The bank that wants to be just like Coca-Cola

Ask Sir Brian Pitman which well-known companies he would like Lloyds TSB to emulate and the first name that springs to the lips of the group's new chairman is the Coca-Cola company, just about as far from banking as it is possible to get.

Sir Brian is a great admirer of Coca-Cola's performance in creating value for shareholders, building a top-flight cadre of managers, and achieving high ratings for customer satisfaction and employee relations. He is not, of course, dropping a hint that Lloyds TSB will soon be selling brown fizzy liquids in its branches.

"You might think it very strange for us to compare ourselves with a soft drinks company," Sir Brian said. "But if we can keep up with Coca- Cola it would be a considerable achievement."

Other British bankers, pressed to say which companies they most admire, are more likely to cite Lloyds TSB than Coca-Cola. Indeed, many management consultants and business schools have long had the group and its predecessor, Lloyds Bank, high on their lists of successful case studies.

It was one of the first quoted companies publicly to make shareholder value a key objective of management. Now it is a phrase on every chief executive's lips.

During Sir Brian's period as chief executive, which began in 1983, Lloyds' market capitalisation has risen from pounds 1bn to more than pounds 20bn. Sir Brian's reward yesterday for transforming a staid, old clearing bank into what is widely acknowledged as Britain's most dynamic retail financial services empire, selling both banking and insurance, was to be promoted to the chairmanship.

In the old days, clearing banks chose their chairmen from the upper reaches of the establishment and their chief executives from long-serving bankers who started at the bottom of the ladder, with the professionals excluded from the chairman's seat. That is another thing that has changed in banking.

But why does Sir Brian focus on Coca-Cola as a role model? There are other world beaters, he concedes as an afterthought, but not many of them. General Electric is the only other worthy target whose name he is prepared to mention. "A brilliantly successful company," he says. Lloyds regularly exchanges information with a small group of top companies, including at least one in the motor industry.

The problem in seeking conventional benchmarks against which to compare the Lloyds TSB group is that financial services firms have not been particularly good performers over the past 15 years.

The Lloyds board looked first at UK banking and insurance and then expanded its comparisons to the worldwide financial industry, but could not find any companies that had been consistently top flight over several business cycles. From that fruitless search arose the idea of ignoring the products companies made and concentrating on the way they ran their businesses and served their shareholders and customers.

Coca-Cola's characteristics include excellent leadership in every part of the company and at every level, says Sir Brian. It has also been successful at continually expanding the educational horizons of its own management.

"Management education turns people on more than anything else. People become excited about things that are new that they find they can do. The desire to be better is very strong," said Sir Brian, who enthused about the importance of giving people the opportunity to make decisions.

An example is pay differentials in the branches, which used to be dictated by a centralised personnel system: "Managers used to say, `We have too many underperformers in this place - head office should do something about them'. Now we say to the managers in the branches, `You do something about it, and we will back you'."

The fundamental principle Sir Brian admires at companies such as Coca- Cola is, however, a very simple one. He said the top management "sets extremely stretching goals - some would say unreasonable ones. That is the absolute key in these outstanding companies."

Furthermore, their performance targets encourage a common interest between management and shareholders, and that is where shareholder value comes in.

In Sir Brian's earlier days at Lloyds, one of the first performance measures the bank used was the ratio of market value to book value, which shows whether investors think assets are being used well or not.

But at Lloyds, this evolved to measuring value by total shareholder returns, measured by the increase in the share price plus the cumulative total of dividends paid out. From that Lloyds evolved an even simpler measure of success, which is how long a company takes to double shareholder value. For many typical British companies it takes six or more years. For Coca- Cola, the period is three years, and that is the stiff target Sir Brian set his managers, to considerable scepticism from some of them.

He insists that boards must be careful to look at a 10-year cycle, to avoid a short-term outlook. "We say it would be brilliant to achieve a doubling of shareholder value every three years over the next 10 years," Sir Brian said. The proof of the pudding is in the eating. "We started when Lloyds was worth pounds 1.2bn, and now it is worth pounds 20bn," he said.

He spreads the message down the organisation: every part of the business has to value itself as if it were a publicly quoted company, whether it be the registrar's department in Worthing or the leasing business.

But haven't big takeovers been the real driving force behind Lloyd's recent growth? There is Abbey Life, an unsuccessful bid for Midland Bank, then the absorption of Cheltenham & Gloucester and TSB.

Sir Brian has two answers. If performance targets are measured in terms of value per share, then the underlying performance shows through, irrespective of the scale of takeover.

More important, he insists that organic growth from within is the the key feature of all successful companies, even though they may make add- on acquisitions. Organic growth "comes from a constant flow of ideas. You are never going to achieve those unless you embrace radical change all the time."

Innovation is absolutely vital, he says. That includes an acceptance that products have a life cycle. All the people writing strategy papers in Lloyds TSB "start off by saying these are the things we should stop doing, or put on the backburner rather than promote".

He warned that, "the minute you think you have found the recipe for success, that is when you are going to get into trouble".

Sir Brian identifies a turning point for Lloyds Bank five years ago. A senior executive - not Sir Brian - suggested a theme at a weekend brainstorming session of senior management. They were to think of themselves as predators who had taken over the bank, and ask themselves what they would do to it.

Sir Brian says the ideas the assembled managers came up with convinced the board that it should do the job itself.

Lloyds has since then been transforming itself into Britain's biggest retail financial services group, by driving for market share in mortgages, high-street banking and insurance, shedding peripheral businesses and slashing its costs as it goes.