Performance Measurement for Accountability in Corporate Governance

Abstract

The recent spate of business scandals has placed a renewed emphasis on better corporate governance by raising the issue of accountability for business performance. The most common business performance analysis is based on financial measures and includes various accounting ratios. Since these measures often provide conflicting signals, which do little to establish responsibility and accountability, we compute a DEA based "income efficiency" measure of business performance. We analyze the pharmaceutical industry, which includes many multinational corporations with complex governance problems, over ten recent years, and the strategies that allowed firm efficiency rankings to improve or worsen over time are highlighted. Our analyses indicate that the inclines and declines in DEA efficiency rankings are related to the strategic choices made by the upper management, thereby lending credibility to the use of these rankings in performance measurement by the board of directors.