Diversity, equity and inclusion (DEI) within firms is linked with either positive or neutral firm performance outcomes, according to new LSE research.
Teresa Almeida and Dr Grace Lordan found that DEI is positively associated with long-term market valuation and innovation, suggesting that DEI initiatives can be of strategic importance for organisations. Furthermore, DEI appears to be unrelated to short-term financial metrics such as stock returns and profitability, indicating that DEI improvements do not come at the expense of short-term financial performance.
Companies, investors and policymakers are paying increasing attention to DEI. However, measuring its progress within firms and understanding its relationship with performance remains a challenge. Traditional methods often over-focus on demographic diversity or rely on self-reported information from firms.
To tackle this challenge, researchers have developed a new method to measure DEI, using employee reviews posted on Glassdoor, a leading career intelligence platform. This approach draws directly from employee experiences, based on an analysis of more than 3.2 million reviews from 945 companies across the UK and US. It captures aspects of diversity, equity in terms of equalising access to opportunities and inclusion. Ms Almeida and Dr Lordan say this is a first step in measuring DEI at scale, beyond self-disclosed firm data or binary indicators such as whether a firm has a DEI policy.
Overall, the researchers find that their DEI proxy is associated with stronger long-term market performance, but not short-term market performance. Larger effects are found for growth firms. Furthermore, the study highlights that the positive effects of DEI on long-term market performance are amplified in firms with higher levels of ethnic diversity in senior management.
Dr Lordan, Director of The Inclusion Initiative at LSE, said: “We are essentially measuring the aspects of culture that relate to DEI using data external to the firm. Doing so, our work has uncovered a credible signal that predicts innovation and long run market performance that should interest investors. Our proxy is particularly strong for firms that are in their growth phase. Forthcoming work will demonstrate these links using a portfolio selection approach. For me this is good news for firms that have invested in DEI in an authentic way amidst a DEI backlash. For those investors who are sceptical about the link between DEI and firm outcomes I would ask them to call the proxy ‘X’ and consider its meaningfulness in the context of prediction.”
Ms Almeida, Research Officer at The Inclusion Initiative, said: “Our findings underscore the importance of understanding the complex relationship between DEI and firm success. By using employee reviews, we offer a more nuanced and scalable way to measure DEI progress. Our analysis also reveals how DEI’s benefits are amplified in firms with diverse leadership, illustrating the critical role of inclusive leadership in realising these positive outcomes."
Read the report here: not-bad-for-business.pdf