At a time when companies are under extraordinary pressure to maintain financial performance while navigating a rapidly changing business landscape, creating an internal culture of transparency and inclusion, and transforming operations to meet social-impact expectations, the good news is that these goals are not mutually exclusive. On the contrary, our research suggests a strong, positive relationship between them. And in an increasingly complex and uncertain competitive landscape, diversity matters even more.

For this report, the fourth edition of Diversity Matters, we drew on our largest dataset yet—spanning 1,265 companies, 23 countries, and six global regions, and multiple company interviews. We also extended our research and interview focus beyond the relationship between diversity and financial performance, for the first time exploring the holistic impact of diversity on communities, workforces, and the environment.

The most compelling business case yet

There have been far-reaching changes in the business environment over the past few years, yet, companies with diverse leadership teams continue to be associated with higher financial returns. Our expanded dataset shows this is true across industries and regions, despite differing challenges, stakeholder expectations, and ambitions.

The business case for gender diversity on executive teams1 has more than doubled over the past decade. Each of our reports—2015, 2018, 2020, and now 2023—has found a steady upward trend, tracking ever greater representation of women on executive teams. At each time point we have assessed the data, the likelihood of financial outperformance gap has grown: Our 2015 report found top-quartile companies had a 15 percent greater likelihood of financial outperformance versus their bottom-quartile peers; this year, that figure hits 39 percent (Exhibit 1).

Exhibit 1

The business case for diversity on executive teams and financial outperformance.

A strong business case for ethnic diversity is also consistent over time, with a 39 percent increased likelihood of outperformance for those in the top quartile of ethnic representation versus the bottom quartile. This has persisted even with eight new economies added in our analysis of 2022 financial data.2

The penalties3 for low diversity on executive teams are also intensifying. Companies with representation of women exceeding 30 percent (and thus in the top quartile) are significantly more likely to financially outperform those with 30 percent or fewer. Similarly, companies in our top quartile for ethnic diversity show an average 27 percent financial advantage over others (Exhibit 2).

Exhibit 2

The difference in likelihood of financial outperformance.

Both forms of diversity in executive teams appear to show an increased likelihood of above-average profitability. Companies in the top quartile for both gender and ethnic diversity in executive teams are on average 9 percent more likely to outperform their peers. (This gap has closed slightly since our previous report.) Meanwhile, those in the bottom quartile for both are 66 percent less likely to outperform financially on average, up from 27 percent in 2020, indicating that lack of diversity may be getting more expensive.

Our latest analysis shows that companies with greater diversity on their boards of directors are more likely to outperform financially. For the first time, this correlation is statistically significant for both gender and ethnicity. Companies in the top quartile for board-gender diversity are 27 percent more likely to outperform financially than those in the bottom quartile. Similarly, companies in the top quartile for ethnically diverse boards are 13 percent more likely to outperform than those in the bottom quartile. These findings support the hypothesis that diversity benefits extend across top corporate leadership to boards, where DEI policy decisions for the whole organization are often made. We also examined diversity in emerging and advanced economies, finding that while advanced economies see a much higher likelihood of outperformance for executive gender diversity, emerging economies have shown meaningful progress in recent years and may have the most to gain from increasing diversity.

Equitable representation at the top is within reach

Since McKinsey first started tracking data on representation in 2015, women have made substantial gains in the workplace and in leadership. The current global dataset shows that one-fifth of executive team members are women, a third higher than reported in 2020. Eight in ten surveyed companies now have at least one woman on their executive team (up from fewer than two-thirds), while seven in ten have more than 10 percent. Since 2020’s Diversity Wins (and with an expanded dataset), we have now seen the highest increase in diversity in a decade and more representation at the highest levels than ever before (Exhibit 3).

Exhibit 3

Average women and ethnic diversity representation on executive teams.

Because each region has a unique ethnic makeup and cultural norms, we have assessed rates of ethnic representation by evaluating equitable representation levels—how closely leadership mirrors regional demographics.4 US companies are currently the closest to representing the population at 20 percent ethnic representation, but still lag behind the population share of 41 percent.

