by Brian Pitman

Lloyds Bank’s Journey to Shareholder Value

In 1986, Lloyds Bank decided to sell its California operations. Though the market was attractive, we had no edge there and held a negligible share. Competing with giants like Bank of America wasn’t realistic. The decision sparked debate. Many feared “withdrawing” from California would seem weak. But the economics were clear. The business wasn’t earning its cost of equity. So, we sold. A Japanese bank paid a premium, and our stock price rose.

That moment taught us a hard truth: managing for shareholder value often means making tough choices. But it works. From 1983 to 2001, Lloyds’s market cap jumped from £1 billion to £40 billion. Shareholder returns averaged 26% annually—on par with top firms like Coca-Cola and GE.

The lesson? Value-based management isn’t about trendy metrics. It’s about shifting beliefs.

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A Single Definition of Success

When I became CEO, my first goal was to define what “success” meant. Our board was brilliant, and the debate was lively. Did “success” mean being the biggest? Or having the happiest customers? We agreed on one thing: we needed one clear goal.

Eventually, the board chose improving shareholder value. Our key metric was return on equity (ROE). Initially, we set a target of 10% above inflation. But a Shell executive urged us to compare ROE with our cost of equity. That made more sense.

When we calculated it, we were shocked. Our cost of equity was 17–19%. Few of our units earned close to that. So in 1984, we set a bold rule: each unit must beat its cost of equity. We tied this to executive pay. “Improve ROE” became our new mantra.

This singular focus helped. Customer satisfaction improved. So did employee pay and community impact.

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Setting Stretch Goals

By the 1990s, we needed bigger ambitions. Beating UK banks wasn’t enough. U.S. banks weren’t ideal benchmarks either. So, we looked beyond our industry. I met Coca-Cola’s CEO, who said they aimed to double company value every three years.

At first, our team thought it was unrealistic. But a study showed soft drinks were more competitive than banking. So we adopted that goal—and achieved it.

Many resisted. Some said goals should be “achievable.” I challenged that. High goals drive change. One executive resisted performance-based pay. He was close to retirement and preferred inflation-linked raises. I told him we needed people who believed in improvement. He stayed—and earned far more than expected.

We set clear, role-appropriate metrics for everyone. Check-processing staff weren’t asked to raise ROE, but to improve accuracy and output. Everyone also received stock options, building personal wealth and pride.

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Changing Mindsets

People only commit to value creation if they believe in it. They must accept that profit matters more than growth. Early on, we analyzed each business. We found that a few generated most of the value, while many earned less than our cost of equity. This led us to exit California and focus on UK financial services.

We saw that mortgages and insurance, while less glamorous, fit our strengths. Acquisitions like Abbey Life and Cheltenham & Gloucester added value. The TSB merger in 1995 expanded our reach further.

Exiting unprofitable areas wasn’t easy. Many resisted divestment. People feared public criticism and change. But we had to let go of losing services like investment banking and currency trading. Staying competitive meant focusing where we had advantage.

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Learning Through Inquiry

One Monday, I found a memo on my desk from a manager who had spent the weekend calculating our cost of equity. His engagement showed that belief grows from learning, not orders. Debate was key. I didn’t have all the answers. I encouraged inquiry.

We asked units to propose three real strategies—not token ideas—for each challenge. This pushed learning and ownership. Strategy became decentralized. Managers implemented their own plans—and succeeded.

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No Cookie-Cutter Solutions

If I had to do it again, I’d do some things differently. But not the basic approach. There’s no formula for sustained value growth. Metrics help—but belief drives action.

What matters is getting everyone to rally around a few core ideas. And the only way to do that is to lead them on a learning journey. When people believe in the mission, they’ll make it happen.

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Conclusion

Some now question the focus on shareholder value. Scandals and short-termism have made headlines. But true value creation isn’t about quick wins. It’s about long-term, sustainable growth—for shareholders, employees, and society.

That’s still the ultimate challenge—and the greatest reward in management.

.https://fmfinancialservicesllc.com/insights-of-financial-services/