Benchmarking the performance of nations: non-uniform weighting and non-economic dimensions

Harry P. Bowen and Wim Moesen

Harry P. Bowen is Professor of Economics and International Business at Vlerick Leuven Gent Management School, Leuven, Belgium. Wim Moesen is Professor of Economics at the Center for Economic Studies, Catholic University Leuven, Leuven, Belgium.

Abstract Purpose Most composite indicators of national performance limit their scope to only economic performance criteria and aggregate primitive performance data using subjective xed weight values applied uniformly to all countries. This paper proposes a weighting method to correct for biases inherent in the use of xed and uniform weights, and it presents a composite performance indicator that encompasses both economic and non-economic performance criteria. Design/methodology/approach The paper presents a method that endogenously determines country-specic weights that explicitly take account of a countrys own choices and achievements across primitive dimensions of performance. The method is then used to construct a composite inclusive index that combines economic performance with two other performance dimensions: environmental sustainability and governance. Findings Comparison of the endogenous weight method with the method of using xed and uniform weights indicates a bias in the latter that penalizes countries, in terms of indicating lower relative performance, which are more diverse in their achievements among primitive performance dimensions. When the endogenous weight method is used, the performance ranking of countries is altered such that countries with greater diversity improve their relative performance while the relative performance of countries having less diversity may either rise or fall. Originality/value The weighting method discussed in this paper: is applicable at any level of analysis (e.g. nations, companies, business units, etc.), obviates objections about the importance of alternative primitive dimensions that can arise when subjective xed weights are used; and indicates more accurately relative performance since each unit of analysis is rst allowed to obtain its best performance before relative performance is assessed. The method can therefore assist policy makers, companies, etc. to more accurately benchmark performance and it can, in particular, assist companies to respond to perceptions of low performance or compliance among different performance dimensions when performance has been determined using the traditional method of xed and uniform weights. Keywords Benchmarking, Competitive analysis, Governance, Environmental management Paper type Research paper

The authors would like to thank Hendrik Nevejan for excellent research assistance. An earlier version of this paper was presented at the 3rd Colloquium of the European Academy of Business in Society.

ach year organizations such as the World Economic Forum (WEF)[1] and the Institute for Management Development (IMD)[2] publish rankings of national performance (competitiveness) among countries. These rankings serve as benchmarks for national policy makers and interested parties to judge the relative success of their country in achieving the performance criteria represented by the corresponding performance index. One widely watched composite performance index is the WEFs Growth Competitiveness Index (GCI)[3]. Conceptually, the GCI is meant to reveal the extent to which a countrys institutions, economic infrastructure, and policies and practices are supportive of growth in gross domestic product (GDP) per capita. The GCI is constructed by combining hard data on various national characteristics and soft data compiled from the responses to the WEFs annual Executive Opinion Survey.

To aggregate the various hard and soft primitive data into a unied composite indicator, organizations such as the WEF use a xed set of weight values that are then applied uniformly

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VOL. 7 NO. 1 2007, pp. 6-16, Q Emerald Group Publishing Limited, ISSN 1472-0701

