get any deep inquiry or breakthroughs." Scott Page, a psychologist at the University of Michigan, has shown through his research that the presence of women and minority members on a leadership team enhances problem-solving, since they add perspectives from different experiences. Ethnically and gender-diverse top teams offer companies more problem-solving tools, broader thinking, and better solutions. The Center for Talent Innovation (CTI) supports Page's research, identifying two kinds of diversity - innate (company composition reflects the customer base) and acquired (diversity at leadership levels that provide broader world view, based on individual stories). A recent CTI report, quoted in the McKinsey report, notes that "when leadership lacks innate or acquired diversity or fails to foster a 'speak-up' culture, fewer promising ideas make it to market.… This thinking can exert a stranglehold on an organization if its leaders are predominantly white, male, and heterosexual, for example, or come from similar educational and socioeconomic backgrounds. In short, the data strongly suggests that homogeneity stifles innovation."

In closing the report, the McKinsey researchers identify diversity programs as change programs, designed to modify the culture of an organization, and provide recommendations on change management. Such programs need continual support and dedication from the top levels of management. They need clear targets, based on reasonable measures, and they need to be integrated into the culture of the organization.

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