We have continued to look at boards, given the association of diverse boards with better financial performance and inclusive growth5; even more than executive teams, they can also be a strong positive influence on the societal disposition of a company. This year we once again found that financial impact is linked to increased representation of women on boards. For the first time, we also see a significant association with ethnic representation.

Over the past eight years, we have tracked over 330 companies’ progress on representation and diversity in leadership, and segmented these companies into five cohorts based on both 2015 levels of executive-team diversity and progress since then: Diversity Leaders, Fast Movers, Moderate Movers, Resting on Laurels, and Laggards (Exhibit 4).

Exhibit 4

Cohort matrix and threshold values for 2015–23 comparison.

It has been particularly inspiring to find that Diversity Leaders have attained gender parity and equitable ethnic representation, showing that equitable representation at the top is not just a lofty dream but a realistic goal. Further, our Fast Movers demonstrate that change can happen at speed and scale, with gender representation reaching 32 percent—the first time we’ve seen such a promising outcome in this cohort. These companies have raised the bar to keep pace with the changing landscape of diversity representation in leadership. Their strong performance prompted us to raise the improvement thresholds for companies from our 2020 Diversity Wins report to reflect the gains seen in top-performing quartiles (five percentage points for gender and ten percentage points for ethnicity).

Companies in our top cohorts have shown rapid, groundbreaking growth in representation, with some even attaining gender parity. In fact, diversity-leading companies in the United Kingdom have reached an ethnic-representation average, at 28 percent, that exceeds the region’s general population. Diversity-leading US companies have reached 50 percent representation of women on executive teams. In addition, leading companies in the United States now have on average 39 percent of executives from historically underrepresented ethnicities.

Considering the dataset as a whole, however, there is still a substantial gap in ethnic representation at top levels. For companies included in both our 2020 and 2023 reports, only 16 percent of leaders on executive teams belong to historically underrepresented ethnicities.6 These gains have slowed since 2019. At the time of Diversity Wins, 61 percent of companies had at least one person in leadership from a historically underrepresented group; this figure has grown only slightly (68 percent).

While there is some good news on progress in the area of equitable representation, across most geographies, significantly more work is needed. Diversity Leaders are beacons for other companies, demonstrating that scaling and institutionalizing policies that promote multiple forms of diversity can move the needle on representation.

Diversity supports inclusive growth

While year over year financial performance remains critical, businesses are increasingly aspiring to have positive, long-term impact on all stakeholders—the core tenet of stakeholder capitalism. This emphasizes the interests and needs of a wider set of stakeholders, including employees, customers, and investors, prioritizes social and environmental goals, and drives towards sustainable, inclusive growth—in short, what we refer to as holistic impact.

In many parts of the world there is a growing call for organizations to consider their holistic impact, not only within their own business environment, but on a wider scale, both locally and globally. Our research points to five main areas of holistic impact: financial and operational, capabilities, health and workforce, and environmental and social. In this report, we broaden the lens of our research, placing particular focus on environmental and social-impact elements.

Our findings are striking. Across all industries surveyed, more diversity in boards and executive teams is correlated to higher social and environmental impact scores.

We recognize that creating social impact, alongside other business priorities, is a challenging task, even for companies who have strong intentions to do so. Yet, over half of sampled companies in our dataset perform well in community involvement.7 We find that diverse leadership teams could help to bolster community involvement, positively impacting ethical disposition, community orientation, and the general image of a company.

We examined how leadership diversity could be linked to three components of holistic impact—community, workforce, and environment—which all have particularly close connections with employee and community well-being. The results were pronounced: across all three components, we found positive correlations with gender and ethnic leadership diversity (Exhibit 5).

Exhibit 5

Correlation of representation on leadership teams with sample of holistic impact metrics.

