Last year, McKinsey & Company released a study purporting to demonstrate that corporations with more diverse leadership—more women and racial minorities in executive positions—were also more profitable. The consulting behemoth’s findings were consistent with those of its previous three diversity studies, in 2015, 2018, and 2020, each of which had been cited across industries and government institutions as proof of the supposed financial benefits of race- and gender-conscious hiring policies. Now, a new paper raises questions about McKinsey’s methodology and suggests that its advertised findings may have gotten the causation backward: financial success may lead corporations to embrace diversity efforts, rather than the other way around.
Earlier this week, journalist Christopher Brunet flagged a paper in the March 2024 issue of Econ Journal Watch, a biannual publication edited by George Mason economist Daniel Klein that publishes article-length responses to other economists’ errors. The paper, written by accounting professors Jeremiah Green, of Texas A&M, and John R. M. Hand, of the University of North Carolina, addressed the first three of McKinsey’s four-installment series of diversity studies.
Green and Hand sought to test the replicability of McKinsey’s findings. Could another set of researchers, using the same data, come to the same conclusions? Since McKinsey refused to turn over its numbers, Green and Hand had to reverse-engineer the firm’s 2015, 2018, and 2020 datasets. The results were startling: Green and Hand couldn’t replicate the results of McKinsey’s first three studies, which monitored the profitability and executive demographics of an undisclosed group of S&P 500 firms and claimed to have found a positive correlation between diverse leadership and firms’ performance. “We do not find a statistically significant positive correlation between McKinsey’s measures of the racial/ethnic diversity of the executive teams of firms” as measured in December 2019, Green and Hand reported, “and either the likelihood of financial outperformance over 2015–2019 or financial outperformance per se over 2015–2019.”
Green and Hand not only were unable to replicate the studies’ findings; they also found that each of the three studies had analyzed the data backward. Instead of looking at a firm’s diversity policies in the years leading up to a given year’s financial performance, McKinsey had reviewed each firm’s financial performance in the four or five years leading up to the year in which its researchers snapshotted their executive demographics. In other words, according to Green and Hand, the positive correlations that McKinsey researchers observed may have reflected “better firm financial performance causing companies to diversify the racial/ethnic composition of their executives, not the reverse.”
Wouldn’t this methodological problem have been obvious to McKinsey researchers? Apparently, it was. Buried in the firm’s 2018 study, its researchers concede the possibility that “better financial outperformance enables companies to achieve greater levels of diversity”—in other words, that more profitable firms may pursue diversity-hiring policies as a result of their profitability. McKinsey’s public presentation of its results, however, has not been so nuanced. As Green and Hand record, Dame Vivian Hunt, a McKinsey managing partner and a coauthor on each of the firm’s diversity studies, claimed in 2018 that “the leading companies in our datasets are pursuing diversity because it’s a business imperative and driving real business results” (emphasis added).
Despite these methodological concerns, major corporations and government entities have cited the McKinsey studies to justify antimeritocratic hiring practices. A series of posts from the think tank America2100 lists several entities, including Raytheon, JP Morgan, and even the U.S. Navy, that referenced the studies in their DEI materials. Intel Corporation executive Jackie Sturn, for example, cited McKinsey’s research as evidence that “diversity is pivotal for long-term economic growth.”
The hyping of these McKinsey studies reflects progressives’ inability to grapple with or even admit the existence of tradeoffs. They do not consider their preferred programs to be the best of a set of imperfect options; rather, their policies represent definitive advances that come with no corresponding downsides. They don’t see the debate over diversity-hiring programs, for instance, as being between inclusion, on the one hand, and meritocracy, on the other. They think that firms can hire candidates at least partially for reasons having nothing to do with those candidates’ qualifications and not suffer any corresponding drag in performance. It can’t be that diversity-hiring programs correct for past injustices and are worth their inherent costs—a straightforward and honest (if misguided) argument—it has to be that diversity programs actually make corporations richer.
Progressive proponents of decarceration do the same thing. They may want to make the normative case that America’s legal system is wholly unjust and ought totally to be torn down, but they feel compelled to make an instrumental case as well, one that denies the most obvious tradeoffs of their preferred policy—that it would free murderers and other dangerous criminals. So they insist instead that arresting and incarcerating criminals actually “makes us less safe.”
It’s entirely possible that McKinsey will address Green and Hand’s methodological objections and claim vindication for the firm’s original findings. It’s also possible that Green and Hand’s objections are sound, and that McKinsey’s studies are bunk. But if firms are hiring people for important positions at least partially based on irrelevant criteria like race and sex, it doesn’t take a social scientist to deduce that some corresponding decline in performance will result. You don’t need a multimillion-dollar study to tell you what common sense makes obvious.
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