The Connection Between Diversity and Organizational Financial Results

Thanks to increasingly comprehensive diversity data collection and pressure on companies to share that data, the positive correlation between fostering a diverse organization and improving corporate financial performance is finally coming into focus.

A recent analysis of diversity, equity, and inclusion (DEI) data shared by 277 large employers builds on previous studies that had indicated such a correlation exists. The study, a collaborative effort among three diversity-centric organizations—As You Sow, DiversIQ, and Whistle Stop Capital—reviewed data contained in Equal Employment Opportunity Component 1 data (EEO-1) forms that companies are required to submit to the U.S. Equal Employment Opportunity Commission (EEOC).

Previously, most companies had not shared their forms with the public. But, due largely to pressure from investors and other groups, the number of S&P 100 companies that release their forms publicly more than quadrupled between August 2020 and October 2022, the study sponsors say in a release.

To truly understand the link between diversity and performance, they add, more companies must be convinced to share the data.

Trends spotted in the recent DEI analysis tend to support the theory that greater diversity within both the overall workforce and the management team leads to better financial results. For instance, the data shows that such measures as market capitalization, book value per share, three- and five-year revenue, cash flow, net profit, earnings per share (EPS), and price change all had solid to strong connections to greater diversity within the organization. A more diverse management team generally leads to higher performance in most standard areas that are important to investors.

Key additional findings include:

• Higher representation of Black, Indigenous, and people of color (BIPOC) employees in management has a positive relationship to a range of financial indicators, including higher cash flow, net profit, three- and five-year revenue, five-year return on equity (ROE), and stock performance.
• Positive financial performance correlates with smaller gaps between diversity throughout the employee base and the diversity of the management team.
• Similarly, negative financial performance correlates with larger gaps between BIPOC representation in the broader employee base and BIPOC representation in the management team.
• Five-year ROE has a slightly negative correlation to an increasing proportion of White managers.
• The gap between overall female representation in the workforce and female representation in management has a negative performance association for the financial sector. The larger the gap between overall representation and women in management, the more significant is the underperformance.
• Much diversity is lost between broader organizational representation and the management level, indicating that overarching challenges exist in the cultivation, retention, and promotion of diverse talent, regardless of sector.

Another significant finding: Stock brokers tend to overvalue companies with mostly White management teams. “Brokers are more likely to assess future expected performance positively for those companies with high percentages of White managers, although the past performance data of these companies does not support these optimistic expectations,” the report says.

“This report shifts expectations for DEI reporting from anecdotal to quantitative. It utilizes data to demonstrate the importance of diversity and inclusion for companies making hiring and promotion decisions while looking to outperform their competitors,” says Andrew Behar, CEO of As You Sow. “From an investor’s standpoint, it energizes the demand for deeper disclosure of material information to assist in critical decision-making. We can now see the metrics linking diversity in management to financial performance and the impact of broker bias. This report demonstrates the power of actionable data and explains why shareholders continue to require more granular DEI data transparency from the companies they own.”

From: BenefitsPRO