We also found a link between greater diversity in leadership roles and diversity across the organization.8 For a 10 percent rise in women’s executive representation in our 2019 dataset, we see on average a 2.1 increase in the percentage of both women employees and women managers in 2021. A similar, if somewhat smaller, effect holds with ethnic representation.9 When there is a path for women and ethnic minorities to step into the highest roles, it suggests that there are inclusive practices at play, making it possible for all to succeed.

Overall, there is a strong correlation between diversity in influential company leadership roles and multiple indicators of holistic impact across workforce, community, and environmental components. These relationships hold across sectors.

Five levers for change

The last decade has been a period of notable progress on equitable representation in leadership. Yet representation alone is an insufficient and unsustainable outcome. Since Why Diversity Matters in 2015, our thinking has evolved with continued engagement in this field. From our initial focus on diverse representation in leadership, we added a perspective on the practical steps companies can take to increase leadership diversity. From there, we broadened our focus to highlight the importance of inclusion and equity.

Now, we are beginning to distill the essence of holistic impact, and the role that leaders play in cultivating visionary workplaces. By building inclusive and supportive workplace cultures where diverse leaders and allies are truly heard, companies can chart a path towards impact beyond financial performance.

Leveraging our company interviews as a valuable source of refreshed insight, our data shows that the more diverse the leadership team, the more likely they are to have made public, mature commitments to diversity, equity, and inclusion (DEI) in their decision-making strategies. Transforming this commitment into bold action is the natural next step. To facilitate this transformation, we conducted interviews with diversity leaders who shared invaluable insights. These interviews surfaced five strategies to effectively turn words into action:

  1. Commit to a systematic, purpose-led approach to benefit all stakeholders. Companies should frame and pursue their DEI aspirations—internally and publicly—as core to their mission and embedded into their strategic goals. Having diverse perspectives and backgrounds may be uniquely helpful, as suggested by the relationship between ethnic and gender diversity and companies’ inclusive-growth performance.
  2. Embed your strategy in company-wide business initiatives while tailoring to local context. While DEI strategy is typically shaped at the top, giving local teams license to tailor to local contexts is key to building ownership and local impact. Agilely launching test and learn cycles for DEI initiatives in specific localities before rolling them out corporate-wide can also support larger DEI goals. In crafting a “global-local” approach to establishing their DEI strategy and values, leaders should build open lines of communication to develop a deep understanding of their workforce, community, and customers. This ensures DEI moves from abstract ideals to concrete actions.10
  3. Prioritize belonging and inclusive practices to unlock performance. Diverse representation will have the most impact within a culture that fosters inclusion and belonging—which also facilitates retaining diverse talent, innovation, and customer centricity. This support should include making inclusive leadership the norm through management training and accountability, as well as providing high-impact support to affinity and Employee Resources Groups (ERGs) to boost employee satisfaction.
  4. Embolden and activate champions and allies by providing adequate resources and support. DEI efforts of individual leaders, particularly women, are often less high-profile or officially rewarded, including their contributions to inclusive leadership, allyship, and employee well-being. Companies that recognize these efforts and provide a supportive environment can help these leaders thrive. This support could include mentorship and sponsorship, as well as encouraging and celebrating allyship. Leaders could be measured on their contributions to DEI and employee wellness in their performance evaluations.
  5. Act on feedback, including dissenting voices. A culture of feedback on DEI strategy from the workforce and wider stakeholders can provide valuable insights, identifying both strengths and opportunities for change. Leaders can use routine company pulse surveys to collect feedback internally, and social listening externally. It is important for dissenting voices to also be heard to pinpoint root causes of any roadblocks and contribute towards optimizing impact of the DEI strategy.

Despite a challenging business environment, the business case for diverse leadership teams is clear and growing stronger. In this report, our findings also show a statistically significant link between diverse boards and executive teams and higher holistic-impact scores, including on environmental and social measures.

To achieve lasting impact along these dimensions, companies must move boldly beyond increasing diverse representation to integrating DEI in a purpose-driven approach, broadening the company’s positive impact across stakeholders, employees, the external community, and the environment.