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What Sir Brian Pitman can teach today's bankers

Robert Peston | 09:30 UK time, Monday, 15 March 2010

I had been meaning to write something about Sir Brian Pitman, the former chief executive of Lloyds Bank, who died last week, but have been delayed by the latest Lehman revelations.

Sir Brian PitmanAlmost 20 years ago, when I was the Financial Times' banking editor, I saw a great deal of him. And I would argue that he was one of the four or five most important British business people of the Tory years of government from 1979 to 1997 - which is not to say anything about his politics, but just to point out that his heyday was the age characterised by the Thatcherite war on the state and a resurgence in the private sector.

He was certainly the most important British banker of his generation. And his single most important contribution was that he understood - in a way that previous leaders of the Big Four clearing banks and many of his contemporaries did not - that banks were supposed to be run for the long term benefit of their shareholders and that what customers wanted actually mattered.

This may today sound like a statement of the bloomin' obvious - even if most banks have recently rather failed to meet those basic standards. But 20 years ago they were revolutionary ideas: banks back then were run by public-school chairman and grammar-school general managers whose primary belief was that the size of a bank was what really mattered, and never mind if being big ran counter to the interests of the owners and the clients.

Together with his own public-school chairman, Sir Jeremy Morse, Pitman dared to be different in another way. Lloyds largely eschewed the glamourous businesses of stock broking and investment banking, and concentrated on serving the needs of retail customers.

Because of his obsession with what was at the time the relatively new concept of risk-adjusted return on capital, he could see how to make money for shareholders over the long term out of basic banking, but not out of wholesale speculative activities where the risks were harder to measure and control.

Only a few days ago, he gave a synopsis of what really mattered to him as a banker and business leader in his evidence to the Future of Banking Commission:

"Nobody is a greater believer in shareholder value than me... It's long term shareholder value and everything has to be structured around the long term, particularly the remuneration structure has to be around the long term. The minute you move to a huge emphasis on short term big bonuses you're going to change the behaviour. It is perfectly possible, in our case for 17 years when I was there, we were doubling the value of the company every three years for 17 years. Nearly everybody had shares in the company; messengers were worth a quarter of a million pounds when I left because we'd been successful as an organisation. But we believed it all had to start with the customer."

This relentless focus on doing one thing well and putting the customer first, rather than going for the glory of becoming a global universal bank, meant that Lloyds was for much of the late 1980s and early 1990s Britain's most successful bank by a mile - measured in respect of its profits growth and share price performance.

On his watch, accident-prone Midland was devoured by HSBC, Barclays suffered humiliating losses on property lending and made a very expensive debut in investment banking and NatWest lurched from mediocrity to eventual takeover by Royal Bank of Scotland.

Which is not to say he did everything right. Arguably it was a mistake that he stayed on as chairman after ceasing to be chief executive - because it was impossible that the new chief executive would have any real sunlight in which to flourish under his long shadow.

And he became so obsessed with growth, that when the natural growth to be squeezed out of the domestic retail market was largely exhausted, Lloyds probably became too hooked on making acquisitions, not all of which were sensible.

But if you want a measure of what he did right, HBOS would today be a nationalised basket case, if he hadn't transformed Lloyds into such a fearsome money-making machine that it has been able to absorb HBOS' mind-bogglingly huge losses (although many Lloyds shareholders would wish that his successors at the helm hadn't tested the bank's robustness with that deal).

Pitman was a player in the banking industry till the end.

He recently became chairman of Virgin Money and on 25 February, speaking to the Future of Banking Commission, Pitman made an important point about the financial and economic havoc wreaked by banks in the past few years that has not received enough attention: the chief executives of banks have the power to drive up short-term profits by pulling a lever that forces their respective banks to take more risk, to lend and invest more relative to their capital resources.

As he said, bosses of banks and other financial companies (such as insurers) have this unique ability to engineer increases in profits over the succeeding two or three years in a purely mechanistic way. It is not a power, for example, that a retailer has.

But after profits have been lifted significantly by the income stream automatically generated by lending and investing more, there is - usually - a horrible reckoning, when many of the loans and investments turn bad, as borrowers find it difficult to keep up the payment. Does that sound familiar?

