CIO

Hidden Assets

Strategies for managing your intangible leadership capital

Whether you know it or not, your "leadership capital" is always at stake, always in flux and always a key factor in determining your success in any endeavour. Leadership capital can be formed or drained, managed or mismanaged, and can have a high or a low yield.

In most discussions on leadership, the emphasis is on sexy issues such as vision, goals, strategy and decision making. There is far too little talk about leadership capital, which I define as an executive's resources available to fuel his agenda. A lack of leadership capital awareness can lead to dangerous misconceptions among many aspiring leaders - for capital is not merely a constraint or an enabler, it is a central force in leadership.

I wish I had learned that lesson earlier in my own career. Hearing people speak of "political capital" got me thinking about the hidden threads that form the fabric of great leadership. Having seen the dynamics of leadership capital in small-scale entrepreneurial operations, at a moderate scale in major corporations and at a large scale in the federal government, I have learned a set of essential principles governing capital. I hope they'll help you and perhaps inspire you to share some of your own lessons.

Capital is indivisible. Your capital is made up of all the political, personal, intellectual, physical and monetary assets you can bring to bear in meeting challenges. These are all interrelated. A big budget enhances authority. Reputation qualifies personal wealth. As a result, leaders need to manage their total capital.

The most clearheaded leaders I've known - my best recruits, most valuable allies, greatest mentors and most dangerous adversaries - have always viewed capital in its totality. I've also observed leaders that compartmentalise it. For instance, they rely on authority, budget power and position, while neglecting trust, respect and goodwill. That approach limits what they can accomplish.

Soft capital drives hard capital. Soft capital - people, relationships, ideas, information and reputation - determines the allocation and value of hard capital, such as money and physical assets. The best hard assets in the world can be rapidly destroyed in the hands of a corrupt leader or at the mercy of fluctuating demand. One of my mentors used to call the elements of soft capital "the four Cs": character, competence, contacts and creativity.

The reason Tylenol remains a byword for crisis management is that the manufacturer's leadership recognised from the outset that the risks to the company's soft capital would affect its hard capital for many years to come. During US poisoning scares in 1982 and 1986, Johnson & Johnson quickly recalled Tylenol products from stores. Because of this widely lauded response, the short-term costs of the crises, though high, were temporary.

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Capital isn't always transferable. The value of your leadership capital varies according to where you work, where you are and who you work with. Track records in one industry might not transfer to another. Outstanding accomplishments in one organisation may be below average in a world-class enterprise. Budgetary authority and company reputations mean different things in different countries.

Perhaps the best thing you can do is gain a sense of what forms of capital are genuinely transferable in your situation. These vary from great accomplishments and brand-name employers to prestigious awards and exclusive memberships. The best career advice I ever got was to look for intersections between my passions and opportunities that would expand my future options.

Markets make capital grow. Part of the miracle of financial markets is that they provide a means of increasing stocks of capital. Although leadership markets in and among organisations are informal and invisible, they too can make capital grow. They are driven by word of mouth and track records, and mediated by headhunters and board members.

The better you are at creating markets for leadership, the more capital you and your organisation will have at your disposal. I once counselled a client on building a leadership development system, which involved all the existing leaders of the organisation in choosing, nurturing and managing future leaders. By creating a market for leadership, these leaders were also refreshing their own leadership capital base.

The best capital is scarce and sensitive. Cash under the mattress and government bonds are safe forms of financial capital, but they are not premium capital. For leaders, a world-class reputation, brilliant personnel, revolutionary inventions and strategic alliances are premium capital with extremely high value. That type of leadership capital can bestow an extraordinary advantage. It can be leveraged to accomplish your goals and attract other forms of capital - such as a big budget and a great staff. But by its very nature, premium capital is hard to build and often very easy to destroy. One scandal tarnishes a career. A competitor poaches the high-flyers on your staff. Innovation renders a key patent obsolete.

One flaw turns an alliance into a trap.

Wise leaders look for ways to build premium leadership capital but not depend on it too much, so that they can use it to their benefit but limit the risks. My basic rule is if your premium capital is highly leveraged and relied upon for more than a few weeks or months, then you're in a danger zone.

Capital can be overspent. Financial investors manage their portfolios for a high yield. Managing your leadership capital is also about yield - getting the greatest result for the least possible investment. With leadership capital, yield comes in many forms: increased options, better outcomes or improved strategic positioning. But if you always strive to maximise yield - by, say, leaning too heavily on your relationships with other executives - you risk spending down your leadership capital. A better approach is to pick your spots, applying your capital only when it can make a difference for your position or your company.

In summary, be aware of your leadership capital, or it will limit you. Manage it poorly and you'll find yourself constrained and unable to control risks, which will lead to suboptimal outcomes and will decrease your capital stock. Manage your leadership capital well and you'll find yourself able to reach for higher goals and manage risks with an increased probability of success - which will increase your capital. So take stock of your own leadership capital and how you're managing it. Changing the way you think about capital is one more way to bring your leadership to a new level.

Christopher Hoenig is a director of strategic issues for the US General Accounting Office and has been an entrepreneur (CEO of Exolve), consultant (McKinsey & Company) and inventor; he is the author of The Problem Solving Journey: Your Guide to Making Decisions and Getting Results