Alex Edmans

Is diversity actually good for business?

It is a sacred mantra of the business circuit that diverse boards improve company performance. It has apparently been proven in multiple studies by the world’s leading companies such as McKinsey and BlackRock, as well as regulators like the Financial Reporting Council (FRC). The evidence is so irrefutable that one FTSE 350 chair raged that ‘There have been enough reports… statistics and… evidence-based research to stop talking about it and get on with it.’ Another viewed the evidence that diversity trumps any other attribute as so ironclad that he tells executive search firms, ‘I don’t want to see any men. I don’t care if they’re Jesus Christ. I don’t want to see them.’ 

But does the evidence really show that diversity is the key to business success, or is this a case of confirmation bias – accepting a claim uncritically just because we want it to be true? 

When you take off your blinkers and look at the evidence with a clear head, you can see the glaring errors in these widely touted diversity studies. Take the FRC report. Its executive summary claims that ‘Higher levels of gender diversity of FTSE 350 boards positively correlate with better future financial performance.’ But when you look at the actual results, they ran 90 tests comparing diversity to financial performance – and every single one found no relationship. The authors announced a result that just wasn’t there. Yet many newspapers and companies parroted the study’s claims, presumably because they wanted them to be true. 

Even when studies do find a correlation between company performance and diversity, it could be data-mined. One McKinsey report claimed to find a strong link between diversity and EBIT (earnings before interest and tax, a measure of profits) using one specific methodology.

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Written by
Alex Edmans

Alex Edmans is Professor of Finance at London Business School. His book May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases – And What We Can Do About It, will be published by Penguin in April 2024.

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