DOI 10.1108/14720700710727078

to the underlying data for each country. A natural question that arises is whether the weight values chosen, and the uniform application of these weight values to every country, may incorrectly penalize some countries and favor other countries such that the resulting performance index values, and the subsequent ranking of countries, is biased. One aspect of the present paper is to address the issue of potential bias due to the uniform application across countries of a single set of weight values. Toward this end, we introduce a novel procedure that allows for the determination of weights that are specic to each country and that reect each countrys own relative performance across the different dimensions of performance. Our method therefore recognizes and reects diversity among countries when attempting to measure and benchmark the relative performance (competitiveness) of countries. A second key issue we address is that of scope, by which we mean the breath of domains included in any given index intended to gauge relative performance. For example, the WEFs GCI only seeks to capture success in one domain: the ability to achieve growth in GDP per capita. Other goals that a nations policy makers may deem as important as the pursuit of economic growth are therefore excluded. Yet such other goals may not only be relevant in terms of national policy priorities, but also they may represent legitimate constraints on the achievement of such growth. This introduces another source of potential basis: by excluding other policy goals, lower relative performance may only indicate a policy preference for other goals not captured by the index being considered. The exclusion of additional policy domains may then introduce a basis that is similar to that introduced by the use of uniform weights, namely, a failure to account for diversity of countrys goals across several domains. Recognition that nations may pursue a different policy mix therefore needs to be explicitly taken into account if one is to arrive at better understanding of performance rankings based on a single domain. If for no other reason, a broader recognition and incorporation of goals other than, for example, growth in GDP per capita, would permit one to formalize and measure trade-offs among alternative goals. In this paper we address the issue of scope by constructing a more inclusive measure of national performance. To this end, we simultaneously combine the economic domain captured by the WEFs GCI with two non-economic domains: environmental sustainability and governance[4]. Using our method of endogenously determined, non-uniform, weights we aggregate these three domains to form a new metric which we label the Composite Inclusive Index (CII). By using country specic weights we allow that countries may place different emphasis on the three domains but still achieve the same overall level of performance. By addressing the issue of appropriate weights and lack of scope, our method has implications beyond composite indicators of national performance. Increasingly, pension funds (e.g., the California Public Employees Retirement System (CalPERS))[5] and other institutional investors show a keen interest in socially responsible investment. In addition, NGOs and other third parties often use composite indicators to advance agendas that seek to promote ethical or socially responsible business behavior. Such ethical screening of the business community has become an industry unto itself. In each instance, the composite indicator used can be criticized on the same grounds as those directed toward composite indicators of national performance[6]. Hence, our method has wide applicability, and it can assist companies in their dealings with, and their responses to, governmental policy makers, non-governmental organizations (NGOs), etc., regarding perceptions of low performance or compliance along any dimension, including that of corporate governance.

I. Benchmarking performance: endogenous and non-uniform weighting

The benchmarking of national performance requires the construction of a unied composite indictor that can be compared across countries. In general, the construction of any composite indicator that collapses information across several primitive data dimensions must address three sets of issues: 1. Scope. What primitive data are to be used to represent the underlying concepts, which the index is intended to summarize?

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2. Normalization. On what common scale will the underlying primitive data be measured? 3. Aggregation. What weights are to be given to each primitive data component? In this paper our main focus is the issue of aggregation, that is, how to select the weights to be applied to the primitive sub-indicators (variables) used to form a composite index. A simple and often popular aggregation procedure is to assign equal weights to each sub-indicator. For example, one can take the average of the different sub-indicators, which implies equal weighting. Implicitly, equal weighting reects a judgment that the different sub-indicators have equal importance within the evaluation process. Unequal weighting is instead desired when the different sub-indicators manifestly do not share the same relative importance. Unequal weights can be derived by informed judgments of external experts, but these opinions are often too divergent to settle upon one set of acceptable weights. Also, the cost to obtain such weights can be high. To meet these objections, we elect to use a technique that requires less information but that nonetheless reveals preferences in that the data are allowed to speak for themselves. The procedure we adopt computes implicit (or shadow) weights from observed sub-indicator values. The weight accorded to each sub-indicator or dimension is therefore endogenously determined, and it reveals the associated relative performance of a country in each dimension being evaluated. Our aggregation methodology selects the most favorable weights for each country, where the most favorable weights are those that give the highest value of a countrys composite index. Good relative performance in a particular dimension can be interpreted as revealing that a country sets a higher priority on that dimension. This seems an attractive second best route in the absence of full information about true policy priorities (Melyn and Moesen, 1991). Apart from allowing for the constructive treatment of countries diversity, another appealing feature of our method is its exibility: it still allows for imposing various kinds of additional weight restrictions. Indeed, while it is hardly conceivable that experts will ever agree on point estimates for country-specic weights to be accorded to each sub-dimension, it seems much more reasonable to assume that they can reach consensus on bounds for the relative policy weights. Such consensus positions are readily incorporated in our weighting procedure, as discussed further on. Our weighting procedure is inspired by data envelopment analysis (DEA) as developed by Charnes et al. (1978) in the context of operations research[7]. DEA was designed to measure the relative efciency of organizations when multiple outputs are produced with several inputs, and when there is no obvious objective way of aggregating either inputs or outputs into a meaningful index of productive efciency. In formal terms, our technique consists of solving, for each country i, a linear programming problem in which the unknowns are the weights wij to be given to each of j sub-indicators (Iij) that are then summed to give a composite index value. The weights are calculated such that they maximize, for country i, the value of an objective function, this being the composite index being considered. Since we will apply this technique to construct a composite index of national performance that encompasses both economic and non-economic dimensions, we label this index the CII. Given N countries and J sub-indices, the linear programming problem can be written:
J X w ij I ij max CIIi max w
ij

