Professor of Finance, non-executive director, author, TED speaker
McKinsey's (2015, 2018, 2020) reports claiming that diversity improves performance have already been discredited. They've doubled down in their latest report, entitled "Diversity Matters Even More", claiming that "the business case is the strongest it has been". While they are not alone in producing flimsy research on diversity, the concerns here are particularly serious for the following reasons: 1. The Errors are Particularly Basic They correlate diversity in 2022 with financial performance in 2017-21. This makes it particularly likely that financial performance causes diversity, rather than diversity causes financial performance. This is an even more basic error than made by other papers (e.g. failing to control for industry). Yet their belief that diversity improves performance is so entrenched, and their confirmation bias so strong, that they dismiss this possibility without any analysis, even though their research design makes it very likely: "It is theoretically possible that financial outperformance enables companies to achieve greater levels of diversity ... However, in practice this seems unlikely." This is the opposite of diversity of thought. 2. The Errors Have Been Extensively Documented Green and Hand (2021) previously showed that the McKinsey studies are irreplicable even with their chosen performance measure (EBIT) and preferred methodology. Moreover, there is no link between diversity and other performance measures, or with more established methodologies that do not throw away data. McKinsey are aware of the critique since Green and Hand called one of the authors. Yet they do not address any of the critiques, using the same flawed methodology as prior papers for "consistency". But continuing to do something wrong and refusing to heed suggestions for improvement is the opposite of diversity of thought. Indeed, McKinsey have gone the other way and obfuscated their methodology (they don't even say how they collect their sample) to prevent future replication. 3. The Errors Contradict McKinsey's Own Research McKinsey produces a gamut of papers claiming to have identified the secret sauce that improves performance. Yet they control for none of these factors in their tests. They simply link diversity to whether performance is above the industry average with no controls. Even if you are an advocate of DEI (as I am, properly practiced), you should be concerned about such papers. They blind you to the fact that properly-measured DEI, that doesn't reduce a person to their gender and ethnicity, may be genuinely correlated with performance, or that DEI initiatives can be justified on social grounds. #MayContainLies https://lnkd.in/eRGn6_BM
David M.
9mo
.. The rational for positive outcomes from DEI practices is that when making decisions, seeking opinions and innovating effectively you consciously seek diverse input and critical discussion to be better informed, have more effectively tested and risk assessed outcomes. Diversity can lead to better outcomes and performance BUT - To use a creative analysis if you are painting a good mix of colours can generate a fantastic pictures but if you just mix the paint up without care, thought, skill or deliberation you bet a muddy brown outcome. Diverse thought must be managed and so the culture and leadership that surrounds a diverse group of people is key to how productive and how well they synthesis their diversity to a potentially outstanding outcome. Studies of DEI impact need to look in granularity and measure and account for actual cultural and leadership styles. I suspect mismanaged diversity can be as destructive to performance as positive and in more likely to impede productivity compared to mismanaged non-DEI groups who while they may do things wrong or badly will nonetheless get things done. Culture and Leadership are needed to translate DEI workforces into an amazing picture of excellence and performance.
Jerry Bowyer
9mo
This is a point that Peter Thiel made in an interview with me, based on his anecdotal, but considerable, experience. Companies with high value creation can "afford" social gestures. Also, it is amazing that these studies are still being done without sector bucketing. Tech is very ethnically diverse and tech has been on a run. Mining and materials is very non-gender diverse. When tech is doing well, it looks like diversity wins. When mining is, the opposite holds. Do these McKinsey guys not know about Simpson's Paradox?
Giuseppe Russo
9mo
To their defense: they're not in the business of being right, they simply sell very pricey PowerPoint slides.
Marc Lawn
9mo
Thanks for highlighting Alex Edmans. There are so many aspects to this that the great comments have already highlighted - the one I haven’t seen yet which is ‘of concern’ to me. How we ensure we have balanced & credible research when the authors have a vested interest in the outcome as a source of revenues/sales. For me, that’s the biggest challenge of all.
Victoria Knox
9mo
Thanks Alex Edmans. Flawed research like this undermines the legitimate objectives of DEI, though I’m sure it still appears in many organisations’ “business case for diversity”.
Jun Yang
9mo
I look forward to reading your new book, Alex.
Diversity of thought and experience are what matters to innovation and in turn financial performance and not diversity based on sex or ethnicity.
Ron Batten
9mo
This type of flawed research is equivalent to greenwashing. There should be laws against it. Mind you, I do believe in the advantages of greenwashing, but I do not believe they could ever lead to maximising short-term profits. Diversity leads to more sound consideration of short- and long-term risks (which reduces short-term profits), better labour relations and a corporate culture that counters all kinds of unprofitable practices such as discrimination on whatever grounds. Some of these practices, such as maternity leave, cost money, but make for a better society. So how could they ever improve firm performance in just a financial sense?
I am not at all surprised by this. McKinsey either employs morons or is trying to drive up diversity-consulting fees. Probably both.
Managing Partner, Thinking Dimensions ► LinkedIN Top Voice 2024 ►Bold Growth, M&A, Strategy, Value Creation, Sustainable EBITDA ► NED, Senior Advisor to Boards,C-Level,Family Office,Private Equity ► Techstars Lead Mentor
9moThank You for sharing Alex Edmans, and I too am a big advocate for properly practiced DEI and am concerned to see such statements from big firms proclaimed as fact when it is clear this is not the case. Why does this matter so much to me? 1. For those who do not support DEI initiatives, it is simple for them to discredit incorrect studies such as this and put the entire effort into question 2. Should we insist that decisions can be made solely on "business cases" the social contract and values of the firm- the very reason for existence- become irrelevant 3. When DEI is implemented well there are benefits which do not necessarily show up directly on the income statement and yet drive enormous long term loyalty and respect Lastly, as someone who has worked in and invested into the professional advisory industry for decades, inaccurate papers and ChatGPT type authority errors discredit the trust we have worked for so years to build and reinforce with our clients and communities.