The New World Marketplace Dividends – diversity yields higher financial returns
I’ve always geared away from using the terms “diversity” or “feminism” for they are loaded with polarized reactions….viewed mainly as social issues to overcome, HR initiatives so to speak. I coined the phrase The New World Marketplace to address these major cultural macro trends as economic and business imperatives. My background in C-suite and P&L management afforded me credibility in the areas of branding strategies and marketing. But in terms of business leadership, analysis and sample sizes were too small to make a difference. Until now…
McKinsey has been examining diversity in the workplace for several years. Their latest report, Diversity Matters, examined proprietary data sets for 366 public companies across a range of industries in Canada, Latin American, the United Kingdom, and the United States. In this research, they looked at metrics such as financial results and the composition of top management and boards. In short, the companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians. More specifically, companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians. And companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians. That’s big…!!!
Soon, diversity probably won’t be a competitive differentiator for companies. Just look at the talent pipeline….take a look at your new world marketplace customers….women, youth and multicultural. But the time to shift market share towards more diverse companies is NOW. I’d like to encourage all of you to share this data with your senior team. The case is becoming more and more compelling.
Other findings from the report were:
Companies in the bottom quartile both for gender and for ethnicity and race are statistically less likely to achieve above-average financial returns than the average companies in the data set (that is, bottom-quartile companies are lagging rather than merely not leading).
In the United States, there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent.
Racial and ethnic diversity has a stronger impact on financial performance in the United States than gender diversity, perhaps because earlier efforts to increase women’s representation in the top levels of business have already yielded positive results.
In the United Kingdom, greater gender diversity on the senior-executive team corresponded to the highest performance uplift in our data set: for every 10 percent increase in gender diversity, EBIT rose by 3.5 percent.
While certain industries perform better on gender diversity and other industries on ethnic and racial diversity, no industry or company is in the top quartile on both dimensions.
The unequal performance of companies in the same industry and the same country implies that diversity is a competitive differentiator shifting market share toward more diverse companies.
While this McKinsey report still shows concerns for current leadership gap underlining the work that remains to be done, as I wrote in my last blog, I think this issue will resolve itself as the keys to the kingdom are changing hands. (Also read Gen Y women will break the glass ceiling ) Timing is everything. Lead not follow. Time to take full advantage of the new world opportunity that diverse leadership teams represent, given the higher returns that diversity is expected to bring. This is, and continues to be, a strong strategic differentiation. Your leadership needs to represent the customers you serve. Do you know how your customers are changing?
