The Pentagon failed to respond to questions about a peer-reviewed study seeming to debunk key research used to underscore arguments for diversity, equity and inclusion (DEI) initiatives throughout the military.
The Department of Defense (DOD) and the Navy have each cited studies conducted by global consulting giant McKinsey & Company to justify DEI policies and recruiting and retention efforts favoring minorities. Department leaders say business practices apply to the military and characterize the studies as further evidence that more racially and ethnically diverse teams yield better performance results.
However, a new, peer-reviewed paper published in March in Econ Journal Watch, a journal published by the Fraser Institute, builds a case that McKinsey’s conclusions were flawed; not only could researchers not reproduce the McKinsey studies, but the firm’s methodology undermined its eventual findings.
The Navy said it was unable to comment on the new study because it was not conducted by a Navy organization, a spokesperson explained to the DCNF. The DOD did not respond to the DCNF’s request for comment in time for publication.
McKinsey & Company is a mammoth U.S.-based management consulting firm that serves customers across the globe, including international governments, militaries and defense industries.
The company attests to holding a “deep and longstanding commitment” to advancing DEI efforts, including social justice and anti-racism in business and has spent $20 million on research into DEI, according to the company’s “About Us” page. Its diversity and inclusion studies have been used to support business talent acquisition practices and cited in Harvard Business Review.
The new paper concluded that caution is warranted when relying on McKinsey’s findings to justify improved financial performance following the increase in racial and ethnic diversity.
Authors Jeremiah Green, an associate professor at Texas A&M University’s Mays Business School, and John R. M. Hand, a distinguished professor at University of North Carolina-Chapel Hill’s Kenan-Flagler Business School, said they attempted to replicate the results of McKinsey’s multiple studies purporting to show that increasing racial and ethnic diversity is correlated with better financial performance.
“McKinsey’s studies neither conceptually (in terms of the correct direction of causality) nor empirically (in terms of their set of large U.S. public firms) support the argument that large U.S. public firms can expect on average to deliver improved financial performance if they increase the racial/ethnic diversity of their executives,” the authors conclude. (RELATED: EXCLUSIVE: ‘A Huge Blow’: Decline In White Recruits Fueling The Military’s Worst-Ever Recruiting Crisis, Data Shows)
In 2015, 2018, 2020 and 2023, the firm released installments in a series of research reports that extol the value of racial, ethnic and gender diversity in business. Central to McKinsey’s backing of DEI is the idea, supported by self-conducted studies, that companies with racially and ethnically diverse high-level executives tend to perform better, with higher productivity and profit margins.
While it does not claim to prove a causal relationship, it does argue that the relationship between ethnic diversity and financial outperformance grew stronger through the various iterations of the study.
“A strong business case for ethnic diversity is also consistent over time,” McKinsey wrote. The last version of the study, published in 2023 from a dataset dated to 2022, found a 39% increased likelihood of outperformance for companies in the top quartile of ethnic diversity.
‘DEI Core Competencies’
Several DOD publications directly reference the suspect diversity studies to support the claim that companies high in racial and ethnic diversity companies outperform less diverse counterparts.
“There is a business case for the Department’s prioritization of DEI as normal operations,” a November 2022 DOD human resources newsletter states. “McKinsey & Company reports diversity in executive teams makes them stronger and ‘the most diverse companies are now more likely than ever to outperform less diverse peers on profitability,'”
Diversity can lead to higher productivity, creativity and innovation and render employees happier and more likely to stay at the company, it adds.
The Navy’s 2021 “Health of the Force” report references the findings of McKinsey’s 2015 research to suggest that capitalizing on a mass of on racial and gender-diverse sailors will “increase our warfighting potential, innovation, and lethality.
The document then goes on to describe how the service has or plans to implement trainings and policy changes encouraging Navy leaders to develop “DEI core competencies.”
Another Navy publication on the findings of “Task Force One” cited the 2015 McKinsey study in a section explaining the importance of knowing the racial and ethnic composition of the force — although McKinsey only examined diversity among senior leadership.
Former Chief of Naval Operations Michael Gilday set up “Task Force One” in 2020 to probe society-generated issues “that detract from Navy readiness, such as racism, sexism and other structural and interpersonal biases,” according to the report.
DOD has obligated nearly $400 million to McKinsey since 2009, data from USASpending.gov shows.
The belief that increased diversity contributes to improved performance is replicated throughout the DOD’s documents and public statements on DEI efforts, although they are not always explicitly linked to any study or underlying data.
Soon after taking office, President Joe Biden dictated that all federal workplaces, including the DOD, should “cultivate a workforce that draws from the full diversity of the Nation.” Officials throughout the Pentagon and service branches have defended the military’s ability to both promote diversity and adhere to a merit-based system.
The DOD’s DEIA Strategic Plan says DEIA efforts should be data-driven. The plan later states “A more diverse, equitable, inclusive, and accessible force can ensure that the benefits of teams comprised of individuals with a broad range of backgrounds and experiences – such as improved problem-solving and critical thinking – accrue to DoD.”
‘No Evidence’
When Green and Hand tried to copy McKinsey’s studies, they could not achieve similar results.
“No evidence of any statistically significant positive relations between the financial performance of S&P 500® firms and McKinsey’s measures of the racial/ethnic diversity of their executives,” the authors wrote.
They worked backwards from the process laid out in the original papers to infer statistical functions with a sample of S&P 500 companies and racial and ethnicity data coded from publicly available data on firm executives. The journal’s “quasi-replication” of McKinsey’s study, granted, only examined U.S. firms and the sample of companies Green and Hunt included differed slightly from McKinsey’s sample.
There was no statistically significant positive correlation between McKinsey’s measurements when they were taken in 2019 and the likelihood of overperformance during the time period McKinsey looked at in the study 2015 to 2019, the authors found.
McKinsey uses a definition of diversity for its calculations that assumes a perfectly diverse company would be more diverse, or have different distributions of racial and ethnic groups, than the general U.S. population, according to the paper.
McKinsey also interprets the direction of correlation between diversity and financial performance backwards, Green and Hand wrote. Researchers measured financial performance for the companies in their sample over the four or five years preceding the time they measured diversity among company executives. A possible conclusion would be that better profitability is positively correlated with more diverse leadership.
The latest study report acknowledges in a section on limitations that “It is theoretically possible that financial outperformance enables companies to achieve greater levels of diversity” but says the practice seems unlikely.
Diversity is a force multiplier and we are committed to inclusivity. Find out how the DOD is crowdsourcing to identify better ways to promote diversity and inclusion: https://t.co/wot2goEFVu pic.twitter.com/u2a5weh2ku
— Department of Defense 🇺🇸 (@DeptofDefense) August 25, 2020
The 2015 study examined “proprietary” datasets of executives at 366 public companies spanning a range of industries in Canada, Latin America, the United Kingdom and the U.S. It found that companies in the top quartile for racial and ethnic diversity were 35% more likely to have financial returns higher than the median of those in their respective industries and countries.
In the U.S., “there is a linear relationship between racial and ethnic diversity and better financial performance,” McKinsey found. For every 10% increase in racial and ethnic diversity at the top echelons of leadership, earnings (before interest and taxes) rose 0.8%.
“Diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time,” according to the study.
McKinsey’s 2018 study expanded the dataset to 1,000 companies across 12 countries and found similar results. Companies with the least corporate diversity were also more likely to underperform relative to the median profitability margin. The 2020 review slightly expanded the dataset, with similar results, and also took a look at how companies have progress or regressed since the dataset was first constructed.
McKinsey did not immediately respond to the DCNF’s request for comment.
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