Companies could improve their diversity statistics but fail to improve “diversity, equity and inclusion” (DEI), a team of academics has concluded, after developing a new measure of minority representation.
The project, led by London Business School’s Alex Edmans, attempts to build a measure of DEI, that goes beyond counting representatives from minority groups, to create what they describe as a more “holistic” picture of DEI inside companies.
The research found that high DEI, based on the researchers’ new measure, is only “weakly correlated” with traditional measures of demographic diversity, such as percentages of women and ethnic minorities in senior management and the wider workforce. The project also found low correlation with boardroom gender and minority representation.
But perhaps the most important finding from the group, which also includes Caroline Flammer at Columbia University and Simon Glossner, an economist working at the US Federal Reserve, is that firms with sales growth over one and three years tend to score better on DEI, as do firms on three-year stock returns. Dividends also appear to be positively associated with buoyant DEI.
A report from the research team concludes that the findings may change the way company managers think about diversity.
“This has implications for the significant attention paid to diversity metrics,” the researchers warn, “by companies, investors, employees, the public, the media, policymakers, regulation and ESG ratings agencies—they omit a big piece of the picture.
“Companies can ‘hit the target, but miss the point’—improve diversity statistics without improving DEI.”
They add that DEI may follow success because a strong financial position “frees a company from having to focus on short-term pressures and instead allows it to address longer-term challenges, such as DEI.”
Poll position
To create their novel DEI scorecard, the team looked at data between 2006 and 2021 from the Great Place to Work survey, a project run to find the top 100 US companies to be employed.
Among the 58 statements in the poll, there were 13 the team identified as referring to DEI topics, such as: “I can be myself around here”; “This is a psychologically and emotionally healthy place to work”; or “Managers avoid playing favourites”. The 13 also included statements to the effect that people were treated fairly regardless of their race, or sex, sexual orientation or age.
The research also finds a positive association between DEI and “seven out of eight” financial measures, including a return on assets, return on sales, profits divided by employees and sales divided by employees.
However, though increased diversity is assumed to mean more creativity, the research finds little association between DEI and patents.
The team constructed the DEI measures after recent doubts about the assumption that higher levels of minority or gender representation in boardroom and senior management produce better corporate performance.
That was based on an often-cited insight from consulting firm McKinsey. But US academics Jeremiah Green and John Hand cast doubt on the report’s reliability.
They argue it shows better performance improves diversity, not the other way round. They also write that they struggled to replicate McKinsey’s results. Lastly, they worry about the “validity” of diversity measures used by McKinsey.
Diversity is a complex issue and in recent years the business world has moved to address a lack of representation. However, this new research suggests it may take more understanding than simply addressing demographic numbers.