Does diversity benefit businesses?

The Truth Behind Diverse Boards and Improved Company Performance: A Critical Look at the Evidence

There is a widely held belief among businesses that diverse boards lead to improved company performance. This claim has been backed by numerous studies from leading companies, regulators like the Financial Reporting Council (FRC), and world-renowned consulting firms. However, questions have been raised about the validity of this claim. It is possible that people are accepting this idea without proper scrutiny simply because they want to believe it’s true.

Upon closer inspection of the evidence, it becomes clear that there are significant flaws in these well-regarded diversity studies. For example, take the report from the FRC. The report claims that a higher gender diversity of FTSE 350 boards correlates with better financial performance, but after running 90 tests comparing diversity to financial performance, no relationship was found in any of them.

It is important to be aware that studies that do find a correlation between company performance and diversity could be the result of data-mining. One McKinsey report, for instance, claimed to find a strong link between diversity and earnings before interest and tax (EBIT), but total shareholder return (TSR) is just as important or even more so as it measures what you actually get from investing in a company. In conclusion, while the idea of diverse boards leading to improved company performance may seem appealing, it is essential to carefully examine the evidence before making any conclusions.

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