Performance Measurement for Accountability in Corporate Governance: A Data Envelopment Analysis Approach

Abstract

This paper was inspired by the Coase (1937) theory of the firm. The purpose of this paper is to show the applicability of data envelopment analysis (DEA) in arriving at an unbiased account of relative performance of a set of companies, using the pharmaceutical industry as an example. A DEA based income efficiency measure of business performance for the pharmaceutical industry is computed. The pharmaceutical industry, which includes many multinational corporations with complex governance problems and strategies that allowed the efficiency to change over time, over ten recent years, are analyzed. The analyses indicate that inclines and declines in DEA efficiency rankings are related to the strategic choices made by the upper management. This approach may be ideal to evaluate strategic managers (CEOs, general managers, and presidents) by the board of directors since it relates multiple performance indices to a meta measure of performance. Another group of beneficiaries include the sector analysts. Our approach adds a new dimension to sector analysis, to compare specific industries and identify the relative performance of firms on multiple performance indices.

Keywords: Coase theory of the firm, Corporate governance, Performance measurement, Strategic management, Sector analysis, Pharmaceutical, DEA, Political Economy

JEL Classification: C44, C61, C67, D57, D61, G29, G30, G34, K32, L60, M40, M41, P16