Is there a payoff from top-team diversity?

Abstract5Here is a brief excerpt from an article written by Thomas Barta, Markus Kleiner, and Tilo Neumann for the McKinsey Quarterly, published by McKinsey & Company. They acknowledge that, between 2008 and 2010, companies with more diverse top teams were also top financial performers. That’s probably no coincidence. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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There are many reasons companies with more diverse executive teams should outperform their peers: fielding a team of top executives with varied cultural backgrounds and life experiences can broaden a company’s strategic perspective, for example. And relentless competition for the best people should reward organizations that cast their nets beyond traditional talent pools for leadership.

To understand whether reality is consistent with theory, we looked at the executive board composition,1 returns on equity (ROE), and margins on earnings before interest and taxes (EBIT) of 180 publicly traded companies in France, Germany, the United Kingdom, and the United States over the period from 2008 to 2010. To score a company’s diversity, we focused on two groups that can be measured objectively from company data: women and foreign nationals on senior teams (the latter being a proxy for cultural diversity).

Diversity and performance

The findings were startlingly consistent: for companies ranking in the top quartile of executive-board diversity, ROEs were 53 percent higher, on average, than they were for those in the bottom quartile. At the same time, EBIT margins at the most diverse companies were 14 percent higher, on average, than those of the least diverse companies (exhibit). The results were similar across all but one of the countries we studied; an exception was ROE performance in France; but even there, EBIT was 50 percent higher for diverse companies.

The broad range of companies in our sample makes us confident that industry-specific distortions—those arising, for instance, when a particularly profitable industry has high numbers of foreign executives—are negligible. We did another stress test as well, looking at a subset of German companies for the independent (as opposed to combined) effects of gender and international diversity. Here, too, the performance relationships were strong. Research by our colleagues that focuses on senior women alone (and was conducted over time frames different from ours) also produces similar results.

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Here is a direct link to the complete article.

Thomas Barta is a principal in McKinsey’s Cologne office, Markus Kleiner is a consultant in the Frankfurt office, and Tilo Neumann is a consultant in the Berlin office.

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