Study Challenges Claim That Business Benefits From “Diversity”

2024-04-05 14:00:11

A new study challenges the conventional wisdom that diversity improves a business’s financial performance. The study attempted—and failed—to replicate the results of four well-known and widely relied-on studies showing a financial performance benefit from executive team “racial/ethnic diversity.”

The study by Jeremiah Green and John R.M. Hand appeared in the March 2024 issue of the peer-reviewed Econ Journal Watch and attempted to replicate the results of four studies from the management consulting firm McKinsey & Company. The McKinsey & Company studies, published in 2015, 2018, 2020, and 2023, have influenced thought and policy on diversity initiatives in academia, industry, and the military:

The 2023 McKinsey & Company study summarizes the firm’s prior results showing that businesses with racially and ethnically diverse executive teams had a strong advantage in financial performance. McKinsey & Company’s studies used unspecified “publicly available data” from more than 1,000 companies worldwide. The Econ Journal Watch study limited its focus to companies in the United States because “racial and ethnic diversity is an ongoing and currently politically and socially important issue in the US.”

McKinsey & Company, according to Green, would not share its dataset, citing the confidentiality of its clients, some of whom were presumably included in the McKinsey & Company studies. Green and Hand instead had to use companies from the S&P 500, the index of the largest publicly traded companies in the United States.

“Since we know [McKinsey & Company] have substantial business in the U.S. and we don’t know the scope or location of their international clients, we had to start with what we could reasonably collect,” Green told Legal Insurrection.

Green and Hand replicated McKinsey & Company’s methodology, which included sorting executive team members into racial categories after reviewing the executive’s picture and name. Green and Hand, like McKinsey & Company, then determined financial performance using the EBIT margin, which measures a business’s earnings before interest and taxes.

Green and Hand’s study critiqued McKinsey & Company’s methodology for getting causation backward. They note that McKinsey & Company “measures firm financial performance over the four or five years leading up to the year in which they measure the race/ethnicity of the firm’s executives,” so financial performance precedes and may, in fact, lead to diversity.

McKinsey & Company conceded this possibility, noting that

It is theoretically possible that the better financial outperformance enables companies to achieve greater levels of diversity. Companies that perform well financially may choose to deploy more of their resources toward more advanced talent strategies, thus allowing them to attract more diverse talent, for example.

McKinsey & Company further acknowledged that its work established “a correlation, not a causal link.”

Green and Hand, unlike McKinsey & Company, found no statistically significant relationship between diversity in the executive team and financial performance.

“We did try to exactly replicate their results as much as we could with what we know with a reasonable sample,” Green told Legal Insurrection.

Green and Hand then relaxed their methodology in an attempt to find some financial benefit to diversity in the executive team.

“[W]e tried different definitions of diversity, different measures of performance, and different testing methods,” Green continued. “Despite trying our best, we could not get the same or similar results to what they have.”

Green offered some insight into why his study could not replicate McKinsey & Company’s results, including McKinsey & Company’s use of international companies and the possibility that his study and McKinsey & Company’s studies classified executives by ethnicity differently.

“There may be a reasonable explanation for this, but we can’t definitively identify it if they won’t share their data or more of what they did,” Green told Legal Insurrection.

“McKinsey’s Diversity Matters/Delivers/Wins Results Revisited”:


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