Posted on July 1, 2024

Diversity Was Supposed to Make Us Rich. Not So Much.

James Mackintosh, Wall Street Journal, June 28, 2024

When management consulting firm McKinsey declared in 2015 that it had found a link between profits and executive racial and gender diversity, it was a breakthrough. The research was used by investors, lobbyists and regulators to push for more women and minority groups on boards, and to justify investing in companies that appointed them.

Unfortunately, the research doesn’t show what everyone thought it showed.

There are obvious benefits of diverse corporate leadership for society, both in providing role models and in showing a commitment to promoting the best people, irrespective of skin color or gender. But doing it because it is the right thing is not the same as doing it because it makes more money.

Since 2015, the approach has been tested in the fire of the marketplace and failed. Academics have tried to repeat McKinsey’s findings and failed, concluding that there is in fact no link between profitability and executive diversity. And the methodology of McKinsey’s early studies, which helped create the widespread belief that diversity is good for profits, is being questioned.

McKinsey has tried to remedy one of the most obvious flaws. It originally linked profits over several years with diversity at the end of the period, meaning the most it could prove is that profitability led to more diversity, not the other way around. In its latest study, it said it had now run the tests using diversity at the start of the period, and still found a correlation.


Even the correlation is in doubt. Academics can’t replicate McKinsey’s study precisely, because it keeps secret the names of the companies it used. But a paper published this year finds that McKinsey’s methodology doesn’t show benefits from diversity for S&P 500 companies for a range of profitability metrics. It isn’t that a lack of diversity is good for profits either, it’s just there’s no link.


“It seemed implausible because companies would have jumped on it and the advantages would be competed away,” said John Hand, an accounting professor at the University of North Carolina at Chapel Hill. With Jeremiah Green of Texas A&M University, he found no results that were statistically significant when repeating McKinsey’s study for the S&P 500. {snip}

This matters, because the McKinsey study was hugely influential. McKinsey’s research figures first in BlackRock’s references for supporting a board diversity target of 30% in its proxy voting guidelines. It featured prominently among studies used by a Securities and Exchange Commission commissioner in 2020 to explain why she supported corporate disclosure of diversity metrics. Nasdaq cited it as evidence when the exchange applied to the SEC for a rule requiring companies it lists to have minimum diversity on boards, or explain why they don’t. It has been cited by dozens of campaign groups pushing for rules to support consideration of social issues by pension funds and others, too.

McKinsey’s influence wasn’t only on policy, which ought anyway to consider moral and societal issues as well as purely financial ones. BlackRock and Refinitiv, now part of the London Stock Exchange Group, cited the study as evidence of financial benefits from diversity when they created an ETF that tracked a diversity index. That index has lagged badly behind since its 2018 launch, returning about 55% against more than 70% for the global index without diversity conditions.