At last year’s World Economic Forum in Davos, Switzerland, the head of Goldman Sachs announced a new policy for the richest investment bank in the world: It would refuse to underwrite the stock offerings of any private company that did not have at least one woman on its board of directors—and that the minimum would move up to two in 2022.
“This decision is rooted first and foremost in our conviction that companies with diverse leadership perform better,” the Goldman CEO, David Solomon, declared. “Companies that have gone public with at least one female board director outperformed companies that do not.”
Solomon gave no source for this assertion, and Goldman did not reply to a request for comment. But much of the authority for claims like his rest on three studies done between 2015 and 2020 by the consulting company McKinsey, which were trumpeted as proof that large companies can boost their profits significantly by adding women and people of color to their boards of directors. “Companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above average profitability than companies in the fourth quartile,” the 2020 report says, while those in the top quartile for ethnic diversity are 36 percent more profitable than those in the bottom quartile.
“What our data show is that companies that have more diverse leadership teams are more successful,” the 2020 report concludes, recalling the two-word phrase in the title of an earlier report: “Diversity Wins!”
That line has been given credibility in major media outlets. “Diversity isn’t just a feel-good measure; it has bottom line benefits,” The Wall Street Journal reported in a 2018 piece on the McKinsey study. That conviction has inspired policies at large companies such as Goldman, and new state laws, including one in California that requires corporations headquartered in the state to have at least one director “from an underrepresented group” by the end of 2021, two by 2022—and three such directors if the board consists of more than nine people.
Even as the McKinsey’s conclusions have become conventional wisdom in America’s power centers, there has been little outside scrutiny of its claim that companies enjoy bottom line benefits when they replace white men in leadership positions with women and people of color. But a new academic paper—the first detailed, independent analysis anybody has made of McKinsey’s findings and methods—concludes that while there is nothing wrong with diversity per se, McKinsey provides no evidence that it “wins.”
“Our results suggest that despite the imprimatur often given to McKinsey’s (2015, 2018, 2020) studies, caution is warranted to support the view that U.S. publicly traded firms can deliver improved financial performance if they increase the racial/ethnic diversity of their executives,” the authors report in a summary statement of their findings.
The study, carried out by Jeremiah Green, an associate professor of accounting at Texas A&M University, and John R.M. Hand, distinguished professor of accounting at the University of North Carolina, Chapel Hill, also suggests that McKinsey has misleadingly characterized its own findings to make the case for diversity.
“McKinsey’s studies are a little strange,” Hand said in a Zoom interview, “because they’re not structured to detect any causal evidence [that diversity generates profits]. They’re silent with regard to the fundamental causal question.”
The McKinsey study, written by four of the company’s consultants in its London, Chicago, and Atlanta offices—gives each firm that it studied a “diversity score,” based largely on pictures and descriptions of executives on that company’s website and reports. It then measures each company’s economic performance. But as McKinsey acknowledges in the methodology section of its 2020 report, the financial data it collected on companies came from the period 2014 to 2018, while the data on diversity was compiled from Dec. 2018 to November 2019—showing that the diversity data come after or at the same time as the financial data, not before.
In other words, McKinsey’s own data show, if anything, the likelihood that profit leads to more diversity, not the other way around. Green and Hand didn’t study the causes of such a direction of causality, but in his Zoom interview Hand cited one likely reason: “More successful firms are able to spend more money on aspects that would appeal to customers and respond to internal pressures from employees or boards—that would be the idea.”
McKinsey acknowledges this possibility in its 2020 report. “We are not asserting a causal link,” the methodology section states. “It is theoretically possible that the better financial outperformance enables companies to achieve greater levels of diversity.”
Nevertheless, as Green and Hand point out, the company’s public interpretations of their results seem to set aside this crucial problem. They quote Vivian Hunt, McKinsey’s managing partner in the United Kingdom and one of the study’s four authors, saying, “What our data shows is that companies that have more diverse leadership teams are more successful.” Companies are implementing diversity, she continued, “because it’s a business imperative and driving real business results.”
Similarly, the main body of the McKinsey report repeatedly and enthusiastically makes “the business case for diversity,” even as it encourages companies to “purposefully tackle inclusion,” but there are no caveats or qualifications until the technical aspects of the report are disclosed at the end. McKinsey claims to have conducted “longitudinal analyses” of 365 companies in the United States and the United Kingdom—meaning that its studies were carried out over periods of time, years in typical cases. The McKinsey study does look at the companies’ degree of diversity over time, but that does not seem to be the case with financial performance as a function of racial or ethnic representation among the companies’ executives.
“The business case for diversity is growing stronger and clearer,” McKinsey’s 2020 report says nonetheless. “The experience of the diversity winners we have studied suggests that it’s time to be bold in deploying a systematic approach to I[inclusion] & D[iversity].” The coronavirus epidemic has made doing business harder than ever, it says, but “[c]ompanies whose leaders welcome diverse talents and include multiple perspectives are likely to emerge from the crisis stronger. In short, diversity wins, now more than ever.”
Asked for comment on the Green–Hand conclusions, a McKinsey spokesperson said in an email that the academics’ study “defined diversity differently, gathered data using a simplified analysis and looked at a significantly smaller data set focused only on U.S. data. ... It’s not surprising that with different methods, they ended up with different results, although we would note that their results are directionally similar to ours.”
In fact, it’s debatable whether Green and Hand’s conclusions are “directionally similar” to McKinsey’s, but on the matter of the size of the study, McKinsey is correct that it examined more companies than Green and Hand, in all 1,036 of them in 15 countries, compared with the 497 in the S&P 500 examined by Green and Hand. The large majority of those 497 companies were American, compared with the 322 American companies in the 2020 McKinsey study.
