A new paper argues that many current diversity, equity and inclusion (DEI) practices have become ineffective and urges investors to move beyond what it calls a “demographic-box-ticking exercise”.
The paper, The End of DEI, authored by Alex Edmans, professor of finance at the London Business School, argues that the backlash against DEI is largely against its practice, not its purpose.
Edmans argues that DEI’s aims remain valid, but its implementation has become reductive, politicised and overly tied to demographic metrics that fail to capture what drives performance or help investors build genuinely strong teams.
His proposed alternative, the Potential, Synergy and Inclusion (PSI) framework, is designed to preserve DEI’s original objectives while shifting emphasis towards factors that contribute directly to performance.
New framework
Edmans told IPE: “DEI has become so loaded that people either have an allergic reaction to it or assume anything called DEI must be amazing.
“At the core of DEI is the potential to create financial value as well as social value, but the way we practise it has moved away from that.”
He added: “I’m not saying we should throw the baby out with the bathwater, but the current implementation is not delivering what DEI advocates hoped for.”
Edmans told IPE that PSI aims to re-centre DEI on contribution rather than identity, with potential broadening assessment beyond past achievements and demographic indicators to capture a person’s trajectory.
According to the paper, potential broadens assessment beyond past achievements and demographic indicators to focus on a person’s trajectory. Synergy moves away from simplistic demographic representation and emphasises building teams whose skills, perspectives and styles genuinely complement one another.
Demographics may matter, but they are only one limited source of cognitive diversity, the report added.
Inclusion, in the PSI model, becomes the mechanism that enables potential and synergy to translate into outcomes through cultures where dissent is safe, ideas are tested and barriers are removed.
“People think gender and ethnicity should get you 80% of the way there. Sadly, the evidence is not there, and demographic diversity has very little correlation with cognitive diversity,” said Edmans, who added that looking at demographic metrics alone will not improve financial performance.
He said: “Data should be the start of a conversation, not the end of one.”
Cognitive diversity
Earlier this year, Edmans led a new study that challenged the commonly held assumption that diversity, particularly cognitive diversity, guarantees stronger team performance and investment decisions.
Edmans has been a longstanding challenger of certain diversity strategies, and in 2023 notably took aim at Nicolai Tangen, chief executive officer of Norges Bank Investment Management (NBIM), for endorsing a BlackRock report about gender diversity.
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