REUTERS | Gene Blevins

Updating the business case for inclusion and diversity

Diversity, whether gender, ethnic or cultural, is an increasingly high profile issue for organisations.  But how can organisations be convinced to implement the changes required to ensure diversity?

The persuasive economic and business case for embracing diversity often leads back to a 2015 report by McKinsey & Company, which was updated earlier this year. The statistics and analysis in that report provide a useful tool for gaining attention from executive teams and planning how an organisation can respond postively and effectively to diversity-related measures. The updated report, summarised in this blog, offers fresh confirmation that supporting diversity makes sense for organisations in every respect.

The Parker Review Committee’s final report into the ethnic diversity of UK boards, was clear in its exhortation to embrace diversity; as Business Minister, Margot James, stated:

‘Businesses of all sizes need to take positive steps to ensure they are not seen as out of touch, to demonstrate that they are operating for the benefit of the many, not the privileged few’.

For further information on the growing focus on diversity, see for example this  note on inclusion and diversity in in-house law or this recent update on gender pay gap reporting.

In January 2018, consultants McKinsey & Company published Delivering through diversity (the Report) which updates and expands upon their 2015 report, Diversity Matters.  The original report was vital in establishing the business case for diversity and the findings in the update reinforce the link between company financial performance and diversity, which is defined as a greater proportion of women and a more mixed ethnic and cultural composition in the leadership of large companies, and company financial performance.

The Report’s analysis draws on a data set of more than 1000 companies covering 12 countries, measuring not only profitability (in terms of earnings before interest and taxes or EBIT) but also longer-term value-creation (or economic profit), exploring diversity at different levels of the organisation, considering a broader understanding of diversity (beyond gender and ethnicity), and providing insight into best practices.

Gender diversity, particularly in revenue-generating roles, correlates with increased profitability and value-creation

The Report finds that companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profitability, and 27% more likely to experience longer term value-creation, than companies in the fourth quartile.  Of note is the finding that having more women executives in line roles (typically revenue generating), is more closely correlated with financial outperformance.  10% of total executives at companies in the top quartile for gender diversity on their executive teams are women in line roles as opposed to 1% at companies in the fourth quartile, however even among companies in the top quartile for gender diversity on their executive teams, women are more likely to occupy staff roles than line roles.

Ethnic and cultural diversity correlates with increased profitability

Based on six countries where the definition of ethnic diversity was consistent and data were reliable, the findings are that companies with the most ethnically diverse executive teams, not only with respect to absolute representation, but also to variety or mix of ethnicities, are 33% more likely to outperform their peers on profitability.  Focussing on the UK and the US, ethnic and cultural diversity on executive teams is low.  For example, 22% of university students in the UK identify as black and minority ethnic, yet only 8% of UK executives in the Report’s sample do.

Persistent performance penalty for lack of diversity

Companies in the fourth quartile for both gender and ethnic diversity are 29% more likely to underperform their industry peers on profitability.

Developing inclusion and diversity strategies

Whilst companies sampled report that utilizing inclusion and diversity as an enabler of business impact are challenging goals, multiple companies worldwide have made sizeable improvements to diversity across their organisations, and have been reaping tangible benefits.  The Report identifies four crucial imperatives, instigated by these companies, in developing inclusion and diversity strategies:

  • Articulate and cascade CEO commitment to galvanize the organisation.
  • Define inclusion and diversity priorities that are based on the drivers of the business-growth strategy.
  • Craft a targeted portfolio of inclusion and diversity initiatives to transform the organisation.
  • Tailor the strategy to maximise local impact.
Practical Law In-house Kitty Hopkin

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