Which is why Sir Brian was such a critic of a short-term bonus culture in banking that provided powerful incentives to bank bosses to pull that lever and increase the risk being taken by their banks.

He felt you needed 10 years to measure the success of a bank. And he wanted bankers to be rewarded for increasing profits and the share price over considerably more than three years.

Oh, and he also thought that banks ought to be run by bankers who understood all this. Although he was that rare banker who actually listened to customers, he was withering about "retailers" with little grasp of risk who had had taken over his industry and almost destroyed it.

Comments

  • Comment number 1.

    > he was withering about "retailers" with little grasp of risk who had had
    > taken over his industry and almost destroyed it.

    What do you mean - "almost"?


  • Comment number 2.

    I have been worried that no-one looks to the past history in banking to see what mistakes and successes happened. It looks from your article that lessons of good practice are around and within short term history.

    And it looks like Virgin money will miss having the advice as well.

  • Comment number 3.

    The Credit Card industry are manipulating the law selling debt to Loan Sharks to force people into Bankruptcy then illegally buying debt back as back dated transactions to repossess properties. Trustees are manipulating the law charging £100,000 legal fees to claim excess values for properties. Properties are illegally sold in undervalued backhanded cash transactions to people they illegally tip off. These creeps have more info on you than MI5 and work in collusion as bullies.. The County Courts and officers Stripped me Naked

  • Comment number 4.

    # 2. At 09:55am on 15 Mar 2010, barry white wrote:

    > I have been worried that no-one looks to the
    > past history in banking to see what mistakes and
    > successes happened.

    It is more general than that, I think. The history of many areas of human
    endeavour is littered with disasters. And, for centuries, we "forgot" each
    cycle.

    The difference now is that we have an academic field, called Engineering,
    that subjugates the power of nature and bends it to our will. We are now
    developing a similar field that subjugates the power of bankers and bends
    them to our will. We gave the likes of Sir Brian Pitman the chance to sort
    banks out, and they all obviously failed catastrophically. So now we have
    to apply the measures by force.

  • Comment number 5.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 6.

    The sales culture, now endemic across all banks IS off-putting, even alienating, for customers. They have to suffer a myriad of terms and conditions and, for the vast majority who are unwary, they will fall foul of high penalty fees for the slightest breach. High Street branches are perhaps only one or two rungs up from full blown loan sharks. They have the resources to take the time necessary to grind customers down, (where loan sharks take a more direct approach.)

    Pitman's take on business seems to support the John Lewis approach to business ownership. John Lewis is a full blown retailer though, however, they seem to get the art of "selling" right. Why can't bank branches? - Because they are just target orientated, for quarterly bonus purposes. Keeping the sales figures up, is higher up the priority list in your average branch today than paying staff correctly, organising workload, getting customer paperwork right. Same old story really, thousands of sales staff, and 2 bods to manage the admin & paperwork. (Sales mentality is in charge, not shareholder value mentality.)

  • Comment number 7.

    "I would argue that he was one of the four or five most important British business people of the Tory years of government from 1979 to 1997."

    As Karl Marx may have said...you just can't imagine how much wealth Sir Brian Pitman has generated for this country!

    Lending out money (with interest) does not require great deal of genius.

    He was just a money lender at the end of the day.

  • Comment number 8.

    Stop Credit, Kill the industry dead and Kill corporate greed, Screw their evil fake economy and live good

  • Comment number 9.

    "in a way that previous leaders of the Big Four clearing banks and many of his contemporaries did not - that banks were supposed to be run for the long term benefit of their shareholders and that what customers wanted actually mattered."

    ...but Robert, in a system which success is measured in capital accumulation and where lifetimes are about 70 years on average - what do you expect?

    Wht incentive is there for 'long term shareholder value' - which actually means 'only take small slices from the workers back so you don't bleed him to death'

    It's all well and good getting dewy eyed about 'old school banking' - but the reality is that this was an inevitable progress of Capitalism.

