Scarcity: An Economic Perspective on Leadership and Executive Development
Scarcity: An Economic Perspective on Leadership and Executive Development
Congratulations—you made it! By simply including the word economics in the title, there's a high chance that several people opted to invest their precious time elsewhere. For those of you who are more curious or discerning (yes, that’s you), I’m glad you decided to read on.
I must confess that while I’ve spent the past thirty years in the fields of HR and leadership development, my academic background and early career were in economics. This foundation has sustained my interest in exploring the interplay between economics, business, and leadership.
Although much has been written about the relationship between economics and business, surprisingly little attention has been given to how economics intersects with leadership. What does exist tends to frame the conversation around why leadership is important to economics. In this article, I aim to flip the narrative and explore why economics is essential to our understanding of leadership.
An Economist’s View of Leadership
If the importance of a subject were measured by the volume of literature produced, leadership would undoubtedly rank among the most significant fields in human history. Over the past year alone, it’s likely that at least 1,000 books have been published on leadership. Search "What makes a great leader?" on Google, and you'll find around 65 million results.
CEOs also consistently underscore the importance of leadership. Research by DDI’s Global Leadership Forecast revealed that the primary challenge facing C-suite executives is developing “next-gen” leaders. Further studies confirm this sentiment. A McKinsey report surveying 500 executives found that leadership development was among the top three human capital priorities, with nearly two-thirds ranking it as their most pressing concern.
But do organisations truly act as though leadership development matters? Applying an economic lens to how organisations treat leadership might lead us to a different conclusion. To understand why, let’s explore a cornerstone of economic theory: scarcity.
The Economics of Scarcity
Scarcity is a fundamental concept in economics. It describes the condition where resources—whether natural or human—are limited and cannot meet all our needs and desires. Economics, at its core, is the study of how individuals, businesses, and societies make choices in the face of this constraint.
What does this mean for leadership? When we think of scarce resources, we often imagine commodities such as water, minerals, or energy. However, in economic terms, human resources—including leadership—are just as vital. Leadership, as both a skill and a resource, is increasingly scarce, and the data backs this up.
According to DDI’s Global Leadership Forecast, the global leadership bench strength—essentially the readiness of organisations to replace leaders—has declined by 28% over the past seven years (GLF, 2018).
This scarcity is especially significant in today’s business environment, where 60–80% of organisational value lies in intangible assets such as knowledge, relationships, and innovation. A Economist article reported that 32% of S&P 500 firms now invest more in intangible assets than in physical ones. Leaders play a critical role in nurturing and leveraging these intangible assets, making their scarcity all the more pressing.
Why Should We Think About Leadership as a Scarce Resource?
Scarcity drives market dynamics that have profound implications for organisations. When a resource becomes scarce, its absence can jeopardise business continuity and erode market value. Consider the impact of CEO departures. Data from YCharts shows that companies experiencing CEO departures see an average drop of 4.19% in stock returns compared to the S&P 500.
Leadership scarcity also imposes financial costs. For instance, external hires for leadership positions often cost 15–20% more than promoting internal candidates. At the CEO or executive level, this premium can amount to millions. By contrast, investing in the development of internal talent can reduce this cost while enhancing retention. Yet, despite the clear benefits, many organisations fail to treat leadership as the finite resource it is.
Making Better Economic Choices About Leadership
Economics studies how we make choices under conditions of scarcity. Traditional economic theory assumes that humans act rationally, using data to make optimal decisions. If this were true, we’d expect organisations to make significant investments in leadership development to address leadership scarcity.
However, behavioural economics, led by thinkers like Daniel Kahneman, suggests that our decisions are often irrational and influenced by biases. Present bias, for example, causes us to prioritise short-term gains over long-term benefits. This may explain why many organisations underinvest in leadership development despite its clear value.
Opportunity cost—the value of what we forgo when we make a choice—also plays a role. When organisations allocate resources to other priorities, they may fail to fully appreciate what they sacrifice by neglecting leadership development.
Addressing Leadership Scarcity
If we apply an economic framework to leadership scarcity, several strategies emerge:
Minimise waste: When a resource is scarce, eliminating inefficiencies is critical. Yet, many organisations waste leadership potential. Alarmingly, four in ten newly promoted executives fail within 18 months. With just 40% of executives rating their development as high-quality (GLF, 2018), this represents a significant waste of talent. Reducing such failure rates requires better onboarding, coaching, and ongoing support.
Take control of supply: In industries dependent on natural resources, companies actively search for new reserves. Organisations can adopt a similar approach to leadership by proactively investing in succession planning, executive development, and mentorship programmes. Leaving leadership development to chance is not an option.
Explore alternatives: If addressing supply proves challenging, organisations may need to manage demand differently. For instance, some companies are adopting self-managed teams, which reduce dependence on formal leadership roles. While this approach shifts responsibilities, it comes with its own challenges.
Highlight opportunity cost: People often fail to act on leadership development because they don’t see the full cost of inaction. By quantifying the risks of underinvestment—such as higher turnover or business disruption—organisations can build a compelling case for action.
A New Perspective on Leadership
Organisations must start viewing leadership and talent through an economic lens, recognising it as a finite resource. This shift in mindset will drive more disciplined and strategic decisions about how we develop, support, and retain leaders.
Leadership scarcity is not an insurmountable challenge, but it requires deliberate choices informed by data, economics, and foresight. Embracing this perspective will help organisations build a sustainable pipeline of leadership talent, ensuring success in an increasingly complex and competitive world.
by Mark Busine