Addressing the Green–Hand argument that the McKinsey study was not longitudinal, the spokesperson said, “Throughout the report and in multiple exhibits, we compare the 2019 data that we describe in our methodology with our 2017 and 2014 datasets.”
Green and Hand find other problems with the McKinsey report, including its assumption that the single factor of diversity could lead to the remarkable outcomes its study proclaims—a 36 percent improvement in the likelihood of having financial returns above the national industry medium for companies with the highest diversity indices. That’s an astonishing improvement to attribute to a single factor. Could having a few underrepresented minorities among a company’s executives really be solely responsible for such an immense difference?
“The output of high firm financial performance causally depends on a vast number of inputs, not just racial/ethnic diversity,” Hand said in an email. “This ‘vast number’ aspect is important,” he added, because, among other reasons, “it plausibly means that any one of the vast number of inputs is unlikely in and of itself to be a, or the, huge driver of financial performance.” Green and Hand also question the measure of diversity used by McKinsey to create what it called its “diversity score.” What they call the “key weakness” here is that the score given by McKinsey to any study “doesn’t benchmark against anything"—not against the actual representation of various ethnic groups in society, or what that representation was when the current generation of executives was graduating from college.
As a result, McKinsey’s score doesn’t say much about what diversity actually means in any given company. As Green and Hand point out, a company whose executives match the American population—ranging from 61 percent white down through to 1 percent Native American–would have the same diversity score as a company that had the reverse representation (61 percent Native American down through to 1 percent white).
This “counterintuitive” diversity metric, as Green and Hand put it, means that McKinsey gives no indication of whether a high diversity score means a significant representation of the groups that are of most concern to the social justice movement, namely blacks and Hispanics. McKinsey simply doesn’t say whether diversity means larger numbers of blacks and Hispanics or larger numbers of ethnic Koreans and Chinese.
“The McKinsey diversity score is blind to what people are most interested in,” Hand said, “namely the fractions in executive positions of specific racial and ethnic groups. They get to diversity in a very generic and not very meaningful way,” and certainly not in the way that both business people and diversity advocates actually care about.
While the Green and Hand study is particularly robust—they tested all of McKinsey’s data for the hundreds of Americans companies it included to see if they could reproduce the consulting firm’s findings (the researchers could not)—they are not the only scholars to challenge the assertion that diversity is good for the bottom line. “Getting Serious About Diversity: Enough Already With the Business Case” is the title of an article last year in the Harvard Business Review by Robin J. Ely, a professor of business administration at Harvard, and David A. Thomas, a professor emeritus at Harvard, now the president of Morehouse College. There are plenty of reasons to promote diversity, they argue, but higher profits is not one of them.
“Business leaders and diversity advocates alike are advancing a simplistic and empirically unsubstantiated vision of the business case,” Ely and Thomas write. “Taking an ‘add diversity and stir’ approach ... will not spur leaps in your firm’s effectiveness or financial performance.”
Asked specifically about the McKinsey studies, Ely said in an emailed response, “They are correlational and don’t control for much of anything as far as I can tell. They are also cross-sectional as opposed to using data over time,” and, she added, “the latter kinds of data sets (longitudinal) are really the only ones from which one can reasonably test hypotheses about x causing y.” She and Thomas argue in their Harvard Business Review article that having company directors from different sexes or ethnicities doesn’t automatically mean a diversity of “perspectives,” as diversity advocates often claim, since women in business don’t necessarily see things differently from their male counterparts, and, indeed, when there are different perspectives, “things often get worse, because increasing diversity can increase tension and conflict.”
There are other reasons for skepticism about the McKinsey conclusions and the use put to them by those claiming the diversity–profit connection. Among them is a comparison with ethnically homogeneous countries whose companies, despite their lack of diversity, have been successful and highly competitive on the international business scene.
It’s not likely, for example, that Chinese giants like Tencent or Alibaba have many ethnic Tibetans or Uyghurs in senior corporate positions, and women are severely underrepresented on Chinese corporate boards. According to a report by the World Economic Forum, as of 2018 only 21 percent of Chinese companies had even a single woman in a senior managerial position.
Similarly in Japan, according to McKinsey itself, only 15 percent of managerial positions are held by women, well below the world average, and yet many Japanese companies are highly successful, including against their American competitors.
Of course, the drive for diversity can be justified in many ways besides some supposed financial benefit, as matters of fairness, equal opportunity, social justice, and others. But the claim that diversity leads to profitability has been used by powerful companies like Goldman Sachs and state legislatures like California’s as a main reason not just to pursue their own diversity programs but require them on the part of others—diverse boards for companies to be approved for underwriting in the case of Goldman, or to be in compliance with the law in the case of California.
Since California imposed its requirement on local companies to have both women and underrepresented minorities on their boards, there’s been a whole literature asserting that this has led to improvements in these companies’ bottom lines.
“Women on boards are good for California business,” was the headline of a recent opinion piece in the Times of San Diego by Betty T. Yee, the state’s controller, but Yee, while citing McKinsey and earlier studies on the supposed benefits of gender diversity, cites no data on the financial performance of California companies since the gender equality law went into effect. She seems, like many people, to take it for granted that having more women on corporate boards will illustrate that McKinsey headline: Diversity Wins.
But is this conclusion based on real data examined over time, or is it a kind of corporate magical thinking, or perhaps a calculated effort by companies like McKinsey to show publicly that they are signing on to a fashionable trend?
Ely and Thomas, who have actually studied the question in detail—not specifically in California but among the largest companies nationwide—have a very different point of view. “We know of no evidence that replacing, say, two or three white male directors with people from underrepresented groups is likely to enhance the profits of a Fortune 500 company.”