    I'm sure you can profess that in the 'good old days' banking staff were there for the customers - but the reality is that they were just as risky back then. I mean the great depression was as a result of banks lending money to customers to purchase equity shares (sound familiar??) - instead of shares we have property which is fuelled by the same credit boom.

    One day the 'business journalists' of this world will think about the source of the profit these banks gamble with so freely - and when they finally realise it - they will be ashamed they have played along with the lies of the ruling classes in a betrayal of thieir own people.

    History has proven once again that no man can control Capitalism and yet we still have claims that it is under control.

    ....just waiting for the Sovereign defaults to remind us all of this fact...

  • Comment number 10.

    Almost nostalgic but not relevant today. The current and future management of banks are and will continue to be motivated by the extraordinary wealth that a few years in the hot seat can bring - both salaries/bonuses and pay offs/pensions. That is why banks and finance institutions need suppervision and governance needs to be legally enforcable so that serious misdemeanors can and do result in personal liability and/or prison.

  • Comment number 11.

    I was so sorry to hear of Sir Brian Pitman's death for he belonged to an era when you could trust your bank and there was never any question that it could go bust.

    So little has been mentioned of those times when banks actually gave back to the community. By providing secondee managers to help promote small businesses and providing loans and advice to business start-ups who would probably not even be entertained by today's banks. The days when your bank actually had a business manager and not some anonymous person on the other end of a telephone.

    I saw his interview when he first took over the Chairman's job at Virgin Money and breathed a sigh of rlief that such people were still prepared to stay active in the business world. Such a badly needed resource in today's uncertain climate.

    Very sad news indeed!

  • Comment number 12.

    Grow your own profits literally, cut out the likes of rich family businesses venturing into global takeovers of petrol banking credit car sales and mortgages

    Why do third world countries have the worlds resources and the lowest economies?

  • Comment number 13.

    11. virtualsilverlady 'Very sad news indeed!'

    You're just saying that (to look good). ;-)

    What we need is Father Gabriele Amorth!

  • Comment number 14.

    Monday. A Banking story.

  • Comment number 15.

    4. At 10:17am on 15 Mar 2010, Jacques Cartier wrote:

    # 2. At 09:55am on 15 Mar 2010, barry white wrote:

    > I have been worried that no-one looks to the
    > past history in banking to see what mistakes and
    > successes happened.

    It is more general than that, I think. The history of many areas of human
    endeavour is littered with disasters. And, for centuries, we "forgot" eachcycle.


    Wasn't it Enoch Powell who said that "history is full of wars people knew would never happen"?

  • Comment number 16.

    Just for clarity, Capitalism has not failed, but suceeded. Instead, Socialism (our ability to bend capitalism to be socially useful), has failed. This is what it looks like.

    This gent seems to be very reasonable, but you cannot have endless growth, so perhaps we might have fallen over in a couple of years, rather than now, but fallen over we will have.

    Somewhat paradoxically there seems to be too much money around, and the barons still want more and more. Having failed to get "decent" returns on manufacturing and ariculture, they turned to the great money making schemes of the financial sector for better profit.

    We are going to have to be a lot cleverer if we want to control this in the future, if indeed it's at all possible with 6bn+ people on the planet, all wanting the good life.

  • Comment number 17.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 18.

    Exactly how 'boring' was Sir Brian Pitman?

    Lloyds under Sir Brian Pitman was a boring conservative bank. However in a moment of madness, a rush of blood to the head Lloyds blew all that by taking on one of the worst banks in the UK, HBOS. Did that undo all the good that the like of Sir Brian Pitman did - probably yes!

    Much like Sir Arnold Weinstock's GEC that was destroyed by his successors Lloyds has been, if not destroyed, then tarnished by his successors.

    The fools that are regulating and running the present banks need to be reminded that the banks that they destroyed had been around for hundreds of years till they got their hands on them and created the worst financial crisis for 350 years, all in the space of about a decade and a half.

    What failed so badly in their education (that we paid for!) for Mervyn King and his fellow agents of destruction to so damage the entire world banking system? My guess is that they were selected by the system to be incompetent and spineless, as regulatory incompetence lets the rogues divert huge fortunes to their personal benefit.

