Research

Why Diversity and Inclusion Matter: Financial Performance (Appendix)

Jun 24, 2020

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 return on investment (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

Cash flow return on investment1
  • Credit Suisse studied 30,000 senior executives at over 3,000 companies across the world. Among their findings: companies in which women held 20% or more management roles generated 2.04% higher cash flow returns on investment than companies with 15% or less women in management roles.2
Earnings Before Interests and Taxes (EBIT) margins3
  • McKinsey & Company’s global study of more than 1,000 companies in 15 countries found that organizations in the top quartile of gender diversity were more likely to outperform on profitability—25% more likely for gender diverse executive teams and 28% more likely for gender-diverse boards. Organizations in the top quartile for ethnic/cultural diversity among executives were 36% more likely to achieve above-average profitability. At the other end of the spectrum, companies in the bottom quartile for both gender and ethnic/cultural diversity were 27% less likely to experience profitability above the industry average. Researchers measured profitability by using average EBIT margins.4
  • The Boston Consulting Group 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%).5
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins6
  • Credit Suisse studied 30,000 senior executives at over 3,000 companies across the world. Among their findings: companies in which women held 20% or more management roles generated 2% higher EBITDA margins than companies with 15% or less women in management roles.7
Gross and net margins8
  • 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.9
Internal rate of return10
  • In a study of private equity firms in Europe and North America, researchers discovered that buyout teams with at least one woman produced an average 12% higher in internal rate of return (IRR) compared with all-male teams. The presence of gender diversity also contributed to a reduced average capital loss ratio of funds by 8%-12%.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 value14
  • Social context matters, according to a study of over 1,000 public companies across 35 countries and 24 industries. When countries and industries embrace gender diversity, gender-diverse organizations in those contexts are more likely to experience higher market valuation and revenue (measured using ROA and Tobin’s Q).15
  • Researchers analyzed the content of anonymous reviews of almost 500 publicly traded companies on the website Glassdoor—paying attention specifically to the language employees used when describing company culture. The study found that organizations with greater intrapersonal cultural diversity also had higher market valuations, as well as a higher quantity and quality of intellectual property through patenting.16
  • Credit Suisse studied 30,000 senior executives at over 3,000 companies across the world. Among their findings: companies in which women represent 20% or more in management have enhanced their share price performance compared to companies in which women are 15% or below in management. Researchers found similar findings among corporate boards. Companies with women occupying 10% or more board seats outperformed those with fewer than 10% women or with no women at all.17
  • A company can experience a boost in stock price after publicly disclosing diversity data. A study of 49 gender-diversity announcements from technology companies between 2014 and 2018 found that every additional percentage of women in a company’s workforce at the time of the announcement was associated with an average 0.1 percentage point increase in stock price. Researchers replicated this study among 10 financial services firms and similarly found a 1.65 average increase.18
Operating profit margin19
  • Research analysts from The Wall Street Journal ranked companies in the S&P 500 based on 10 metrics related to diversity and inclusion performance. These metrics included the share of women in leadership roles, the presence of diversity and inclusion programs, and board demographics. The 20 highest-performing companies in the ranking generated a higher operating profit margin (12%) compared to the lowest-ranking companies (8%). When the researchers examined average compounded annual total stock returns over both 5 years and 10 years, they again found that the highest-ranking companies outperformed the lowest-ranking companies.20
Return on Assets (ROA)21
  • 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.22
  • 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 woman 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.23
  • Social context matters, according to a study of over 1,000 public companies across 35 countries and 24 industries. When countries and industries embrace gender diversity, gender-diverse organizations in those contexts are more likely to experience higher market valuation and revenue (measured using ROA and Tobin’s Q).24
Return on Equity (ROE)25
  • MSCI tracked a selection of companies that appeared on the MSCI All Country World Index (ACWI) from 2014-2016, finding that companies with gender-diverse boards were more likely to have superior talent management practices. Additionally, companies with three or more women on their boards and leading talent management practices produced higher ROE and experienced increased employee productivity, as measured in compound-annualized growth rates of revenue per employee, 1.2 percentage points above industry medians. In contrast, organizations with one or zero women on their boards and lagging talent management practices trailed 1.2 percentage points behind industry medians in employee productivity.26
  • Morgan Stanley’s analysis of firms in the MSCI World Index from 2011-2019 revealed that the stocks of North American companies with a high Holistic Equal Representation Score (HERS), which includes the share of women in leadership positions, produced an increased ROE.27
Return on Sales (ROS)28
  • Examining data from the Human Rights Campaign’s Corporate Equality Index between 2011 and 2014, research discovered that organizations with anti-discriminatory policies based on sexual orientation and gender identity were more likely to experience innovation and increased performance, as measured by ROS and Tobin’s Q.29
Revenue30
  • MSCI tracked a selection of companies that appeared on the MSCI All Country World Index (ACWI) from 2014-2016, finding that companies with gender-diverse boards were more likely to have superior talent management practices. Additionally, companies with three or more women on their boards and leading talent management practices produced higher ROE and experienced increased employee productivity, as measured in compound-annualized growth rates of revenue per employee, 1.2 percentage points above industry medians. In contrast, organizations with one or zero women on their boards and lagging talent management practices trailed 1.2 percentage points behind industry medians in employee productivity.31
  • The Boston Consulting Group 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).32
Sales performance33
  • A recent study of Italian manufacturing firms from 1982 to 1997 found that if an organization’s workforce was comprised of about 20% women, the addition of a woman CEO contributed to an increase in overall sales per employee by 3.7%.34
Stock returns35
  • Companies with consistent, inclusive workplace cultures—especially as experienced by historically underrepresented groups—also outperformed the S&P 500 in average annual stock returns during the Great Recession, according to Great Place to Work’s analysis of financial performance from 2006-2014.36
  • Research analysts from The Wall Street Journal ranked companies in the S&P 500 based on 10 metrics related to diversity and inclusion performance. These metrics included the share of women in leadership roles, the presence of diversity and inclusion programs, and board demographics. The 20 highest-performing companies in the ranking generated a higher operating profit margin (12%) compared to the lowest-ranking companies (8%). When the researchers examined average compounded annual total stock returns over both 5 years and 10 years, they again found that the highest-ranking companies outperformed the lowest-ranking companies.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
  • Social context matters, according to a study of over 1,000 public companies across 35 countries and 24 industries. When countries and industries embrace gender diversity, gender-diverse organizations in those contexts are more likely to experience higher market valuation and revenue (measured using ROA and Tobin’s Q).41
  • Examining data from the Human Rights Campaign’s Corporate Equality Index between 2011 and 2014, research discovered that organizations with anti-discriminatory policies based on sexual orientation and gender identity were more likely to experience innovation and increased performance, as measured by ROS and Tobin’s Q.42