j1

subject to:
J X j1 J X j1

w ij 1 ;i 1; . . .; N

I kj w ij # 1 ;k 1; . . .; i; . . .; N

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CIIi denotes the CII for country i and Iij is the value of sub-index j for country i. Equation (1) states that for each country i, the value of CIIi is to be maximized by choice of the wij. Restriction (2) requires that, for each country i, the weights assigned to each sub-component sum to one. Restriction (3) means that the optimal weight pattern calculated for country i is, in the same numerical exercise, applied also to all other countries in the sample. Restriction (3) states that in doing so, the maximum value of CIIi for any country is limited to be unity (100 percent). This restriction is a simple normalization that insures that no country can have an index value higher than unity regardless of whose weights are used to calculate values of CIIi. For example, it could happen that, using country is optimal weights, some other country k has a higher value of CIIi than does country i. In this case the value of CIIi for country i would be below 1. On the other hand, if no other country in the sample outperforms country i then CIIi will take the value 1 for country i, and country i would be declared best practice. The above restrictions are minimal in that they allow complete exibility in determining the optimal weights for each country. However, since the objective function is a weighted average of the sub-indicators, its value can never be larger than the maximum of the values over all sub-indicators. This means the procedure will always want to assign all weight to the one sub-dimension with the highest numerical value. To account for this, and to also recognize that each sub-dimension should contribute to the value of the index, we will later add lower and upper bound restrictions on the weights. For example, we may specify that each weight must be at least 5 percent and not more than 60 percent. By imposing such restrictions we mitigate the problem of extreme specialization in one dimension or another. In general, imposing upper and lower bound restrictions for the weights will result in index values lower than what would be obtained without these restrictions. However, this does not materially affect comparison of index values among countries and in particular it does not affect a ranking of the index values across countries. Finally, a feature of our approach is its generosity in that the researcher takes a position that is sympathetic to each and every country. For each country, the most favorable weights are calculated from among the set of all possible weights, while obeying restrictions (2) and (3). In this respect, this procedure may, as in Melyn and Moesen (1991), be labeled benet-of-the-doubt weighting. This procedure has also been used in Cherchye et al. (2004a, b).

II. A CII
In this section we implement our endogenous weight method to construct a CII that combines three composite sub-indexes that capture different domains of national performance: growth competitiveness, environmental sustainability and governance. These three domains may represent substitutes in the sense that the pursuit of one may entail some sacrice in terms of performance in one or the other dimensions. Hence, each dimension can contribute differently in terms of its relative impact in determining the overall performance ranking of nations. Our method of aggregation recognizes this potential substitutability when forming the CII, and it allows that a different policy mix involving the three domains can yield the same of level of overall performance. Below we describe each of the three sub-indexes used to form the CII. Growth competitiveness The domain of economic performance is measured by the 2002 value of the WEFs GCI[8]. This composite index is made up of three sub-indices that are intended by the WEF to reveal the extent to which a nations technological capabilities, public institutions, and macroeconomic environment are supportive of growth in GDP per capita. The WEF calculates its GCI as a weighted average of these three sub-indices. Values of the GCI range from 1 to 7, with 7 being the highest level of performance. Environmental sustainability Performance in the area of environmental sustainability is captured by the 2002 values of the Environmental Sustainability Index (ESI) developed as a collaboration between the WEF, the

