A prominent study used to claim diversity quotas in companies raise profitability is extremely dubious, a recently-published study attempting to replicate the results shows.
At issue is a series of studies by McKinsey & Company, a research firm dedicated to DEI (Diversity, Equity, Governance) ideology, claiming to show a correlation between executive diversity and profitability at large firms.
In “McKinsey’s Diversity Matters/ Delivers/Wins Results Revisited,” published last month by Econ Journal Watch, Professors Jeremiah Green and John R. M. Hand debunk McKinsey’s findings and report that their study failed to duplicate McKinsey’s results.
McKinsey’s “highly influential” findings are used to claim that the science is “settled,” because it’s been proven (by McKinsey) that companies should increase executive diversity in order to increase profits, the “Results Revisited” authors note:
“Consultants, business leaders, and activists often promote the view that a strong and settled business case exists behind the normative view that firms should increase the racial/ethnic diversity of their employees.”
McKinsey & Co. says that its studies found statistically significant positive relations between the industry-adjusted earnings before interest and taxes as a percentage of revenues (EBIT margin) of global large public firms and the racial/ethnic diversity of their executives.
One top McKinsey executive told Bloomberg Television that the studies prove that increased diversity is “driving real business results”:
“What our data shows is that companies that have more diverse leadership teams are more successful. And so the leading companies in our datasets are pursuing diversity because it’s a business imperative and driving real business results”
But, the “Results Revisited” study by Prof. Green and Prof. Hand not only debunks McKinsey’s findings and conclusions, it also notes serious flaws in the methodology used to achieve them, specifically:
- They were unable to replicate the EBIT correlation McKinsey claimed – even when they tried using other financial-performance measures, such as sales growth, gross margin, return on assets, return on equity, and total shareholder return.
- McKinsey used a faulty standard of ideal workplace diversity, which it based on equal proportions of racial/ethnic groups, not the actual percentages of those groups comprised of the overall population.
- McKinsey’s claimed correlation between profits and diversity, even if true, would prove only a connection between the two, not a cause and effect.
- Due to a design flaw, McKinsey’s studies actually measure the opposite of what was intended. Thus, even if a positive correlation did exist, it would suggest that higher profits may lead to increased diversity, not that greater diversity yields higher profits.
In summary, Professors Green and Hand report that their findings show that both the credence given to McKinsey’s studies, as well as the claims that McKinsey’s results prove increased diversity leads to higher profits, are unsupportable:
“In conclusion, our results indicate that despite the imprimatur often given to McKinsey’s 2015, 2018, 2020, and 2023 studies, McKinsey’s studies neither conceptually (in terms of the correct direction of causality) nor empirically (in terms of their set of large US public firms) support the argument that large US public firms can expect on average to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.”
Indeed, other studies show that companies that are managed according to leftwing precepts, that fall under the umbrella of Environmental, Social and Governance (ESG) ideology, actually tend to suffer financially.
ESG funds have a widespread legacy of underperforming the S&P 500, and even posting double-digit percentage losses, as companies that are politically-neutral on social and political issues are more profitable than those that practice leftist political activism.
Companies overtly trying to inflict forms of ESG ideology on their customers today are paying a dear price. A Bud Light campaign celebrating transgender social media influencer Dylan Mulvaney backfired last year, causing the beer to suffer record sales losses. Bud Light’s parent company, Anheuser-Busch, went on to eliminate 400 jobs.
Likewise, when Target introduced “tuck-friendly” swimsuits for women with penises and “gay pride” anatomy-neutral onesies for kids and babies, customers were repulsed. Target promptly lost $9 billion of market capitalization (12% of its stock price) in a single week.
The term “ESG” has even become so toxic that Larry Fink, CEO of the infamous mega-ESG-activist investment firm BlackRock, says that he “won’t say it anymore.” When people hear “ESG,” “We lose the conversation,” Fink says.
And, he’s not the only one who’s dropping the term. Analysis of earnings conference call transcripts of S&P 500 companies reveals a severe downward trend in ESP mentions:
“Since peaking at 156 in Q4 2021, the number of S&P 500 companies citing “ESG” on earnings calls has declined (quarter-over-quarter) in four of the past five quarters.
“Compared to Q4 2022, the number of S&P 500 companies citing ‘ESG’ on earnings for Q1 2023 decreased by 23%.”
CNSNews has reached out to McKinsey for comment and will update this story, if it is provided.