    We are still suffering from these people and we must get rid of them! We need debt deflation in both public (a smaller sum) and private sectors (a huge sum), BEFORE we can recover, and it hasn't started yet!

  • Comment number 19.

    # 11. At 11:46am on 15 Mar 2010, virtualsilverlady wrote:
    > I was so sorry to hear of Sir Brian Pitman's death for he belonged to an
    > era when you could trust your bank and there was never any question that
    > it could go bust.

    Even a man with huge influence and great decency could not influence events one iota, when the chips were down.

    > So little has been mentioned of those times when banks actually gave back
    > to the community. By providing secondee managers to help promote
    > small businesses and providing loans and advice to business start-ups
    > who would probably not even be entertained by today's banks.

    That because nobody bothers to thank the participants when things work well. Think of the PC you type these messages into. Countless technicians, engineers and artisans have created that work, yet you would not notice any of it until it was gone.

    > I saw his interview when he first took over the Chairman's job at Virgin
    > Money and breathed a sigh of rlief that such people were still prepared to
    > stay active in the business world. Such a badly needed resource in
    > today's uncertain climate.

    People who can take time to thoughtfully reflect on their activities, and what good they do, are not valued now. People who take big risks, gain a big quick profit and bale out before they get hit are the ones who get the top jobs now – the Sir Greedie Goodwins of this world.

    Th only way to deal with them is to hit them where it hurts the most – in thier pocket.

  • Comment number 20.

    13 statist

    Really! What a cynical comment you have made on a subject you must not have had any experience of.

    It was a complete waste of time and space.

    I do not need to be disingenuous to look good thankyou. Unlike some of your ilk.

  • Comment number 21.

    9. At 11:24am on 15 Mar 2010, writingsonthewall wrote:
    One day the 'business journalists' of this world will think about the source of the profit these banks gamble with so freely - and when they finally realise it - they will be ashamed they have played along with the lies of the ruling classes in a betrayal of thieir own people.
    ------------
    Business journalist sounds like an oxymoron to objectivity.

    I'll say it again, there's only one journalist left in the whole of the BBC - Adam Curtis. But he too got suspiciously silent after the appointment of Alan Yentob.

  • Comment number 22.

    16. Crookwood 'Just for clarity, Capitalism has not failed, but suceeded. Instead, Socialism (our ability to bend capitalism to be socially useful), has failed. This is what it looks like.'

    Perhaps, but it would be clearer to state that capitalism has just been given a bad name in the liberal-democracies recently? Socialism (with Chinese characteristics) hasn't failed in China has it? They actively manage/govern their populations to collective advantage, but we don't. There's a price to pay for that, and guess who pays? There's far more going on than most of us appreciate I suspect. The second link indicates why, I hope. Many just can't see it.

  • Comment number 23.

    16. At 12:17pm on 15 Mar 2010, Crookwood wrote:

    "Just for clarity, Capitalism has not failed, but suceeded. Instead, Socialism (our ability to bend capitalism to be socially useful), has failed. This is what it looks like."

    Capitalism failed the day it needed to be supported by Government. What we have now is a 'long dead' system which can only be supported by further Government intervention (whilst conversely calling for less regulation)

    Attempts to make a system which is driven by profit, greed and is essentially 'anti-human' were always doomed to fail. It's a shame successive Governments spent so much trying to do so and consequently diverted so many resources from socially useful areas in order to save this dirty system.

  • Comment number 24.

    Is this the 'reputation' the City of London is so desperate to keep?

    http://news.bbc.co.uk/1/hi/business/8566904.stm

    Welcome to the 'wild west' of banking, where you can ignore regulations and laws - all in the pursuit of money.

    Got a deal which is banned in the US? - no worries, we can provide you with a legal framework which is more 'tailored for your financial needs'.

    It's like Fagin's "school of honest bankers"

  • Comment number 25.

    Creditors and debt collectors and lawyers should be charged with illegal duress (*)

    (*) legal term

  • Comment number 26.

    20. virtualsilverlady 'Really! What a cynical comment you have made on a subject you must not have had any experience of. It was a complete waste of time and space. I do not need to be disingenuous to look good thankyou.'