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Yale Center for Environmental Law and Policy, and the Center for International Earth Science Information Network[9]. The ESI summarizes 68 underlying primitive variables grouped into ve sub-indices that capture alternative dimensions of environmental sustainability: 1. environmental systems; 2. reducing stress; 3. reducing human vulnerability; 4. social and institutional capacity; and 5. global stewardship. The values of the ESI we use in constructing our CII are those directly presented by the authors of this index. Values of the ESI range from 0 to 100. Governance Performance in the area of governance is measured by the 2002 values of the Governance Index (GI) developed by the World Bank (Kaufmann et al., 1999, 2002). The GI is built up from six sub-indices: 1. voice and accountability; 2. political stability and absence of violence; 3. government effectiveness; 4. regulatory quality; 5. rule of law; and 6. control of corruption. Values of the GI range from approximately 2.5 to 2.5. Since each of the three indices (GCI, ESI and GI) use a different measurement scale some common scale of measurement is needed before constructing the CII. The initial expedient we adopt is to normalize the given values of each index to lie on a 0 to 100 scale using linear interpolation. As mentioned in the previous section, upper and lower bound restrictions on the weights we construct are needed to insure that each of three sub-indices contribute at least something to the value of the CII, and that no one sub-index completely dominates in its contribution to the value of the CII. In this regard, we specify that each sub-index should contribute at least 10 percent to the value of the CII and that no index should contribute more than 50 percent. Formally, these upper and lower bound restrictions for country i can be written: 0:1 # w ij # 0:5 ;j 1; . . .; J 4

Implementation of restriction (4) is made by including it along with restrictions (2) and (3) when determining the weights that maximize the value of a countrys CII[10]. An important advantage of using endogenous weights when constructing a composite index that encompasses, as does the CII, diverse dimensions is that it is then free from dictatorship. That is, each countrys own relative performance on each dimension determines how the individual dimensions will be weighted, rather than the judgments of the developers of an index. In particular, when a diverse (and perhaps controversial) set of domains are to be combined, the agenda of the creators of the composite index may choose weights that others might deem either too low or too high on the various dimensions. That is, whether one accepts the results based on the index may only reect ones own value judgment regarding the relative importance of the underlying dimensions. As such, it is unlikely that the indicator would gain widespread acceptance.

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In contrast, when endogenous weights are used, debate about inappropriate weights is muted, since the source of a countrys high or low score is that countrys own relative performance on the various dimensions. Hence, attention is directly focused on a ranking among peers and those dimensions where a country either does, or does not, do well. A second advantage of our procedure is that, rather than attempting to capture alternative domains using vast amounts of primitive data that are then aggregated into a single index, we instead use as data input only the composite index values that already purport to capture the dimension of interest. The advantage of this is that the implications of a countrys emphasis on one dimension versus another are clearly indicated by the weights assigned to each aggregate dimension (index). Hence, the weight that a country assigns to alternative dimensions is easily observed, and is not obscured by a process that may aggregate perhaps hundreds of primitive variables for a given dimension.