How to cite this product: Catalyst, Why Diversity and Inclusion Matter: Financial Performance (June 24, 2020).

 

  1. Cash flow divided by the market value of capital employed. Eric Yocam and Annie Choi, Corporate Governance: A Board Director’s Pocket Guide: Leadership, Diligence, and Wisdom, Third Edition (Washington: Yocam Publishing, 2014), Kindle edition: p. 146.
  2. Richard Kersley, Eugene Klerk, Anais Boussie, Bahar Sezer Longworth, Joelle Anamootoo Natzkoff, and Darshana Ramji, The CS Gender 3000 in 2019: The Changing Face of Companies (Credit Suisse Research Institute, October 10, 2019): p. 22-23.
  3. Ratio of earnings before interests and taxes to net revenue. Jonathan Law, “EBIT,” Oxford Dictionary of Accounting, Fifth Edition (Oxford University Press, 2016).
  4. Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince, Diversity Wins: How Inclusion Matters (McKinsey & Company, May 19, 2020).
  5. Rocío Lorenzo, Nicole Voigt, Karin Schetelig, Annika Zawadzki, Isabell M. Welpe, and Prisca Brosi, The Mix That Matters: Innovation Through Diversity (The Boston Consulting Group, 2017).
  6. Ratio of earnings before interest, taxation, depreciation, and amortization to net revenue. Jonathan Law, “EBITDA,” Oxford Dictionary of Accounting, Fifth Edition (Oxford University Press, 2016).
  7. Richard Kersley, Eugene Klerk, Anais Boussie, Bahar Sezer Longworth, Joelle Anamootoo Natzkoff, and Darshana Ramji, The CS Gender 3000 in 2019: The Changing Face of Companies (Credit Suisse Research Institute, October 10, 2019): p. 22-23.
  8. A company’s gross margin is its percentage of revenue after the cost of goods is subtracted from revenue. The net margin is the percentage of revenue remaining after its overhead and other expenses are subtracted from revenue. Marcus Noland, Tyler Moran, and Barbara Kotschwar, Is Gender Diversity Profitable? Evidence from a Global Survey (Peterson Institute for International Economics, 2016).
  9. Marcus Noland, Tyler Moran, and Barbara Kotschwar, Is Gender Diversity Profitable? Evidence from a Global Survey (Peterson Institute for International Economics, 2016).
  10. “A method that determines the discount rate at which the present value of the future cash flows will exactly equal investment outlay.” New York State Society of CPAs, “Accounting Terminology Guide.”
  11. Oliver Gottschalg, “Private Equity: The Bottom Line Benefits from Gender Diversity,” Financial Times, December 5, 2019.
  12. The success of an investment, measured through profitability and returns. Paul Gompers and Silpa Kovvali, “The Other Diversity Dividend,” Harvard Business Review, July/August 2018.
  13. Paul Gompers and Silpa Kovvali, “The Other Diversity Dividend,” Harvard Business Review, July/August 2018.
  14. The price investors will pay for a share of a company’s stock. New York State Society of CPAs, “Accounting Terminology Guide.”
  15. Letian Zhang, “An Institutional Approach to Gender Diversity and Firm Performance,” Organization Science, vol. 31, no. 2 (2020).
  16. Matthew Corritore, Amir Goldberg, and Sameer B. Srivastava, “The New Analytics of Culture,” Harvard Business Review (January-February 2020).
  17. Richard Kersley, Eugene Klerk, Anais Boussie, Bahar Sezer Longworth, Joelle Anamootoo Natzkoff, and Darshana Ramji, The CS Gender 3000 in 2019: The Changing Face of Companies (Credit Suisse Research Institute, October 10, 2019): p. 19-22.
  18. Roberta Kwock, “Yes, Investors Care About Gender Diversity,” Kellogg Insight (Kellogg School of Management at Northwestern University, March 2, 2020).
  19. “The profit a company generates from its core business before interest and tax, as a percentage of sales.” Dieter Holger, “The Business Case for More Diversity,” The Wall Street Journal, October 26, 2019.
