Lloyds' past record proves a case for shareholder value creation in the banking sector, with envious results under former CEO Sir Brian Pitman
Sir Brian Pitman, who died in March aged 78, was an old-fashioned banker for whom the terms ‘credit default swap’ and ‘collateralized debt obligations’ were as alien as sensible clothes are for Lady GaGa.
His focus on shareholder value as the core measure of performance transformed Lloyds, which he joined as a school leaver and eventually led as chief executive, into the UK’s most profitable retail financial services group and, briefly, the world’s biggest bank.
When Sir Brian took over as CEO in 1983, Lloyds was doing well on every measure bar one. To Sir Brian, that was the only one that mattered: the bank’s share price languished below its net asset value. He instigated a boardroom debate to clarify exactly what the bank wanted to achieve in order to establish appropriate performance measures. Those discussions eventually led to a single objective: to double shareholder value
every three years.
Companies often have lofty goals, only to quietly drop them when circumstances go awry, but Sir Brian was determined. The breakthrough came in discussions with executives from Shell. Lloyds was then earning a return on equity of about 12 percent; the board believed the bank needed to earn 10 percent above inflation. But the Shell executives said it needed to earn a return in excess of its cost of equity. The problem was that nobody at the bank knew what that figure was. Months of analysis eventually uncovered that Lloyds’ cost of equity came in between 17 percent and 19 percent. At the time, not even half its businesses earned more than 18 percent after tax; some were in negative territory.
Ambitious plans were put in place to rectify the situation, but it soon became apparent these were doomed. The key was to drive down the cost of equity. Two years after Sir Brian took over as chief executive, Lloyds began to get rid of underperforming businesses and, finally, the share price began to move up. In 1986 he introduced performance-related pay for general managers and, in time, group-wide share-ownership schemes, aligning employee interests with those of shareholders.
Arguably, the acquisitions of rival bank TSB and low-cost mortgage provider Cheltenham & Gloucester catapulted Lloyds (and Sir Brian) into the big time. But neither would have proved so successful or transformational had not Sir Brian and his team undertaken such a deep analysis of the underlying business at the outset.
Sir Brian never apologized for his relentless focus on shareholder value. He believed it possessed a great advantage as a governing objective because it demanded continual improvement.
When competitors moved into investment banking, Lloyds stood back. A good board, Sir Brian said, needed to balance the short-term demands of shareholders, the cost of capital and ensuring the long-term future. Investment banking failed on all measures; Sir Brian did not. By 2001, when he retired, Lloyds had delivered a compound total shareholder return, including reinvestment of dividends, of 26 percent annually. Other banks can only dream.