III. Results
Table I resents the results of calculating the CII for each country. The countries are ranked in descending order of the CII values listed in the column with subheading Endogenous weights. The CII value for each country indicates its score relative to the highest ranked country, Finland. For comparison, the value of the CII that results when equal weights (1/3) are instead used for each country, and the rank of each country based on such values, is shown in the third and fourth columns Table I. The last three columns in Table I, under the heading Weight priority levels, indicate on which sub-component of the CII a country showed its highest performance (Weight priority level 1) and on which component it showed its lowest performance (Weight priority level 3). Looking rst at the CII values, there appears to be a clear differentiation among countries. The rst four countries (Finland, Sweden, Norway and Switzerland) perform similarly, the next seven countries (ranked 5 to 11) form a second cluster, while the next three countries (Germany, the UK, Ireland) may be seen as a third cluster. Likewise, a fourth cluster contains those countries ranked 15th (Portugal) to 19th (Japan) while a fth cluster comprises Italy Table I Composite Inclusive Index values and ranks
Composite Inclusive Index (CII) Endogenous Equal weights weights Score Score Rank 100 91.00 86.66 85.33 79.29 77.61 73.34 70.83 69.69 67.50 67.11 56.55 55.89 52.85 43.68 42.33 40.52 38.16 37.42 16.95 14.92 60.36 23.45 0.39 100 88.24 77.51 79.16 70.76 69.54 68.82 63.25 64.23 59.07 65.04 51.22 45.60 44.84 34.98 38.91 29.26 32.07 33.64 11.30 12.08 54.26 23.87 0.44 1 2 4 3 5 6 7 10 9 11 8 12 13 14 16 15 19 18 17 21 20 Growth Competitiveness Index (GCI) Score Rank 100.00 93.87 84.32 87.75 82.88 90.09 86.49 84.14 82.70 95.86 86.85 82.70 81.44 74.77 70.27 76.58 77.66 71.53 82.52 66.49 68.47 82.26 8.89 0.11 1 3 8 5 10 4 7 9 12 2 6 11 14 17 19 16 15 18 13 21 20 Change in rank in moving from GCI to CII 0 1 5 1 5 22 0 1 3 28 25 21 1 3 4 0 22 0 26 1 21 Weight priority levels GCI ESI GI 1 3 3 3 3 2 2 2 3 1 3 2 2 3 3 3 2 3 1 2 3 3 1 1 2 1 3 3 3 1 3 2 3 3 2 1 1 3 1 2 1 1 2 2 2 1 2 1 1 1 2 2 1 1 1 1 2 2 1 2 3 3 2

Country 1) Finland 2) Sweden 3) Norway 4) Switzerland 5) Canada 6) Denmark 7) New Zealand 8) The Netherlands 9) Austria 10) USA 11) Australia 12) Germany 13) UK 14) Ireland 15) Portugal 16) France 17) Belgium 18) Spain 19) Japan 20) Greece 21) Italy Average Std dev. Coef. of variation

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and Greece. In terms of dispersion, the CII generates signicantly more dispersion in index values across countries than does, for example, the WEFs GCI, a widely used index for ranking national competitiveness. In this regard, the coefcient of variation of CII values (0.39) is 2.6 times larger than that of the GCI values (0.11) (GCI values not shown). The wider dispersion in CII values raises the question of the usefulness of the usual focus on a ranking of countries. For example, on the CII, Italy ranks 21st (last) while Japan ranks 19th, but the difference in the CII values for these two countries is much greater than that suggested by the difference in their ranks. One can compare the ranking of countries based on endogenous weights to the ranking that results if each dimension is instead accorded equal weight. The index value and rank of each country when equal weights ( 1/3) are used are reported in the column with subheading Equal Weights. Equal weighting is often used when the creator of an index wishes to not bias an index, and hence the ranking, toward one dimension or the other. However, this egalitarian view is an illusion, since equal weighting ignores performance differences (diversity) among countries with respect to each of the sub-domains being examined. That is, equal weighting penalizes diversity. By treating all dimensions as equal, one automatically biases the results against countries that perform well in some dimensions but not in others. In this sense, the use of equal weights favors average performance. The difference in the ranking of countries when equal versus endogenous weights are used can be assessed by comparing the rank value of each country under each weighting scheme, as listed in Table I. Another view of the effect of using endogenous versus equal weights is shown in Figure 1. In this gure, the horizontal axis measures the extent of a countrys performance diversity across the three sub-domains. Performance diversity is measured, for each country, as the standard deviation of its scores across the three dimensions minus the average of the standard deviations across countries. Positive values therefore indicate that a countrys has Figure 1 Performance diversity and change in rank in going from equal to endogenous weights when constructing the Composite Inclusive Index

