Diversity makes companies richer says McKinsey. Activist investors take note

A study of more than 1,000 companies shows profitability is significantly higher among companies that hire more women and minorities 

James Moore
Chief Business Commentator
Friday 19 January 2018 11:38
McKinsey says diverse companies are more profitable companies
McKinsey says diverse companies are more profitable companies

When it comes to proving the power of diversity in sport, the stepping out of one Jackie Robinson onto a baseball field in 1947, and his glittering subsequent ten year career, knocked the sport's old fashioned racists out of the park. It just took a while for the rest of the sporting world to wake up.

There won’t be a similar epochal moment in the team sport that is business because the teams are an awful lot bigger and you can't make the case as obvious as Robinson did. You can’t hit a home run to demonstrate your prowess when you’re sitting before an interview panel at, say, the Prudential.

The legendary management consultant McKinsey has, however, done a pretty good of making the case for the Jackie Robinsons of business. And for Billie Jean Kings too while we're at it.

Its report - Delivering on Diversity - reaffirms that diverse companies perform better. Much better.

The findings are stark: Companies in the top 25 per cent for ethnic diversity are 33 per cent more likely to see higher than average profits than those in the bottom quartile. When the latter is applied to gender diversity it comes out at 21 per cent. Still highly significant.

The study - which follows a similar piece of work three years ago and reaffirms its findings - is an exhaustive one. The firm examined 1,000 companies across 12 countries. This is no cheap survey.

It highlights the particular importance of diversity in management roles (where it is often at its lowest) but also in revenue generating ‘line’ roles where women are under represented and, minority ethnic women are particularly under represented. It is from these roles that the executives who can make change happen are usually drawn and it is here that the smart companies that take note of what McKinsey is saying need to do the most work.

If I have one, admittedly self interested, criticism of the work it’s that disability doesn’t get a mention. It would be intriguing to see a future study addressing that. Certainly the conversations I’ve had with the all too few progressive employers in this area say they benefit from hiring disabled people, and that it helps their bottom lines. Perhaps that could be included in future work.

In the meantime, McKinsey also sought to find out why diversity works. With its conclusions it could be accused of stating the bleedin’ obvious. Diverse companies, it found, are better at understanding their customers, find it easy to secure licenses to operate, and boast improved employee satisfaction and decision making. They also find it easier to attract good people generally.

Thing is, the bleedin’ obvious is clearly something that needs stating, again, and again, and again and again, to get it through to some of the bleedin’ thick skulls that dominate the upper levels of business.

It is only when senior level executives start articulating the case for diversity, and pushing the message through their organisations with equal fervour, that change will come and the profits from that change will be reaped. They also need to kick the external recruiters they use. Headhunters too often serve as a subtle impediment to progress.

As for the “we won’t bow to the PC mob when we’re looking for talent” brigade that remains stuck in the 19th century? The figures show that their businesses suffer for their backward looking stance.

Companies in the bottom quartile for both gender and ethnic diversity are 29 per cent more likely to experience below average profitability, and 7 per cent more likely to experience below average value creation than their more diverse peers.

If they won't listen to McKinsey perhaps their investors might like to consider forcing the issue in the way Robinson forced it in baseball and King forced it in tennis?

Activist investors that target underperforming companies and seek to shake them up - an increasingly powerful force in today’s market - might like to consider that they’re missing a trick in not taking aim at a lack of diversity at their targets when they launch their assaults. It is obviously an important factor in what holds back a lot of leaden footed businesses.

​The same is also true for more conventional investors.

But perhaps they too could do with a bit more diversity.

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