It’s a long list that includes companies like Amazon, Meta and Walmart — some of the biggest corporate names in the world recently announced plans to cancel or roll back their diversity, equity and inclusion (DEI) programs. These companies, ostensibly some of the savviest on the planet in generating financial returns, should now be prepared to lose some money because of this decision.
DEI, which stands for ‘Diversity, Equity and Inclusion’ has become a politicized term and a lightning rod for criticism. The acronym has been misappropriated to blame underrepresented communities for our current financial hardships and fears of economic insecurity.
Politics aside, at the core of it, DEI encourages a variety of perspectives, experiences and considerations within business operations and decisions. Historically, that type of corporate strategy has generated stronger financial returns relative to businesses led by more homogenous groups.
Let’s take a look at how more diverse leadership teams correlate with profitability levels.
McKinsey, the global management consultant company, released a series of four reports over the past decade exploring the connection between corporate executive team diversity and financial performance. Their findings are clear; companies with higher levels of gender and racial diversity on executive teams tend to produce higher financial returns.
McKinsey’s first report was released in 2015, demonstrating that companies in the top quartile of executive gender diversity have a 15 per cent greater likelihood of financially outperforming companies in the bottom quartile. The most recent report published in 2023 saw that figure rise to 39 per cent.
The 2015 report also displayed a 35 per cent increased likelihood of financial outperformance for companies with top quartile executive racial diversity compared to those in the bottom quartile. That figure jumped to 39 per cent in the 2023 report. Companies in the bottom quartile of both executive gender and racial diversity were 66 per cent less likely to financially outperform relative to average performance.
Put plainly, the concept of having people of many backgrounds at the table is better for business.
Regardless of politics, viewpoints or leanings, if financial outperformance is the goal, then treating diversity as a competitive advantage is sensible. Corporate diversity leads to higher probabilities of financial outperformance.
Despite their strong operational track records, Amazon, Meta, Walmart, and so many others, are leaving money on the table by scrapping their DEI initiatives. Let’s see if they’re savvy enough to reverse that decision.
On the investment side, a report published by the Harvard Business Review about the venture capital (VC) industry is pretty revealing. The report collected data from 1990 until 2018, and in that 28-year period, only eight per cent of VCs were women, while just two per cent were racially diverse. Lots of white guys in other words, and those VCs composed of a homogenous group (aka white guys) suffered around a 30 per cent decrease in the rate of successful exits from their investments. Additionally, VCs that increased their share of women partners by 10 per cent saw a 1.5 per cent bump in overall annualized returns, and 9.7 per cent more successful exits too.
The same rings true for private equity. According to a National Association of Investment Companies (NAIC) report from 2019, U.S. private equity firms owned by diverse partners outperformed benchmarks across various indicators, including financial outperformance in more than three quarters of the years from 2000-2018.
You get the idea. There’s a trend here, and it seems a bit foolish to leave money on the table because a three-letter acronym has become so politicized.
Regardless of your take on DEI, there’s ample evidence that points to a correlation between more diverse teams and higher financial returns. Let’s not blame DEI for our current financial challenges and fears of future economic insecurity. The data shows otherwise.
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