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above average performance diversity while negative values indicate a country has less than average performance diversity. The vertical axis indicates the change in rank that occurs when one changes from using equal weights to using endogenous weights. Figure 1 indicates that endogenous weights favor countries with more performance diversity; conversely, equal weighting penalizes performance diversity. Countries that rank lower using equal weights are Belgium, Greece, The Netherlands, Norway, Portugal, and the USA. Conversely, the countries that rank higher if equal weights were used are Australia, France, Italy, Japan, and Switzerland. Also reported in Table I, in the column labeled GCI, is the rank each country obtained on the WEFs GCI. To the right of this column is the change in rank each country experiences when moving from having its performance measured by the GCI to having its performance measured by the CII. For example, Norway increases its rank by ve positions, moving from a rank of 8 on the GCI to a rank of 3 on the CII. Other countries who evidence a major improvement in rank are Canada and Portugal. The countries that evidence a major decrease in rank include Australia, Denmark, and the USA. The Weight priority levels in Table I indicate diversity among countries in terms of their performance on each of the three sub-dimensions. Table II summarizes this information by reporting the distribution of these weight priority levels across countries. Governance receives the lowest priority level for only two countries (Japan and Greece), while eleven of the 21 countries assign growth competitiveness the lowest priority level. In contrast, nine countries give environmental sustainability the highest priority while eight countries give this dimension the lowest priority. It appears that the dimension that most differentiates countries on the basis of the CII is their relative performance in the dimension of environmental sustainability. This explains the high CII scores for the three Nordic countries and Switzerland, and the low CII scores for Japan, Greece and Italy. Finally, one can ask how well the CII index compares to a single domain index in terms of its ability to indicate performance differences among countries in a dimension such as the level of GDP per capita. In this respect, Figure 2 shows a comparison of the CII and the WEFs GCI by plotting the values of each indicator (both scaled to lie between 0 and 100) against the 2002 level of real GDP per capita of each country[11]. Also shown in this gure are estimated trend lines together with their associated equations and R-squares that result when GDP per capita is regressed on the values of each index. The relationship between GDP per capita and each index, as measured by the value of each estimated regression coefcient, is not statistically different between the two indices. However, the R-square associated with the CII index is 0.205 compared to the R-square value of 0.167 for the WEFs CGI index, suggesting that the CII explains a bit more of the variation in GDP per capita. While the CII appears to give the better t, neither index is able to explain more than about 20 percent of the variation in GDP per capita.

IV. Summary
In this paper we propose a method that allows the weights used to aggregate separate performance dimensions into a single composite indicator to be different across countries. The weights for each country are endogenously determined, and their values reect a countrys own relative performance on each of the underlying dimensions that make of the composite indicator. We applied our method to construct a composite indicator of national performance that combines three separate composite indicators that are commonly used to Table II Distribution of weight priority levels for the Composite Inclusive Index
Weight priority level 1 2 3 Number of countries assigned the indicated weight priority level Growth competitiveness Environmental sustainability Governance 3 7 11 9 4 8 9 10 2

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Figure 2 Relationship between level of 2002 real GDP per capita and values of Composite Inclusive (CII) and Growth Competitiveness (GCI) Indices

measure performance in three different dimensions: growth competitiveness, governance, and environmental sustainability. We labeled this new indictor a CII. A ranking of countries based on the values this more inclusive index was then presented and compared with the results from using only theGCI constructed by the WEF. Not surprisingly, the more inclusive index of performance led to some major changes in the ranking of countries based solely on the GCI. In this respect, countries that tended to rank high on the GCI also ranked high on the CII. However, there were many cases in which a poor ranking on growth competitiveness failed to take account of superior performance in the dimensions of either governance or environmental sustainability. When these additional dimensions were considered a number of countries improved their overall rank, while others lost rank. In particular, some countries that showed a high rank on the basis of growth competitiveness moved to a much lower rank when the other two domains of performance were considered. Overall, these results suggest that consideration needs to be given to alternative domains of national priority when constricting composite indicators of national performance. Not only does a more inclusive view recognize potential diversity among countries, but it also allows for an analysis of how these alternative dimensions interact to establish a countrys relative performance among countries. In addition to suggesting that the construction of a composite indicator of national performance should use our endogenous weighting method and that other dimensions of performance should be considered, our work also has important implications for companies. First, our method can easily be used to benchmark performance at any level, such as comparing performance across different business units within the same company, or comparing the performance of a given business unit across companies. Second, our method of endogenously determined weights allows for a more precise indication of performance since each entity is rst given its best chance of evidencing superior performance relative performance is assessed, and it also recognizes potential diversity in

