A lack of diversity isn’t just a social problem—it hurts firms’ profits

Which of these is not like the other?
Which of these is not like the other?
Image: Reuters/Pichi Chuang
We may earn a commission from links on this page.

The gender gap in wages, workforces, seniority, and treatment is well documented. But while governments and companies across a range of industries are trying to narrow the disparity, their attempts can easily be dismissed by critics as a box-ticking exercise.

Authentic or not, their efforts are vital, and not just to the imperative for social equality between the sexes. If you look at the range of data that’s out there, a lack of diversity is shown to also actively, financially harm companies.

The latest evidence comes courtesy of INvolve, an organization championing greater inclusion of gender, LGBTQ, and racial diversity in business. It commissioned the Centre for Economics and Business Research (CEBR) to calculate the economic cost of workplace discrimination. In the study sent to Quartz, CEBR used Office for National Statistics data on 517 UK firms, examining their financial performance, workforce composition, and company policies to analyze the relationship between the three.

The study concluded that discriminatory pay practices cost the UK economy £127 billion in lost output each year. It also found “a significant positive correlation between diversity and financial performance,” showing that the most diverse workplaces in terms of gender, ethnicity, and sexual orientation are 12 percentage points more likely to outperform industry averages than the least diverse businesses.

This falls neatly in line with other studies that conclude that the more diverse a team or company is, the more likely it is to outperform the industry average in sales and profits.

A study of 1,000 companies across 12 countries by McKinsey & Co. showed that those in the top quartile for gender diversity were 21% more likely to have above-average profitability than companies at the bottom of the pile. If companies had a greater balance in ethnicities at work, they would on average perform 33% better than those that don’t. Other studies that McKinsey did in previous years (paywall) yielded similar conclusions.

It’s also been found that the more gender-diverse teams are, the more productive they tend to be. In a 2014 study (pdf), researchers from the Massachusetts Institute of Technology and George Washington University analyzed the revenue generated from 1995 to 2002 by different teams at a large professional services firm in Boston. The more teams were evenly split between genders, the better their sales. To get a sense of the strength of the effect, consider this: The researchers calculated that going from an all-male or all-female team to one with equal representation of men and women correlated with a revenue gain of 41%.

But it’s hard to create diverse teams unless you recruit and retain diverse talent. In November, HP, alongside roughly 90 other companies including Accenture, Cisco, and Dell, banded together to promise to build a stronger pipeline of diversity for the future. For example, HP in the UK and Ireland said as “a starting point,” the unit is “committing to hiring a minimum of 50% female interns each year,” noting that the internships are the “the main pipeline for our graduate intake.”

“For businesses, this is not a box-ticking exercise,” said George Brasher, HP’s managing director for the UK and Ireland. “There’s both a moral imperative and a fundamental commercial imperative.”

This story is part of How We’ll Win, a project exploring the fight for gender equality at work. Read more stories here.