Diversity, equity, inclusion: Building a business case for companies to embrace DEI – WRAL TechWire – DC Initiative on Racial Equity
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by Greg Brown and Sarah Franks — January 25, 2022 .

Editor’s note: Greg Brown is Executive Director, Kenan Institute of Private Enterprise; Sarah Graham Kenan Distinguished Professor of Finance, UNC Kenan-Flagler Business School. Sarah Franks is Director, Institute for Private Capital.

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CHAPEL HILL – An increasing focus on social justice has shined a harsh spotlight on systemic inequalities in the corporate sector. In response, businesses have renewed their focus on attracting and retaining a diverse workforce. Companies are working to build a business case for diversity along with operating plans to achieve their diversity goals.

In this Kenan Insight, we examine the business case for diversity, equity and inclusion (DEI) efforts. We discuss some of the findings from a joint report with EY and use the private equity (PE) industry as a specific case for addressing challenges that face a broad range of companies.

Examining the Business Case for Diversity

There is an increasing body of research examining the relationship between DEI and operating performance of companies. Unfortunately, the evidence around direct operational benefits of diversity are mixed. We begin by reviewing this literature, and then consider a more holistic approach to the business case for DEI policies based on stakeholder expectations.

Several recent studies document a positive relationship between corporate board diversity and firm value for publicly traded companies.1 Perhaps the most cited work is a series of studies by McKinsey that document better operating performance (i.e., EBIT margins) for a global sample of publicly traded firms with more diverse executive teams. However, recent research by Green and Hand (2020) challenges the relationship between performance and diversity, suggesting there is not a statistically reliable relationship, at least for U.S. companies in the S&P 500.2 In addition, Green and Hand also point out that the McKinsey studies cannot establish causality because the performance metrics are calculated on data sampled prior to the measurement of diversity.

Among private companies, academic research has found that gender diversity improves venture capital deal and fund performance.3 Other research documents that sociodemographic diversity among lead partner teams of private funds positively affects buyout deal performance, but that other types of diversity related to professional experience and educational background can negatively affect performance.4 Furthermore, certain aspects of diversity apparently create challenges and costs that could offset benefits, particularly when implemented without careful consideration of the full range of stakeholders. For example, insincere attempts at creating a more diverse workforce can backfire by creating a toxic culture of tokenism. Other studies show that diverse professional


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