Leadership Capital
Leadership capital is the recognition that there is a finite amount of power that any leader possesses.
– The Dichotomy of Leadership
Leadership Capital is similar to traditional monetary capital in many ways:
- They are finite.
- They take time to accumulate.
- They have compound effects.
Leadership capital is a resource that can be banked, spent or misspent, invested or lost, managed or mismanaged, and can have a high or a low yield.
They Are Finite
In personal finance, it would be unwise to recklessly spend money on material purchases just to compete with others on “who has the most materialistic possessions”, instead of spend it on meaningful experiences or on building assets.
“Rich men use most of their money to get richer. Poor men use most of their money to look richer.”
Similarly, you don’t want to spend your leadership capital foolishly to force your subordinates to simply follow your order so that you look like “the boss”. Leaders who constantly crack the whip on the team would be despised, not respected. It would be hard for talent retention, and few will follow when it actually matters.
For example, enforcing a rule for “no smartphone/laptop usage during meetings” would be strategically unimportant. A leader could certainly enforce this rule, but they would have less power/influence remaining balance to hold the line to push on fronts that lead to the actual business goals. Once the capital runs out, the leader will no longer be able to inspire and influence their subordinates. It is finite, and must not be abused.
They take time to accumulate
“The first million is always the hardest.” Like any asset, it takes time to build. Acquiring leadership capital requires a foundation of trust and confidence between the leader and subordinates. The leader needs to show that he or she always put the team and people first (not their own personal goals), and can effectively lead the group to achieving their goals. Therefore, such foundation of trust and confidence takes time to build over time.
As we acknowledge that time is an essential ingredient, we can invest our time and energy in ways to facilitate this process by building expertise for Credibility, demonstrating promise-keeping for Reliability, cultivating relationships for Intimacy, and finally focusing on the team’s long term good for reducing Self-Orientation (or self-interest):
As a leader acquires leadership capital and knows to not spend them on strategically unimportant things, the leader can think about how their capital can be invested effectively to achieve the team’s goals.
They have compound effects
Building the first million asset or first ten people of subordinates is likely to take a long time, but after that if invested wisely, at the same rate of return, it takes much less time to grow the second million or a larger organization. As they compound over time to the scale of $100M or 100 people, a 10% ROI or increase is going to be pretty sizeable.
Leadership capital also has compound effects on other types of asset like personal, physical, intellectual, political or monetary assets. And these assets are inter-dependent, for instance, if a leader acquires leadership capital through authority, budget power and position, but neglects trust, respect and goodwill, it would be hard to hold the line when something mission critical is at stake.