Knowledge Center

Why Diversity and Inclusion Matter: Financial Performance

Purpose

This appendix does not cover the broad range of benefits of workplace diversity and inclusion; rather, it is a supplement to Quick Take: Why Diversity and Inclusion Matter.

A vast body of research documents the relationship between diversity and improved financial performance. However, it is important to note that research can only establish correlations, not causations, between the two. At Catalyst, we encourage companies to go beyond the traditional business case by focusing on diversity and inclusion as talent issues, rather than as the “bottom line.” Focusing solely on the ROI of diversity becomes more about compliance than about building a culture that leverages the innovation of a diverse workforce. For companies that would still like to incorporate the bottom line as part of their business case, the table below maps recent studies on this topic. This list is not exhaustive. Researchers apply a variety of approaches in measuring financial performance and profitability; the indicators presented here offer a few examples.
 

Research

Accounting returns1

  • In a meta-analysis of 140 studies on the relationship between women on boards and firm financial performance, researchers discovered a positive correlation between the representation of women on boards and accounting returns. This correlation is stronger in countries with more robust shareholder protections.2

Cash flow return on investment3

  • Credit Suisse studied 27,000 senior managers at over 3,000 companies across the world. Among the report’s findings: companies in which women hold 25% of decision-making roles generate 4% higher cash flow returns on investment than the overall MSCI All Country World Index (ACWI). When women represent half of senior managers, these companies produce 10% higher cash flow returns on investment than the MSCI ACWI.4

Earnings Per Share5

  • Researchers tracked US companies that appeared on the MSCI World Index from 2011–2016, finding that companies beginning with at least three women on their boards produced median gains of 10% ROE and 37% Earnings Per Share. Those that began with zero women on their boards had negative median changes for ROE and Earnings Per Share. When companies added women to their boards over the five-year period, their median gains for Earnings Per Share were double those of companies that lost women (22% compared with 11%). In fact, adding any number of women to boards was associated with higher median increases in Earnings Per Share.6

Earnings Before Interests and Taxes (EBIT) margins7

  • McKinsey & Company’s global study of more than 1,000 companies in 12 countries found that organizations in the top quartile of gender diversity among executive leadership teams were more likely to outperform on profitability (21%) and value creation (27%). Organizations in the top quartile for ethnic/cultural diversity were more likely to achieve above-average profitability—33% more likely for diverse executive teams and 43% more likely for diverse boards. At the other end of the spectrum, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to experience profitability above the industry average. Researchers measured profitability by using average EBIT margins.8
  • BCG and the Technical University of Munich conducted a survey of diversity managers, HR executives, and managing directors at 171 companies across Germany, Austria, and Switzerland. The study found higher levels of diversity in management positions contributes to increased revenue from new products and services. The research also revealed that companies that establish favorable work conditions for employees have higher EBIT margins (17%) than those who do not (13%).9

Gross and net margins10

  • Researchers from the Peterson Institute for International Economics conducted a global survey of financial and governance data from 21,980 publicly traded firms across 91 countries. The study revealed a positive correlation between the presence of women in senior leadership and profitability (defined as gross margin and net margin). This correlation proved stronger for women in executive leadership positions than for women on boards.11

Investment performance12

  • Finding a causal relationship between diversity and financial performance is challenging, particularly for large companies with complex structures and decisions. Researchers from Harvard Business School focused on the venture capital (VC) industry, in which business decisions and results are clearer to understand. An examination of demographics and investment decisions among VC firm teams from 1990-2018 found that diversity improved profitable investments at the individual portfolio-company level and overall fund returns. Teams that shared the same ethnicity experienced a lower success rate for investments: 26.4%, compared to 32.2% for diverse teams.13

Market performance14

  • In a meta-analysis of 140 studies on the relationship between women on boards and firm financial performance, researchers discovered a positive correlation between the representation of women on boards and market performance in countries with greater gender parity.15

Market value16

  • A 2016 study from Intel and Dalberg Global Development Advisors found a link between diversity and higher revenues, profits, and market value in technology companies. These companies could receive $320–$390 billion in increased market value by closing the gender gap in leadership.17

