McKinsey: The benefit of gender and ethnic diversity in leadership

06 July 2020 5 min. read
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Another leading research institute has reconfirmed the business case for diversity in boardrooms. According to a new research by management consulting firm McKinsey & Company, companies with gender diversity and ethnic and cultural diversity in their leadership managed to financially outperform their peers.

McKinsey’s researchers delved into the leadership composition of over 1,000 companies in 15 countries, and compared the make-up against their financial performance. Finding that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile.

Notably, the importance of women in leadership has become more important according to the dataset, amid a rapidly changing economic environment which is placing more emphasis on so-called ‘female’ values and norms. Previous research has shown that female traits such as empathy, collaboration and risk-averseness are becoming more important for the skillset of leadership teams as they navigate unprecedented change and disruption. 

Likelihood of financial outperformance

To this end, the ‘value’ of gender diversity jumped from 15% in 2014 (‘Why diversity matters’) to 21% in 2017 (‘Delivering through diversity’) and 25% in the most recent edition of the study (‘Diversity wins’). Moreover, the researchers found that the value of gender diversity grows with best practice behaviour. The greater the representation, the higher the likelihood of outperformance, with profitability differentials of over 30% for those that lead the field.

“The analysis reaffirms the strong business case for gender diversity and shows that this business case continues to strengthen,” said Vivian Hunt, a senior partner at McKinsey & Company in London and one of the authors of the report.

In the case of ethnic and cultural diversity, the business-case findings are in line with that of previous years, remaining equally compelling. Here, top-quartile companies outperformed those in the fourth quartile by 36% in profitability, slightly up from 35% in 2014. The key finding here is that when executed well, the likelihood of outperformance is higher for diversity in ethnicity than for gender. 

The business case for ethnic diversity on executive teams remains strong

Progress remains slow

While there is advancement on gender diversity and more inclusion in boardrooms, progress is slow. According to McKinsey’s dataset, female representation on executive teams in Western economies hovers somewhere between 10% and 20%, with some progress seen in most markets. The representation of ethnic-minorities is lower, at somewhere between 5% and 14%. 

Minority groups such as LGBQT+ workers face – understandably but also worryingly – an even larger gap. In the US for instance, LGBTQ+ workers are underrepresented across all management tiers, especially LGBTQ+ women. This underrepresentation grows along the corporate ladder, with LGBQT+ leaders making up less than 2% of Senior Vice President and C-suite positions. 

More information on McKinsey’s LGBTQ+ findings: Corporate workplaces falling short on LGBTQ+ inclusion.

In nearly all 15 countries, women are underrepresented on executive teams

Putting it into practice

So how can companies improve their performance in diversity and inclusion? Drawing on its research and experience working with many of the globe’s top performers, McKinsey’s experts put forward a number of recommendations. Obviously, they advise to get the fundament right – making sure that there is enough diverse and minority talent in the organisation through recruitment and retention. Meanwhile, leaders should be held accountable for delivering on key performance indicators.

Then, organisations should develop a governance based on equality, and nurture a culture of fairness and transparency. “To advance toward a true meritocracy, it is critical that companies ensure a level playing field in advancement and opportunity. They should deploy analytics tools to show that promotions, pay processes, and the criteria behind them, are transparent and fair; debias these processes; and strive to meet diversity targets in their long-term workforce plans,” said Hunt. 

Supporting mechanism should be in place too. A zero-tolerance policy is needed for discriminatory behavior, such as bullying and harassment. These and more measures should ultimately ensure that all employees – irrespective of gender, background, etc – feel comfortable and that they can bring their whole selves to work.