Heroes and Lords differ significantly from "normal" units present on the battlefield, but it's not limited to their offensive capabilities, or commanding army in case of Lords. They can also gain experience points and level up (but the process is different than the one used for units), acquire new items, followers and banners. All that influences Heroes and Lords, as well as the whole kingdom.
Acquiring and using skill points
For their services Lords and Heroes acquire higher levels, which in turn unlock additional skill points that are used to unlock new and more powerful abilities. Each Lord and Hero starts with level 1 (it can be changed by constructing specific buildings). Each level rewards a Hero / Lord with a single skill point - they can advance up to level 30, meaning that they can gain a total of 29 skill points.
As you've probably guessed, those points won't suffice to unlock every possible skill (and level of that skill) for them. You must unlock abilities carefully, especially because there's no way to reset skill points once they are allocated. You should try to use most of the skills points in a single skill tree to benefit the most from it. If you want the Lord to be a perfect commander, boosting discipline and military power of your units you should invest in Battle Skills. If that unit, however, has to be as effective in combat as possible, invest most points into Character skill tree.
However, aside from regular Heroes and Lords, there are Legendary Lords available in the game - those that can be selected at the beginning of the campaign (or recruited later, if you've met their requirements). Those Lords are generally more effective in combat and they receive additional, unique to them skill trees, that normally aren't available. Additionally, those Lords have abilities that are associated with quests - unlocked automatically for advancing to a certain level, or by completing a quest.
You can access the ability screen by, for instance, clicking on the number representing the level of the Hero / Lord, which can be found in the lower left corner of the screen.
Aside from experience levels and abilities, Lords and Heroes can also be equipped with various items, such as weapons, armors, talismans, or enchanted items. Each one influences the Lord in a different way, increasing his stats, or offering a new ability (like, for instance, the ability to cast the Fireball spell for a Lord / Hero that is incapable of using magic). This gives you additional possibilities and allows to strengthen certain aspects of Heroes and Lords. Thanks to that you will be able to negate biggest flaws of certain Lords.
Kholen Suneater, one of the legendary Lords of the Warriors of Chaos can be used as a best example. This Lord has an absurd amount of health, inflicts gigantic damage, but has very thin armor (only 30 points). Thanks to specific items (as well as abilities) you can increase this value twice (or more), negating the only problem of that Lord. In case of other Lords it looks almost the same, but you shouldn't try to make a warrior out of a mage - you can increase combat capabilities of mages, but they will still be weaker than a typical warrior hero/lord.
Aside from items, you can also select followers and banners for your Lords and Heroes. Banners increase combat capabilities of a Hero / Lord (or give them a unique ability), and followers influence the whole kingdom, or every Lord / Hero. Followers can give you immensely powerful bonuses, like increasing research speed, income from trade / buildings, increasing the movement range of every unit, or even increasing the experience level of units recruited at the Lord's army. Each Lord and Hero has access to 6 slots for banners and followers.
Items, banners and followers can be gained by completing quests, or winning battles and sieges. Those rewards are mostly randomly generated - aside from story-related quests that have a specific reward for completing them. Additionally, items (similarly to MMORPG games, or the ones from the Diablo franchise) have their own ranks that influence their stats / abilities. Items can have 4 different ranks: Common, Uncommon, Exceptional and Legendary (the last one is reserved for Legendary Lords - they can gain them for completing story-related quests).