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the choices and abilities of the individual entities when computing performance. Third, since our method can obviate objections regarding the use of uniform weights or lack of scope, it can assist companies in their dealings with policy makers, NGOs, and interested third parties who construct composite indexes that fail to recognize that performance outcomes can reect diversity of choices among several dimensions. In this way, our method for computing composite indexed can assist companies to develop adequate responses when faced with perceptions of low performance or compliance along different dimensions, including that of corporate governance. In particular, the application of our method to the problem of combining economic performance with performance along the dimensions of environmental sustainability and governance shows that the debate that has focused largely on what companies can do to enhance sustainable development goals can be elevated to questioning the role that national level institutions can play in fostering such goals.

Notes
1. See www.weforum.org 2. See http://www02.imd.ch/wcc 3. The WEF also reports a Business Competitiveness Index. Inspired by Michael Porter, this index focuses on the corporate sector leaving aside the macroeconomic environment and the public sector. 4. These additional domains can also be considered economic. Our use of the term non-economic is meant only to distinguish these domains from that captured by the WEFs Growth Competitiveness Index. 5. See www.calpers-governance.org 6. An example is the composite Accountability Rating index recently introduced by the Institute for Ethical and Social Accountability (2005). This index ranks companies based on their performance across six domains representing social, ethical and environmental management. This index assigns a weight of 25 percent to stakeholder engagement and 15 percent weight to each of the remaining ve domains; these same weight values are then applied to every company being evaluated. 7. The issue of weighting in the construction of a single index has also been extensively studied in the literature on productivity indices. See Balk (2003) for discussion. 8. Details of the GCI may be found at www.weforum.org 9. Details of the ESI may be found at www.yale.edu/esi 10. Analytically, our endogenous weight methodology will always assign the maximum weight value (50 percent) to the sub-index with the highest numerical value and assign the minimum weight value (10 percent) to the sub-index with the lowest numerical value. Since only three sub-indices are used to construct the CII, this automatic assignment of minimum and maximum weight values fully determines the remaining weight value (40 percent). Although the endogenous weight values will, in this case, always be 50 percent, 40 percent and 10 percent, the weight value assigned to any particular sub-index can vary by country. 11. Real GDP per capita is measured in 1992 US dollars at PPP exchange rates.

References
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Cherchye, L., Moesen, W. and Van Puyenbroeck, T. (2004b), Legitimately diverse, yet comparable: synthesizing social inclusion performance in the EU, Journal of Common Market Studies, Vol. 42 No. 5, pp. 919-54. Institute for Ethical and Social Accountability (2005), Accountability rating 2005: methodology, available at: www.accountabilityrating.com/ cms/client/area3/downloads/Methodology.pdf Kaufmann, D., Kraay, A. and Zoido-Lobaton, P. (1999), Governance matters, World Bank Policy Research Working Paper 2196, World Bank, Washington, DC. Kaufmann, D., Kraay, A. and Zoido-Lobaton, P. (2002), Governance matters III: governance indicators for 1996-2002, World Bank Policy Research Working Paper 3106, World Bank, Washington, DC. Melyn, W. and Moesen, W. (1991), Towards a synthetic indicator of macroeconomic performance: unequal weighting when limited information is available, KU Leuven Center for Economic Studies Public Economics Research Paper 17, KU Leuven Center for Economic Studies, Leuven.

Corresponding author
Harry P. Bowen can be contacted at: harry.bowen@vlerick.be

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