Scarcity: An Economic Perspective on Leadership and Executive Development
Great – you made it. By just putting the word economics into the title there is a very good chance several people made the ‘economic’ choice to use their precious resource of time somewhere else. For those who are perhaps a little more astute or curious (that’s you) I’m glad you found your way here. I have to confess that while my last thirty years has been spent in the fields of HR and leadership development, my university studies and early career were in economics, which is why I have maintained a strong interest in the relationship between economics, business and leadership.
While much has been written on the link between economics and business, surprisingly little has been written on the relationship between economics and leadership and what has been written tends to look at it from the perspective of why leadership is important to economics. What I want to do in this article is explore why economics is important to our view of leadership.
An Economist’s View of Leadership
If we measured the importance of a subject by the volume of literature produced, leadership must be up there with the most important fields in history. In the last 12 months alone, there have probably been, conservatively 1,000 books published on the subject of leadership. Type “What makes a great leader?” into Google, and you’ll receive around 65 million hits. CEOs too acknowledge the importance of leadership. DDI’s Global Leadership Forecast research found that the number-one challenge facing C Level executives was developing “next-gen” leaders and going by the research, you would also think that leadership development is important. McKinsey reported, that in a study of around 500 executives, leadership development was identified as one of the top three current and future human capital priorities. Almost two-thirds of respondents identified leadership development as their number-one concern.
But do we really believe it? If you apply an economic lens to how we treat leadership and leadership development in organizations, you might arrive at a different conclusion. To understand why, let’s explore one of the most fundamental concepts in economics; scarcity.
The resources that we value exist in limited supply. There are simply never enough resources to meet all our needs and wants. This condition is known as scarcity and at the core of Economics is the study of how individuals, families, businesses, or societies make choices under conditions of scarcity.
So, what does all this have to do with leadership? When we think about resources, we often think of natural resources such as water, minerals, gas and so on. But in the study of Economics, resources also include human resources. The human contribution to the production and delivery of goods and services is critically important and in the domain of human resources it applies to both the quantity and quality of those resources. In this context, leadership is a scarce resource that many would argue is getting scarcer. According to DDI’s Global Leadership Forecast, a biennial study of leadership and leadership practices, leadership bench strength has weakened by 28% in the last 7 years (GLF, 2018).
This is particularly relevant in today business context where more than 60-80% of an organization value is tied up in intangible assets and according to a recent article in the Economist, 32% of firms in the S&P 500 invest more in intangible assets than physical ones. Knowledge, relationships and innovation are the currency of today’s organizations and leaders play a profound role driving and enabling success in this context.
Why Should we Think About Leadership This Way?
Scarcity drives several market dynamics that can have a significant impact on organizations. Firstly, firms may not think about the future until it is too late. When a resource becomes scarce, the lack of an alternative can have serious consequences in terms of business continuity and/or market value. Consider the impact of CEO departures. According to data compiled by YCharts, companies whose CEOs departed experienced an average of 4.19% drop in stock returns compared to the S&P 500. In many cases, these were planned departures. McKinsey also found that 30 percent of US companies admit that they have failed to exploit their international business opportunities fully because they lack enough leaders with the right capabilities.
Another problem is that since goods and resources are rationed by price (based on supply and demand), there may be a danger that some organizations cannot afford the kinds of resources they require or are simply more exposed to market factors. For example, several studies have shown that companies pay on average 15-20% more for external hires compared to the cost of an internal hire. At a CEO or Executive level this can equate to many millions of dollars. Of course, the counter argument is that investing in your own leadership and executive resources makes them more attractive in the market. However, what we know is that investing in people also goes a long way towards retaining them. Investing in the growth and development of leaders and executives, has the potential to give organizations more control and predictability over supply.
