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Companies say diversity matters. So why aren't they becoming more diverse?

Top-quartile companies for ethnic and cultural diversity are 36% more likely to outperform bottom-quartile ones.

Top-quartile companies for ethnic and cultural diversity are 36% more likely to outperform bottom-quartile ones. Image: Getty Images

Kweilin Ellingrud
Senior Partner, McKinsey & Company
Maria Del Mar Martinez
Senior Partner, McKinsey & Company
Sara Prince
Partner, McKinsey & Company
Lareina Yee
Senior Partner, McKinsey Technology Council
Ishaa Sandhu
Platform Fellow - Diversity, Equity, Inclusion and Social Justice, World Economic Forum Geneva
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  • Diversity and inclusion efforts are stalling on the ground.
  • Leadership must make diversity a priority – if it wants to see the benefits it brings.
  • Firm metrics and performance goals are essential for achieving equity.
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How is the Global Parity Alliance addressing diversity, equity and inclusion?

The business case for gender and ethnic diversity is strong, and getting stronger. Research shows a consistent correlation between diverse leadership and stronger financial performance for companies. For example, companies in the top quartile of gender diversity on executive teams were 25% more likely to experience above-average profitability than peer companies in the bottom quartile – and this premium is increasing over time. In terms of ethnic and cultural diversity, the effect is even stronger: Top-quartile companies were 36% more likely to outperform bottom-quartile ones in return on equity.

Yet efforts on the ground are stalling. From 2015-20, only a third of the 1,000-plus large firms in 15 countries tracked by McKinsey significantly improved. The other two-thirds have stalled or gone backwards. Globally, the representation of women on executive teams rose by only a single percentage point from 2017-19, and that of ethnic minorities by only two points.

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There is no doubt that COVID-19 has amplified challenges in the workplace. Women are experiencing record burnout and are leaving the workplace in multiple countries. And while a record number of companies have committed to increasing resources around racial-justice efforts, those commitments have not yet translated into tangible results. On all elements of inclusion in corporate America surveyed by McKinsey, Black employees scored the lowest.

Diversity is not an innovation problem. We largely know what works. It’s an execution problem, a cultural problem and a scaling problem. Verbal commitments are easy and rife. Accountability and performance are more important and less common.

To help tackle this challenge, the World Economic Forum, in collaboration with McKinsey & Company, has launched the Global Parity Alliance, a cross-industry group of global organizations that are taking action to accelerate diversity, equity and inclusion.

We know that change is needed now. To ensure that progress is made, focusing on the initiatives that work, highlighting the DEI Lighthouse cases, and sharing this knowledge will drive change.

There are several common barriers, but these can be addressed to accelerate progress on gender and racial diversity and inclusion. Here are four ways companies can do better.

1. Make progress on diversity a leadership priority

The Women in the Workplace report published in September by McKinsey and LeanIn.org of 423 US organizations and almost 65,000 people found that 70% of companies say that diversity is very or extremely critical. But fewer than a quarter of companies translate this commitment into recognition for diversity work or accomplishments on formal evaluations such as performance reviews.

Leaders need to communicate what is expected of employees by articulating specific behaviours and actions. For example, before hiring and promotion processes begin, companies can both train and share reminders to the hiring team about how bias can influence evaluations. When leadership does make diversity a priority, the results can be striking. The US-based banking giant Citigroup makes sure leaders at all levels are directly involved in and held accountable for advancing diversity, with scorecards presented at each board meeting. One result: the representation of women on its executive team has gone from 8% in 2014 to more than 30% in 2019.

2. Don’t accept excuses

We get it: Executives are stretched thin, and the COVID-19 era has brought a whole new set of challenges. There are practical actions that are known to work; it is a matter of execution. Setting and tracking clear aspirations is key to focusing attention, yet only 50% of surveyed companies do so. Choose a few specific interventions that could produce quick wins, then build on them. For example, change job descriptions to make them more appealing to more people and ensure that interview slates and succession planning lists are themselves diverse. Hiring based on the capabilities required, rather than background or degrees, can also bring in a more diverse applicant pool. Make it a priority that all employees have access to mentors. Experiment with virtual and flexible work options.

Progress on diversity is slowing, partially because of the pandemic
Progress on diversity is slowing, partially because of the pandemic Image: McKinsey & Company

3. Be systematic

Having processes and metrics in place is not only likely to produce better outcomes, but is more efficient. Diversity becomes a part of business and strategy, not an adjunct to human resources. Pentair, a global water treatment company, has developed a three-part integrated approach: talent acquisition and deployment; talent development and retention; and leadership of diverse teams. There is consistent training and evaluation, and the company ensures that meeting diversity goals is reflected in matters like benefit plans.

4. Align financial incentives, rewards and recognition with diversity goals

Two-thirds of companies impose at least some accountability for senior leaders when it comes to diversity, and this is real progress. But less than a third do so for managers, where many important decisions are made. Moreover, among companies that say they hold leaders accountable, most do not factor progress on diversity metrics into performance reviews (for either leaders and managers), and fewer provide financial incentives. If accountability is not tied to material consequences, it’s no wonder that people don’t invest in it.

Because of its history, culture and the trauma of the murder of George Floyd, these issues are in the spotlight in the United States. But the need to address them is not unique to any one country. Whether it be about women, LGBTQ+ employees, immigrants, or specific ethnic, linguistic or religious groups, every society needs to look at its own context and identify the main equity gaps. Regardless of where, we believe these efforts can bring positive results. For example, in Latin America, there is a strong correlation between gender diversity and behaviours that are directly related to better organizational health. That, in turn, is associated with better business performance.

To realize the promise of diversity, it makes sense for companies to figure out ways to work together. That’s why we’re collaborating with the World Economic Forum to launch a Global Parity Alliance, a group of companies working across industries and geographies to share best practices and practical insights. The hope is that these companies can inspire themselves and others to take action to close opportunity gaps faster.

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What's the World Economic Forum doing about diversity, equity and inclusion?

We believe diversity and inclusion is the next frontier for companies – and that those that get it right will not only be better placed to support their employees but to perform better. Why? Because the qualities that characterize diverse and inclusive companies, such as innovation and resilience, are those that separate the good from the great.

The Global Parity Alliance is a new World Economic Forum action group, established in collaboration with McKinsey & Company. With a global, cross-industry membership and a holistic approach to DE&I, the Global Parity Alliance aims to drive better and faster DE&I outcomes and elevate the effectiveness of DE&I actions – within organizations and across the corporate ecosystem. To do this, as a first step, the Alliance will identify and showcase DE&I Lighthouses – the proven best practices and practical insights from peer organizations that can help others accelerate their DE&I efforts.

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World Economic Forum

May 21, 2024

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