Diversity Was Supposed to Make Us Rich. Not So Much.

New research questions the methodology of a McKinsey study that helped create widespread belief that diversity is good for profits

By James Mackintosh of The WSJ. Excerpts:

"Since 2015, the approach has been tested in the fire of the marketplace and failed. Academics have tried to repeat McKinsey’s findings and failed, concluding that there is in fact no link between profitability and executive diversity. And the methodology of McKinsey’s early studies, which helped create the widespread belief that diversity is good for profits, is being questioned.

McKinsey has tried to remedy one of the most obvious flaws. It originally linked profits over several years with diversity at the end of the period, meaning the most it could prove is that profitability led to more diversity, not the other way around. In its latest study, it said it had now run the tests using diversity at the start of the period, and still found a correlation."

"The trouble is that McKinsey behaves as though the studies do show causation, constantly talking of the corporate benefits of diversity.

Even the correlation is in doubt. Academics can’t replicate McKinsey’s study precisely, because it keeps secret the names of the companies it used. But a paper published this year finds that McKinsey’s methodology doesn’t show benefits from diversity for S&P 500 companies for a range of profitability metrics. It isn’t that a lack of diversity is good for profits either, it’s just there’s no link."

"If companies could boost their profits as easily as McKinsey suggested—the most-diverse firms had a 39 percentage point higher chance of higher-than-average profit margins than the least-diverse—then surely companies would have rushed to promote more women and minority racial groups."

"“It seemed implausible because companies would have jumped on it and the advantages would be competed away,” said John Hand, an accounting professor at the University of North Carolina at Chapel Hill. With Jeremiah Green of Texas A&M University, he found no results that were statistically significant when repeating McKinsey’s study for the S&P 500. McKinsey keeps secret the names of the companies in its study, which in 2015 included 186 from the U.S. and Canada, so it can’t be independently verified."

"BlackRock and Refinitiv, now part of the London Stock Exchange Group, cited the study as evidence of financial benefits from diversity when they created an ETF that tracked a diversity index. That index has lagged badly behind since its 2018 launch, returning about 55% against more than 70% for the global index without diversity conditions."

"A similar fund was created earlier by State Street Global Advisors with the ticker SHE."

"Since its 2016 launch the fund’s return has lagged more than 70 percentage points behind that of the top 1,000 companies, from which it selected before switching to an MSCI gauge two years ago. It has shrunk from a peak of $400 million to $245 million."

"Common sense also insists that it’s important to build team spirit and trust, where people with a shared background have a head start. University of Chicago law professor Lisa Bernstein showed this for New York’s Jewish diamond dealers, who would score zero for diversity but gained financially by the trust from their common heritage. Similar studies have shown the same for other small ethnic business groups."

"Skin color and sex don’t perfectly capture diversity of thought, anyway. A privately-educated Black Harvard Business School graduate would probably think much the same way about business as a white one. A top female New York lawyer may have a similar experience of life—or lack of it—as a male one. McKinsey’s diversity of thought suggestions don’t extend to, for example, appointing worker representatives to the board, even though their ideas might well be quite different to those of senior management."