What Sir Brian Pitman can teach today's bankers
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.
Almost 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.