Return on Assets (ROA)18

  • Credit Suisse studied 27,000 senior managers at over 3,000 companies across the world. Among the report’s findings: companies with 50% or more women on boards had a 20% higher average ROA compared with companies listed on the MSCI All Country World Index (ACWI) (5.7% versus 4.7%).19
  • A study of 2,000 companies in China revealed a positive correlation between gender-diverse boards and two measures of financial performance, return on assets (ROA) and return on sales (ROS). The researchers also found evidence to support the “critical mass” theory—that is, boards with three or more women experienced stronger ROA and ROS than those with fewer women.20
  • After examining annual corporate governance and financial data on over 3,000 US firms from 2007 to 2014, researchers found a positive relationship between women on boards and organizational performance, as measured using Tobin’s Q and ROA.21
  • A study from the International Monetary Fund reviewed over two million listed and non-listed firms across 34 countries in Europe. Their analysis revealed that having a higher number of women in senior positions contributes to a significantly higher ROA. By replacing just one man with one women on the board or in senior management, firms could experience an 8–13 basis point increase in their ROA. This relationship is even more pronounced in industries that employ more women in their overall workforces: a firm in an industry in the top quartile for gender diversity on boards or in senior management is associated with a 20 basis points increase in ROA. In knowledge-intensive and high-tech industries, this relationship translates into an increase of approximately 30 basis points in ROAs.22

Return on Equity (ROE)23

  • Credit Suisse studied 27,000 senior managers at over 3,000 companies across the world. Among the report’s findings, companies experienced a 19% premium on ROE when they had a woman CEO and an 18% premium on ROE when women represented more than 15% of senior management roles.24
  • Researchers tracked US companies that appeared on the MSCI All Country World Index (ACWI) from 2011–2016, finding that companies that had at least three women on their boards from the outset produced median gains of 10% ROE and 37% Earnings Per Share.25
  • A study of 264 banks in Luxembourg found a positive association between women in management positions and improved ROE. Notably, researchers discovered that this association was almost twice as large during the global financial crisis (2007–2009) than in stable market conditions.26

Return on Sales (ROS)27

  • A study of 2,000 companies in China revealed a positive correlation between gender-diverse boards and two measures of financial performance, return on assets (ROA) and return on sales (ROS). The researchers also found evidence to support the “critical mass” theory—that is, boards with three or more women experienced stronger ROA and ROS than those with fewer women.28

Revenue29

  • Gender diversity pays off in revenue, according to a 2014 study of employee survey data from a global professional services firm. The researchers discovered that offices which went from all men or all women to 50/50 gender representation were associated with a 41% revenue increase.30
  • BCG and the Technical University of Munich conducted a survey of diversity managers, HR executives, and managing directors at 171 companies across Germany, Austria, and Switzerland. The study found that higher levels of diversity in management positions contribute to increased “innovation revenue” (income generated from new products and services).31
  • A 2016 study from Intel and Dalberg Global Development Advisors found a link between diversity and higher revenues, profits, and market value in technology companies. For every percentage point increase in Black and Latinx representation across NASDAQ-listed tech companies, the industry could experience a three-percentage-point increase in revenue. This translates to an additional $300–$370 billion in revenue if the industry’s workforce represented the racial/ethnic makeup of the talent pool.32

Sales growth33

  • Credit Suisse studied 27,000 senior managers at over 3,000 companies across the world. Among the report’s findings: companies in which women represent over half of senior management have experienced higher sales growth than the overall MSCI All Country World Index (ACWI) since 2008, averaging 8% per annum.34

Share price performance35

  • A 2015 South African study collected share returns and board director demographic data from the largest 40 companies listed on the JSE index from 2000–2013. The research discovered that increased gender diversity on boards is associated with improved share price performance.36
  • An analysis of share price performance among Australian companies listed on the ASX 500 found that companies with at least one woman among executive key management personnel (KMP) outperformed when compared with the overall ASX 500. Organizations with more than 30% women executive KMPs experienced an even better performance.37

Tobin's Q38

  • After examining annual corporate governance and financial data on over 3,000 US firms from 2007 to 2014, researchers found a positive relationship between women on boards and organizational performance, as measured using Tobin’s Q and ROA.39
  • Diverse social networks are linked to improved financial performance. A 2018 study gathered a sample of over 1,200 CEOs from S&P 1500 firms over the course of 2000–2010. Researchers then created a social-network heterogeneity (SNH) index to map CEOs’ connections to people of varying demographics and skill sets. The findings revealed that higher SNH for CEOs contributes to higher firm value (measured using Tobin’s Q) via enhanced innovation and diversified mergers and acquisitions. For a diversely connected CEO, the improved firm value is equivalent to an estimated $81 million increase in market capitalization for a median-size firm in the sample.40

 

How to cite this product: Catalyst, Why Diversity and Inclusion Matter: Financial Performance (August 1, 2018).