    Thank you for your insightful and revealing reply. You clearly see yourself as a natural beauty.

    It's a sign of the times ;-)

  • Comment number 27.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 28.

    Re; 23. At 1:23pm on 15 Mar 2010, writingsonthewall wrote:

    I wanted to make the semantic point that Capitalism has succeeded (for the capitalists at the top), as it certainly has done. If you view it as failed, you ascribe it social benefits, which it doesn't have. Rather than try and "fix" capitalism, you have to accept that it is inherently anti-social and dangerous.

    It doesn't need fixing, it needs to be treated as toxic. A bit like nuclear fusion: can be very useful, but has a high risk associated with it.

  • Comment number 29.

    I assume it was agreed with shareholders that the former HBOS and RBS chief executives were 'suitable'. Given that we're all too busy to look into these things the regulator probably has to take this sort of thing on. The 'supermarket' style banking model that failed did appear to be in the customers interests at the time, producing cheaper financial products, for a while.

    Let's hope that the collective wisdom builds strong effective long term regulation, monitoring banks behaviour over 10 years or more before their profits are distributed. I can forsee an outcry from so many with vested interests in the current state of things. Tightening up after the event is part of the boom/bust cycle isn't it, but it's a shame they've been able to get away with it. If it was wisdom, it's called that for a reason, what's expedient for customers now may not hold water later on down the economic cycle - now it's down to the regulator and shareholders to control 'our' banks I guess.

  • Comment number 30.

    Robert,

    As much as I enjoy your blogs, it is the comments which are more enlightening.

    Sort out the moderation queues!!!!!!!

  • Comment number 31.

    Banking is now the business of gangsters. Ethical behavior can not be regulated but unethical behavior can be punished...but is not. Banks are run for the benefit of bankers..depositors might as well be going to casinos...at least you have some fun before they take your money. Be aware that for all that has gone wrong the governments have been unwilling to change anything,,the bankers have assured them that they will behave...but I think they said that last time too. A truly criminal class.

  • Comment number 32.

    26 statist

    Instead of trawling through other peoples comments to rubbish for you obviously have nothing constructive or sensible to say of your own I suggest you look at the subject matter of what is being discussed and at least try to show some respect.

    I do find your perception of others' comments a bit weird.

  • Comment number 33.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 34.

    26 "other dogs bite their enemies, I bite my friends to save them."

    Who said this?

  • Comment number 35.

    Good old Peston!

    Can't even write an obituary without mentioning banks!

    GC

  • Comment number 36.

    Well sad to see he has gone. Meeting investors with Pitman was always a treat, not only because of his ability to engage them but because of the focus and rigour he brought which was a colossal contrast to the rather mediocre intellects and personalities alike who ran the other English banks.

    You should not under-estimate how much of what is attributed to Pitman was enabled at the least by his partnership by his then Chairman, Sir Jeremy Morse. The combination of the Chairman's steely intellect and Pitman's more street wise discipline was formidable.

    In the mid 80's and into the 90s Lloyds were the only English bank (back then both of the Scottish banks were quite different to the disaster areas we see now) and one of the very very few in the world who actually made returns on the capital they employed that beat the cost of that capital, though this ended when they could no longer grow in the UK (in the sense of taking more market share) and started on acquisitions.

    As for the poster above who likens Pitman to Lord Weinstock, sorry but no sale, as history records a somewhat different tale. The unravelling of GEC under his successor's acquisition spree is of course fact. In that respect maybe GEC and LLoyds have a few things in common but Weinstock and Pitman were of a very different stamp in terms of the financial record of their company's during their time.

    Also fact is that GEC had been in long term real decline for a couple of decades at least - or has everyone forgotten that they were for example so stumped for ideas on how to invest properly that GEC ran a huge cash balance for much of the 1970s, though I don't remember when they finally ran it down. This when real interest rates were negative for long periods of time, and below the inflation boosted returns on capital earned by industry at the time. Earning interest at less than the then rate of inflation and not investing it as productive capital is not to me the mark of industrial or financial acumen.

