Florin Paunescu’s Post

"In a series of very influential studies, McKinsey (2015; 2018; 2020; 2023) reports finding statistically significant positive relations between the industry-adjusted earnings before interest and taxes margins of global McKinsey-chosen sets of large public firms and the racial/ethnic diversity of their executives. However, when we revisit McKinsey’s tests using data for firms in the publicly observable S&P 500® as of 12/31/2019, we do not find statistically significant relations between McKinsey’s inverse normalized Herfindahl-Hirschman measures of executive racial/ethnic diversity at mid-2020 and either industry-adjusted earnings before interest and taxes margin or industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return over the prior five years 2015–2019. Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives." https://lnkd.in/ddSq2DJW

"they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives."  In a series of very influential studies, McKinsey (2015; 2018; 2020; 2023) reports finding statistically significant positive relations between the industry-adjusted earnings before interest and taxes margins of global McKinsey-chosen sets of large public firms and the racial/ethnic diversity of their executives. However, when we revisit McKinsey’s tests using data for firms in the publicly observable S&P 500® as of 12/31/2019, we do not find statistically significant relations between McKinsey’s inverse normalized Herfindahl-Hirschman measures of executive racial/ethnic diversity at mid-2020 and either industry-adjusted earnings before interest and taxes margin or industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return over the prior five years 2015–2019. Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives

Interestingly, McKinsey studies about the outperformance of companies with racially and ethnic diverse executives are non-replicable. "Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives." https://lnkd.in/gTPfkSfZ

Interesting! I guess it means that diversity for the sake of diversity itself doesn’t lead to improved financial performance. If diversity can increase efficiency and productivity in some ways, it may lead to better financial performance. Two things jumped out to me from a quick read of the paper: 1. McKinsey results were for global public firms while the EJW paper is about S&P500 firms. Maybe what works for the world doesn’t work for the US firms! 2. The EJW paper concluded that successful firms diversify more, not the other way around as in the McKinsey report. The age old correlation vs causality problem.

#Diversity is good for many reasons, but the oft-repeated claims that it is "good for business" or that it "leads to excellence" have become #tropes that may relate more to good intentions than based upon current strong evidence. In this paper, Jeremiah Green (Associate Professor of Accounting and Ernst & Young Professorship of Accounting at the Mays Business School - Texas A&M University) and John R. M. Hand (Robert March & Mildred Borden Hanes Distinguished Professor of Accounting at the UNC Kenan-Flagler Business School at University of North Carolina at Chapel Hill–Chapel Hill) re-examine the claims made in a series of studies* from McKinsey & Company. Here's the abstract from their paper: "In a series of very influential studies, McKinsey (2015; 2018; 2020; 2023) reports finding statistically significant positive relations between the industry-adjusted earnings before interest and taxes margins of global McKinsey-chosen sets of large public firms and the racial/ethnic diversity of their executives. However, when we revisit McKinsey’s tests using data for firms in the publicly observable S&P 500® as of 12/31/2019, we do not find statistically significant relations between McKinsey’s inverse normalized Herfindahl-Hirschman measures of executive racial/ethnic diversity at mid-2020 and either industry-adjusted earnings before interest and taxes margin or industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return over the prior five years 2015–2019. Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives." In their conclusion, the authors stress the complex and challenging nature of the topic, and urge for more robust research: "... there is great value in future research that would seek to empirically test for the presence, sign, magnitude, and direction of any causal relations that exist. Such longitudinal and causality-oriented studies may also help bring into sharper focus the identities and sizes of the costs and benefits, as well as the risks and returns, that are associated with higher or lower racial/ethnic diversity, not only in firms’ executives, but in their Boards of Directors and rank-and-file employees." * 2015 – 2023 “Diversity Matters”, “Delivering through Diversity”, “Diversity Wins: How Inclusion Matters”, and “Diversity Matters".

Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives. https://lnkd.in/ennKCJz3

I've been interested in DEI and the value it brings and so was impressed by McKinsey's published work on why diversity correlates with higher EBITDA. But according this study https://lnkd.in/eTjxbKxJ the study's results are not replicable: diversity does not affect EBITDA.

Oof. New from Jeremiah Green and John R. M. Hand in Econ Journal Watch: "Our results indicate that despite the imprimatur often given to McKinsey & Company'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." I think one of the key things is the potential for reverse causality. We're talking about the *prior* financial performance of S&P constituents as of a reference date (2019): "McKinsey notes the reverse causal nature of their tests. In all three of their studies, McKinsey states that their positive relation between executive racial/ethnic diversity and EBIT margin is a correlation, and not a causal link that shows that higher racial/ethnic diversity of executives causes higher firm financial performance. McKinsey also notes that better firm financial performance may lead companies to diversify as defined by their measures of diversity. McKinsey even couches their findings as a "likelihood" of financial outperformance of more diverse firms, indicating that they are positioning diversity as a predictive measure, not a descriptive one, as shown in the graphic below from their 2015 study. The WSJ had a similar reverse-causality issue which I identified in a pro-diversity article around 2019 in this article: https://lnkd.in/gZ69Mu-R Full Econ Journal Watch article here: https://lnkd.in/g3WghJBJ

Talk about a wake up call to how far the mighty consulting firms have fallen. Starting a decade ago McKinsey, one of the richest and most well-connected management consulting companies, produced a whole series of studies claiming dramatic improvements to business success when companies prioritized “diversity” for their executives, rather than just merit. These studies were used to justify sweeping anti-male, anti-Asian, and anti-white discrimination at hundreds of US companies, universities, and government agencies. Now, an updated analysis by two economics professors finds that the studies were totally bogus. There was no link between greater diversity and greater sales, greater growth, or higher stock prices. DEI is a scam. https://lnkd.in/ecN_pWEq