Increasing demands on business to re-examine its role in and relationship with the rest of society, will logically have to challenge our accounting formats. Because the way we account for business performance ultimately sets up the way we play the business game. For example, a rugby match that allocates ten points for a penalty and only three for a try will be played very differently from the current game.

The question is of course, for whose benefit is the scoring system designed? In the case of rugby, it is clearly for spectators. In the case of business, seemingly exclusively for the benefit of owners.

The focus of business as reflected by its scoring method undoubtedly has a profound effect on employment. It can be argued that it is time to review seriously the paramount position held by the income statement. If the most critical challenge to business today is to find a common focus between the main stakeholders, and resolve the conflict between them, then the least appropriate accounting method representing all interests is the income statement. Indeed it is a divisive force, not a unifying one.

This statement expresses everything in the business except profits as a drag and a cost. The biggest harm is done in respect of labour. Here it reinforces a commodity and “expense” understanding of people, ignoring the truth that employees as a whole are measurably the biggest contributors to wealth creation, not capital. It creates contradictions. On the one hand the HR practitioner will refer to people as “our greatest asset”, and on the other, the Finance director will refer to them as “our biggest cost.” This is a blatant contradiction in accounting terms.

By having the smallest part of wealth created, that of profits, as the ultimate target of business success, the easiest and simplest way to success is to shed and reduce the biggest cost to capital: that of labour. This is exacerbated by the primary productivity measurement of the monetary value of output over the monetary value of input, because, again, it is easier to reduce input than to increase output. And again, the largest input normally is labour.

It is difficult to understand why productivity excludes as an input, the profits earned by shareholders. One could argue that customers pay for profits, and that they indeed are a cost to the business – the cost of using shareholder funding. Of course, adding them in would bring the productivity measurement in all cases back to 1 over 1, which is not very useful. However, it is clear that if profits are the main exclusion from an input cost definition then the current output over input more appropriately measures profitability and not productivity.

And while, as Nobel Economics laureate, Milton Friedman has argued, profitability is a very incisive gauge of business efficiency, it should be a means to an end and not an end in itself.

We would argue that a far more appropriate measurement of productivity would be value-added or wealth created. The measurement is, as we shall see, incredibly powerful.

It is axiomatic that behaviour should drive the scoreboard and not the scoreboard drive behaviour. This is unfortunately untrue for the largest number of our businesses today. They are mostly headed by professional “resource” managers who have to religiously follow a familiar scoring system. This is very different from the visionary entrepreneur who is guided by his capacity to make a difference to his customers specifically and society generally. He uses all scoring systems as a monitoring tool to ensure that the business can grow. Or, as Peter Drucker once remarked: “profits are the cost of staying in business!”

Kellogg’s by now famous quote is even more appropriate: “The purpose of a business is not to make a profit. It is to add value to people’s lives!”

Arguably the most successful businesses are indeed those that follow this ethos. For it adheres to a universal principle: that our true value lies in our capacity to make a contribution to others. Not only does the income statement detract from this principle, but by focussing on what the company is getting (more particularly for the shareholders), instead of what it is giving to its market, it creates the opposite behaviour. One can therefore argue that the statement encourages containment rather than growth, with an enhanced incapacity to create employment or even retain jobs.

There are many other appropriate scores: such as turnover or market share. But what one is looking for is an overall set of scores leading to an accounting format similar to the income statement.

If company scoring is to play any role in solving unemployment it will have to

Change the focus from containment to growth

Encourage contributing behaviour by all stakeholders

And encourage some form of flexible income on the part of labour.

This is only possible if there is a common focus that binds the vested interests, particularly labour and capital, into a partnership. Secondly the scores have to be thoroughly understood, presupposing that they are inherently simple. Thirdly, flexible pay demands of management rigorous honesty and transparency which assumes that the accounting format must be consistently straightforward, easily communicated by line managers and difficult to fudge.

Given the above and Kellogg’s assumption that the primary purpose of a business is to add value to people’s lives is true, (and more and more mission statements of companies are trying to reflect this) then value added or wealth created is the only proper measurement to use. And the value-added statement (see box) becomes a far more potentially powerful accounting tool from all stakeholders’ perspective than has been recognised up to now.

While we would never argue for the scrapping of any accounting format, least of all one with such imposing shareholder power as the income statement, we would propose that the value-added statement should become part of standard accounting, particularly in employee reporting.

Value-added is indeed the only valid measurement of productivity because it measures the full cake, and not one slice such as profits.

Value-added measures an individual company’s contribution to GDP, or the wealth of the nation. Encouraging everyone to focus on creating more wealth will have an impact on the nation’s wealth and capacity to employ people.

Because value-added is ultimately the full cake that has to be shared between the three main stakeholders (labour, capital and government) and because of the now proven trade-off between rising pay and rising unemployment, it becomes a powerful focal point for gain sharing and flexible pay. (The bigger the cake the more we have to share, the smaller the cake the less we have to share.)

The concept is simple and pure: being the difference between the value of things that we use from others, and the value of what we have earned from our customers.

Value-added measures the contribution the company has made to its market (being the difference between income and outside costs). It is the only measurement in accounting to do so.

Value-added at the same time measures reward for the stakeholders, again the only measurement in accounting to do so.

But more powerfully, by combining contribution and reward into one single measurement it states unequivocally that contribution creates reward and encourages a focus on contributing behaviour.

As far as the full value added statement is concerned, its power above any other form of accounting is implied by

The fact that it most closely measures the behaviour of strongly market, or customer driven, socially contributing and growth orientated companies. Indeed it is the only statement that explains behaviour.

It expresses employees as contributors and partners in wealth creation.

It is simple and very easily understood.

It lends itself to visual and pictorial communication.

It is one of the formal final accounts. (Note: we suggest certain adjustments to its original design of the mid-seventies).

It lends itself to further enhancement by linking sub-scores such as absenteeism, safety measurements, production targets to its main components, giving a direct link between individual and team activities to the overall performance of the company.

It becomes an excellent ongoing education tool.

We have been able to successfully train illiterate employees in understanding the value-added statement. Through this understanding one can achieve perceptible shifts in behaviour. The value-added understanding and accounting format can be used to great effect in people transformation in companies. After all, an informed people are a transformed people.