Articles

The Contribution Cycle And The Value-Added Statement

December 19, 2022 - By Jim Furstenburg, Business Development Associate, BA Social Science

At a recent Legitimate Leadership development day, we discussed performance management systems and their role in contribution.

Legitimate Leadership helps leaders at every level to transform their organisations through applying the Legitimate Leadership Model, characterized by building the following: Legitimacy, Trust, Contribution and Accountability.

The common purpose that binds people in a collective is the contribution which that collective makes to its outside environment. In companies, contribution is about customers in the first place and the broader community in the second. The extent to which individual contributions are aligned to company contribution will determine the degree or ultimate strength and success of the organization. We can assume then that any job, team or function in the organization should be aligned to Contribution. If not, what is the value being added?

Performance management systems do not exist in isolation of the management accounts of the company, and we would expect most key performance indicators at collective and individual level to be based on them.

However, the only financial statement that reflects contribution is the value-added statement or VAS.

Value added is, in essence, a measure of what was given or contributed. As such it puts into quantifiable terms what we believe to be the benevolent intent of any enterprise – namely, to make a contribution to its customers and to the market. This is in sharp contrast to conventional measures of business which are profit derived, from the profit and loss statement.

Profit is a measure of what shareholders get and is not representative of the contribution and rewards for all stakeholders, namely employees, shareholders and the state. VAS measures both how wealth was created and distributed among those who contributed to it.

VAS creates a common purpose among all its stakeholders by selling more, getting a better price, or by reducing costs. A healthy VAS ensures a place in the sun for everybody including the shareholders.

Consistent sharing of the company’s VAS performance will lead to increased maturity of its employees. It solicits contributory behaviour because what is measured is just that – Contribution.

In addition, we can use the VAS as the spine for determining appropriate measures or key performance indicators.

As an example, see below.

Wealth creation sub-scores pertaining to results if achieved will impact positively on value added in the organization.

Wealth distribution sub- scores on the other hand relate to the key variables that affect the sustainability of the organization.

The value of deriving sub-scores in this manner is that they produce clear line-of-site or the golden thread between contribution and ultimately the overall performance of the organization.

In addition, all stakeholders can now see:

  1. How much wealth has been created.
  2. How it is being shared.
  3. What KPIs need be achieved to increase wealth created. Further strategic planning can also be based on the VAS Spine.

A significant next step to this approach is Fortune Sharing – of the excess to budgeted wealth created as a result of contribution. Excess (to expected performance) wealth created should be shared on an equitable manner with all the stakeholders that contributed to creating the wealth. Once an organization has reached this point a cycle of contribution will be in place and will drive contribution both at an individual and collective level – a truly empowered organization. Understanding and applying Contribution in the Legitimate Leadership context can be a game-changer for organization transformation and a bedrock for organization excellence.

 

Jim Furstenburg
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