Emerging Managers, ESG/SRI

Racially Diverse Workforces Boost Bottom Line, Research Says

A variety of research reports released recently indicate that companies that hire more diversely—and in particular companies that have more women on their boards or in top management positions—are more profitable than those in which White men monopolize or are predominant in the workforce. To many, the question then becomes what is the impact of having a board or management team that includes more racially and culturally diverse members? Do those hires play a part in improving company profitability too?

According to a January 2018 report released by McKinsey & Company, titled Delivery Through Diversity, the answer is a resounding yes. McKinsey researchers found that in 2017, companies with the most ethnically/culturally diverse executive teams were 33% more likely to outperform their peers on profitability. “That this relationship continues to be strong suggests that inclusion of highly diverse individuals – and the myriad ways in which diversity exists beyond gender—can be a key differentiator among companies,” according to the report.

Institutional investors, money managers and advocacy groups over the last couple of years have been exerting increasing pressure on companies to hire more women in senior roles. But many have not followed through with the same intensity in pushing companies to hire more minorities (see IA, 5/1). Some suggest that’s because not enough research exists that establishes a connection or correlation between ethnically diverse hires and an improved bottom line. “Racial and ethnic diversity are just as important to a company’s performance as gender, but there is less economic and financial research available, due to the lack of disclosure,” said Heather Smith, Vice President, Sustainable Investing, Pax World Funds. She added that the information that is out there is a small sample size and not readily available, so the data it not robust. Still, from what researchers have been able to glean, “the same principles apply to diversity, whether you are talking about gender or race. Both enhance decision making, corporate governance and oversight,” Smith said. The McKinsey report begins to make that connection.

Penalties for opting out

Companies will pay a price for opting out of ethnically and cultural diverse hires at the executive level, according to the report. “The penalty for bottom-quartile performance on diversity persists,” it says. “Overall, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to achieve above-average profitability than were all other companies in our data set. In short, not only were they not leading, they were lagging,” the report says.

Narrowing its research to focus on which candidates are getting hired out of school, the numbers for minorities were sorely lacking. Black Americans comprise 10% of U.S. graduates, but hold only 4% of senior-executive positions; Latinos/Hispanics comprise 8% of graduates, but are just 4% of executives; and Asian Americans are 7% of graduates but hold just 5% of executive positions.

Impax Asset Management, investment advisor to Pax World Funds, (see related story in this issue) seems to be ahead of the curve when it comes to pushing for racial diversity at companies and divesting from those that don’t comply with its standards. “With regard to proxy voting, we vote against director slates that do not include any minorities. When we file board diversity resolutions, we ask companies to commit to include women and underrepresented minority candidates in every pool for new nominees and to adopt a policy committing to diversity inclusive of gender, race and ethnicity,” said Smith. A recent resolution at US Foods, a food distributor servicing restaurants healthcare, hospitality, government and educational institutions, said, “We believe that diversity, inclusive of gender and race, is a critical attribute of a well-functioning board and a measure of sound corporate governance. Shareholders request that the Board of Directors prepare a report by September 2018, at reasonable expense and omitting proprietary information, on steps US Foods is taking to foster greater diversity on the Board.

McKinsey report finds diversity effect at board level too

The McKinsey report also found that ethnic and cultural diversity’s correlation with outperformance on profitability was statistically significant not only at the executive level but at the board level as well. “We found that companies with the most ethnically/culturally diverse boards worldwide are 43% more likely to experience higher profits.”

School doesn’t necessarily lead to executive jobs for minorities

The report has some disheartening statistics: Narrowing its research to focus on which candidates are getting hired out of school, the numbers for minorities were sorely lacking. Black Americans comprise 10% of U.S. graduates, but hold only 4% of senior-executive positions; Latinos/Hispanics comprise 8% of graduates, but are just 4% of executives; and Asian Americans are 7% of graduates but hold just 5% of executive positions. By contrast, White executives hold nearly 85% of C-suite positions, but make up just 68% of U.S. graduates. In the U.K., the disparity is even greater: 22% of university students identify as Black and Minority Ethnic (BAME), yet only 8% of U.K. executives in the sample share this identity, according to the report.

Double whammy for Black women

Black women appear to be the target of bias on two levels, gender and race, which may be keeping them from reaching the uppermost levels of corporate leadership. “Black women executives are underrepresented in line roles, and may face a harder path to CEO,” the report said. Among our U.S. sample, not only do women hold a disproportionately small share of line roles on executive teams, but women of color (including black, Latina and Asian women) hold an even smaller share,” the report revealed. In the McKinsey U.S. sample, “black female executives specifically are more than twice as likely to be in staff roles than in line roles, and our sample denotes an absence of black female CEOs,” according to the report. In fact, Black women make up 7% of line roles, Hispanic women make up 10%, and Asian woman make up 13%, compared with 69% of White women in these roles.

“Research supports that diverse and inclusive teams tend to be more creative and innovative than homogenous groups. Diverse teams bring different experiences, perspectives, and approaches to bear on solving complex, non-routine problems. Diverse teams are also better able to target and distinctively serve diverse customer markets, such as women, ethnic minority, and LGBTQ+ communities, which command an increasing share of consumer wealth, and which could represent untapped markets for some companies,” according to the report.

 

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