    GEC also failed to translate its success of the prior decades into new generations of technology and steadily lost out on everything from telecommunications equipment to several different areas of defence contracting and more besides. Rather like a lot of other british industry one might say.

    By all means pick business heroes, but at least be realistic about them.

  • Comment number 37.

    Robert - as people read your touching obituary yearning for a less frenetic banking environment, they might almost forget that it was YOU who was instrumental in spooking people to queue frantically to get their money out of Northern Rock. Caledonian Comment

  • Comment number 38.

    32. virtualsilverlady 'I do find your perception of others' comments a bit weird.'

    Maybe that's a glimmer of possible learning/enlightenment that you're misinterpreting? ;-)

  • Comment number 39.

    28. At 2:22pm on 15 Mar 2010, Crookwood

    Agreed - we are on the same page.

  • Comment number 40.

    In Australia the Government gave everyone a couple of grand to buy plasma TV's and boost the economy. In the United Kingdom the HMRC would rather overtax and bankrupt you as it is not Quote In The Interests Of The Crown Unquote to be reasonable or nice

  • Comment number 41.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 42.

    #37 Caledonian Comment

    Quite. And many would argue that wasn't the only incident where Hon Peston has adversely influenced events by virtue of irresponsible and often incorrect interpretation and reporting - and unsuitable use of his privileged access and sources. But I'll probably get moderated out by the biased BBC again for posting this type of observation...

  • Comment number 43.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 44.

    This is the same Brian Pitman who bought the TSB resulting in thousands of job losses and closed branches and the same Brian Pitman who bought Scottish Widows for an exhorbitant price resulting in massive destruction of shareholder value.

    Not a lot of lessons that the current crop of bankers haven't already learned.

  • Comment number 45.

    Yes we are legal bloodsuckers, but any other professional in the same position would have done exactly the same. If you take us to court about our dodgy strategies we will bankrupt you again.[*]



    [*]= illegal intimidation

  • Comment number 46.

    Brian Pitman was one of the last CEOs of a bank who had actually worked his way through a bank, from junior management. When I worked at Lloyds you had not only Sir Brian, but both a Head of Risk and a Deputy Chairman who had worked their way up from jobs on a banking counter and therefore had vast experience. After the likes of those left it became fashionable to employ MBA graduates and retailers rather than people who actually understood what they were doing - in Lloyds and their peers. It doesn't matter when you make widgets, however when you effectively control the economy it is obviously disastrous. In the case of BoS one can only wonder at what the appointments committee thought they were doing and be incredulous that the regulatory authorities were so toothless or incompetent that they didn't think it a risk. Perhaps shareholders have learned their lesson. But I doubt it.....

  • Comment number 47.

    #28 Crookwood - yes, just let me elaborate: I was in Russia (USSR) 1991-2004 and had seen all the process of dismantling of the old system and establishing the new one. It was, to sum it up in few words a ruthless destruction, where no value was taken into account but net extracted value followed by primary investment and than, what I would call a macrocristallization process, with swift takeovers on every level. Fortunes of regional size grew from a level of local shop (then a chain, then a wholeseller, then a local big factory shareholder). Somewhere in this macrocristallization phase public had seen real benefit from it. Competition worked like solving a business workbook exercises. Working stock was being modernized, investment was made. Then the process spiralled up on to a different level. Investment and consumer value got irrelevant. At this stage highly concentrated business was able to sort their competition issues through financial, legal and last but not least, political operations as weapons of choice against building up consumer utility. I wonder if knowing Marx so well wasn't one of the reasons the process went on so quickly?

  • Comment number 48.

    Robert,

    Oh but that you could teach today's bankers anything at all.

    They're all too thick to listen to anyone. They're all so up their own rear-ends they're 110 per cent certain they know everything.

    (And you could probably add the FSA to that group too, in many respects)

    Nice try and only what many people said when the banking crisis started - banks need to be outcome-focussed and client-focussed, they need to be working for their shareholders and customers ..... not themselves.

    As yet, no real evidence that they have changed or ever will, or that government has fathomed that simple reality out. I mean I still hear no moves to replace the current banks with something else (e.g. National Girobank II, or whatever) that does do that.

 

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