The road to riches may not be paved with diversity, equity, and inclusion after all.
A pair of economists investigated a trio of studies that claimed there are bottom-line benefits to diversity in the executive ranks of companies. They found that the linkages did not exist.
The researchers — Jeremiah Green, an associate professor of accounting at Mays Business School at Texas A&M University, and John Hand of the University of North Carolina Kenan-Flagler Business School — found there were no statistically significant correlations between the racial and ethnic diversity of a company’s executive team and its financial success.
The paper, published in March in the Econ Journal Watch, examines a very influential set of studies by McKinsey & Co. that claimed to have detected a link between the diversity of executives and higher profits. Those studies encouraged many companies to pursue more aggressive diversity, equity, and inclusivity (DEI) programs.
Hand and Green wrote:
[W]hen we conduct a quasi-replication of McKinsey’s tests using data for US S&P 500 firms as of 12/31/19, we find a not statistically significant relations between McKinsey’s measures of executive racial/ethnic diversity and not only industry-adjusted EBIT margin, but also industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return.
The new paper adds to the growing backlash against the corporate drive to adopt DEI policies that critics say has hurt businesses and resulted in racial discrimination against executives not seen as adding to the “diversity” of a company’s executive ranks.
Sarah Todd, writing about an earlier draft of the paper for Quartz, reported that there were methodological issues with McKinsey’s study:
Among the additional research that Green and Hand call for is a way to better examine whether there is any causal relationship between a firm’s diversity and its financial performance. McKinsey, by its own admission, is only looking at correlation. Green and Hand are working on a longitudinal study that will look at causation by gathering historical data on the racial and ethnic makeup of firms’ leadership teams in different years, then looking at the companies’ financial performance before, during, and after those years. [Emphasis added]
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From an academic researcher’s perspective, he says, it’s unclear why McKinsey looks only at companies in the top and bottom quartile on diversity, as opposed to the top third or bottom third or not splitting them up at all. Also unclear is why the McKinsey studies focus on whether the most — and least — diverse companies beat the industry average of profitability. “The most standard way to do it is to say what’s the average profitability of diverse versus the average profitability of non-diverse” companies, he says. [Emphasis added]
Alex Edmans, a professor of finance at London Business School, said in a 2017 TEDx talk when reviewing a study, “It’s really easy to get away with sloppy research if it confirms what we’d like to be true because we’ll accept it uncritically,” he says.
Other academic experts, such as Katherine Klein, a Wharton management professor, wrote in a post investigating two meta-analyses on board diversity that the analyses “suggest that the relationship between board gender diversity and company performance is either non-existent (effectively zero) or very weakly positive.”
“Scholarly researchers have rarely found that increased diversity leads to improved financial outcomes,” Robin Elyn, a professor at business administration at Harvard Business School, and David Thomas, president of Morehouse College, a historically black college, wrote in an article for Harvard Business Review.
Now, it appears that many companies may have figured out that DEI does not necessarily drive better performance.
Mentions of DEI or diversity, equity, and inclusion appears to have dropped dramatically since its peak in 2021, according to Axios.
Johnny Taylor, the president of the Society for Human Resource Management, said in a January interview, “The backlash is real. And I mean, in ways that I’ve actually never seen it before. CEOs are literally putting the brakes on this DE&I work that was running strong,” since the death of George Floyd.
Sean Moran is a policy reporter for Breitbart News. Follow him on Twitter @SeanMoran3.
