Last week (May 19, 2020), McKinsey released its 2020 report on diversity and inclusion. Titled Diversity wins: How inclusion matters, the report is the third in a McKinsey series investigating the business case for diversity.
The report is based on research covering over 1000 large companies across 15 countries. It suggests that ‘the business case for inclusion and diversity (I&D) is stronger than ever’.
Why is this, and what role should the board play in improving I&D?
The tangible benefits of an organisation built on I&D
Not only is the business case for I&D robust, the report notes that ‘the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time’.
And it’s not all about diversity. The report presents new insights into inclusion, which show that ‘companies should pay much greater attention to inclusion, even when they are relatively diverse’.
The differences between the I&D leaders and laggards
Tracking companies in the reports’ data set since 2014 shows that most have made slow progress; however, this generalisation hides a polarised picture, with some clear leaders. The report notes that ‘some are making impressive gains in diversity, particularly in executive teams’.
Simplifie have previously explored the importance and value of this board-level diversity, asking what your board should be doing on gender parity and looking at the importance of diversity in the boardroom.
Companies that lead the way on diversity are today ‘more likely than ever to outperform less diverse peers on profitability’. This alone should be enough to get the attention of the board – not a common-sense approach or a box-ticking exercise, diversity has a clear link to financial performance.
Companies where the board leads by example demonstrate the biggest rewards; those in the top quartile for gender diversity on executive teams are 25% more likely to have above-average profitability, up from 21% in 2017 and 15% in 2014.
Further, those with the greater representation show the highest outperformance. Companies with more than 30% women executives were more likely to outperform companies with 10-30% women in the most senior roles. With a recent study claiming that UK firms are failing to improve diversity in their boardrooms, this is something you might want to prioritise.
Equally compelling findings are seen when looking at ethnic and cultural diversity; as in their previous surveys, McKinsey found that the potential for outperformance was greater for diversity in ethnicity than in gender.
Penalties for failing to act on I&D
There are not only benefits for those that perform well on I&D, but clear penalties for those that don’t. In 2019, companies in McKinsey’s fourth quartile for gender diversity on executive teams were 19% more likely than companies in quartiles 1-3 to underperform on profitability.
Those that fell short on both gender and ethnic diversity saw an even more pronounced impact, being 27% more likely to underperform on profitability.
The report identifies five cohorts of companies, ranging from Diversity Leaders to Laggards. You can read more detail on the cohorts and the differences in their approaches and performance in the report summary.
What can the board do?
The report notes two critical factors when looking at how approaches to I&D can inform the performance of organisations:
- A systematic, business-led approach to I&D
- Bold action on inclusion
It goes without saying that the board and senior leadership, at the centre of devising and driving business strategy, can play a key role in both of these.
McKinsey state that ‘work environments characterised by inclusive leadership and accountability’ are central to success here – and the report cites ‘strengthen[ing] leadership accountability and capabilities for I&D’ as one of its five suggested areas of action.
Further, it says that firms should ‘foster belonging through unequivocal support for multivariate diversity. Companies should build a culture where all employees feel they can bring their whole selves to work’.
Again, the board needs to lead by example here, modelling behaviours they want to see reflected across the organisation and showing themselves to be an example of the sort of I&D they want across the firm.
To read the full findings from the McKinsey Diversity wins: Why inclusion matters report, you can download the full report here.
Overcoming barriers to inclusion
There are many practical steps boards and organisations at all levels can take to improve their I&D strategies, and increase their chances of enjoying the benefits of a more diverse organisation.
The language of the boardroom is one thing that has been recognised as a potential barrier to inclusion, excluding outsiders or newcomers and making it harder to understand the processes of the board.