  20. Dieter Holger, “The Business Case for More Diversity,” The Wall Street Journal, October 26, 2019.
  21. Net income divided by average total assets. New York State Society of CPAs, “Accounting Terminology Guide.”
  22. Martin J. Conyon and Lerong He, “Firm Performance and Boardroom Gender Diversity: A Quantile Regression Approach,” Journal of Business Research, vol. 79 (2017): p. 198–211.
  23. Lone Christiansen, Huidan Lin, Joana Pereira, Petia Topalova, and Rima Turk, Gender Diversity in Senior Positions and Firm Performance: Evidence from Europe (IMF Working Paper, 2016).
  24. Letian Zhang, “An Institutional Approach to Gender Diversity and Firm Performance,” Organization Science, vol. 31, no. 2 (2020).
  25. Net income divided by average stakeholders’ equity. New York State Society of CPAs, “Accounting Terminology Guide.”
  26. Meggin Thwing Eastman and Panos Seretis, Women on Boards and the Human Capital Connection (MSCI, March 2018).
  27. Morgan Stanley, “Rise of the SHEconomy,” September 23, 2019.
  28. An organization’s income as a percentage of earnings from sales of products and services. New York State Society of CPAs, “Accounting Terminology Guide.”
  29. Mohammed Hossain, Muhammad Atif, Ammad Ahmed, and Lokman Mia, “Do LGBT Workplace Diversity Policies Create Value for Firms?” Journal of Business Ethics (2019).
  30. An organization’s income, including earnings from sales of products, merchandise, and services. New York State Society of CPAs, “Accounting Terminology Guide.”
  31. Meggin Thwing Eastman and Panos Seretis, Women on Boards and the Human Capital Connection (MSCI, March 2018).
  32. Rocío Lorenzo, Nicole Voigt, Karin Schetelig, Annika Zawadzki, Isabell M. Welpe, and Prisca Brosi, The Mix That Matters: Innovation Through Diversity (The Boston Consulting Group, 2017).
  33. The amount of exchanges of goods or services for money. New York State Society of CPAs, “Accounting Terminology Guide.”
  34. Luca Flabbi, Mario Macis, Andrea Moro, and Fabiano Schivardi, “Do Female Executives Make a Difference? The Impact of Female Leadership on Gender Gaps and Firm Performance,” The Economic Journal, vol. 129, no. 622 (2019): p. 2390-2423.
  35. A return is a profit on an investment, in this case a stock, usually expressed as an annual percentage rate. New York State Society of CPAs, “Accounting Terminology Guide.”
  36. Great Place to Work, Hidden Pieces of the D&I Puzzle (2020).
  37. Dieter Holger, “The Business Case for More Diversity,” The Wall Street Journal, October 26, 2019.
  38. “The sum of market equity and the book value of debt divided by total assets.” Martin J. Conyon and Lerong He, “Firm Performance and Boardroom Gender Diversity: A Quantile Regression Approach,” Journal of Business Research, vol. 79 (2017): p. 198–211.
  39. Martin J. Conyon and Lerong He, “Firm Performance and Boardroom Gender Diversity: A Quantile Regression Approach,” Journal of Business Research, vol. 79 (2017): p. 198–211.
  40. Yiwei Fang, Bill Francis, and Iftekhar Hasan, “Differences Makes a Difference: Diversity in Social Learning and Value Creation,” Journal of Corporate Finance, vol. 48 (2018): p. 474-491; Yiwei Fang, Bill Francis, and Iftekhar Hasan, “Research: CEOs With Diverse Networks Create Higher Firm Value,” Harvard Business Review, April 10, 2018.
  41. Letian Zhang, “An Institutional Approach to Gender Diversity and Firm Performance,” Organization Science, vol. 31, no. 2 (2020).
  42. Mohammed Hossain, Muhammad Atif, Ammad Ahmed, and Lokman Mia, “Do LGBT Workplace Diversity Policies Create Value for Firms?” Journal of Business Ethics (2019).