How We Make Economic Choices
As stated earlier, the foundation of Economics, is the study of how we make choices under conditions of scarcity. Traditional economics would suggest that humans are rational and therefore our decisions regarding the use of limited resources such as leadership are also rational. Adopting a traditional view of economics, one would expect that confronted by the challenge of leadership supply and readiness, companies would do all they can to better manage this scarce resource.
While it is true that prior to COVID-19 the investment in leadership development was increasing, data from several studies offers a startling insight into the preparation and development of leaders and executives.
Only 40% of executives feel the development they receive is high quality (GLF, 2018)
45% of HR leaders say their organizations struggle to develop effective leaders (Future of HR, Gartner 2019)
60% of frontline leaders say they have never received any training for the role (Talent Reimagined, CCL 2018)
So why the disconnect? Several factors may be at play.
According to behavioral economists like Daniel Kahneman, our economic choices are prone to bias and irrational behavior. While a traditional view of economics would suggest that investing in leadership makes perfect sense, other factors will often influence our choices. For example, present bias suggests that our decisions may be more heavily influenced by short-term needs and results rather than longer-term gains and opportunities.
Another factor at play is opportunity cost. Since resources are limited, every time we make a choice about how to use them, we are also choosing to forego something else. Every economic choice has an opportunity cost and while we might consciously acknowledge the importance of leadership and leadership development, we either consciously or unconsciously choose alternative options.
The broader issue is that we typically don’t think about leadership as a scarce resource in a true economic sense. While we know we have trouble finding good quality leaders and executives, we don’t bring the same discipline and mindset that a mining company might bring to the way it manages its scarce natural resources.
Addressing Leadership Scarcity
If we apply an economic lens to the issue of leadership scarcity what are our options? Here’s a few thoughts:
Minimize waste. If you are confronted with a scarce resource one of the things you want to do is minimize waste. The data would suggest that this is a significant opportunity for many organizations. Consider the plight of new executives. Four of 10 newly promoted managers and executives fail within 18 months of starting new jobs. These are typically not green, inexperienced individuals. This is some of the best talent within our organizations. Keeping in mind that just 40% of executives feel the development they receive is adequate, this represents a significant waste of premium resources. As a society, we have become much more attuned to waste and the social and economic impact of poor resource management. Applying this mindset to how we support leaders and executives can have a profound impact on the effective utilization of scare leadership resources.
Take control of supply. Resource companies have individuals whose role it is to search for new supplies of natural resources. They don’t sit back and wait for the resource to appear. In the field of leadership there’s various ways organizations can be more proactive from formal activities such as leadership and executive development, succession management and hiring activities to informal approaches such as coaching, mentoring and peer networks. The important thing is to do something that is appropriate to the needs of your leaders and organization. Leaving leadership and executive development to chance is not an option.
Look for an alternative. If you can’t address supply, then you may need to look for alternative way to deliver outcomes. In other words, tackle demand. In a work context this might mean reengineering the workplace for less or different types of leaders. We have seen this occur in the past and today, technology is enabling organizations to redesign the way work gets done. In more recent times we have seen the growth of self-managed teams that don’t rely on formal leadership. Of course, that brings its own implications as more and more people are asked to embrace leadership responsibilities.
Elevate the opportunity cost. One of the reasons we sometime choose a particular course of action is that we don’t fully appreciate the opportunity cost associated with that action. For example, have you ever added up how much you spend on coffee in a year? On a daily basis the three to four dollars we spend on a couple of coffees might seem pretty insignificant. But when added up over 12-months (approx. $3000), our perspective on how that money might have been used can change dramatically and alter our choices moving forward. The important insight here relevant to leadership is that we need to bring strong data that builds and elevates the opportunity cost of not developing, preparing and supporting leaders and executives. Leadership and executive development should not be a discretionary pursuit.
The bottom line is that organizations need to start thinking about leadership and talent as an economic resource and start making better and more informed choices about how we manage these scarce resources. Once we embrace this perspective our focus and energy are likely to change dramatically.
by Mark Busine