I am currently a level 2 candidate (just failed 2nd test) and work for a small bank and I have a question to make sure I am not crazy. My boss (CEO) is extremely focused on growth. I keep telling him that if we are generating a 10% return on higher than industry average leverage that it is best that we don’t focus on growth and focus on improving our risk-adjusted return on equity. I think that we need to be generating a 13% to 15% returns to create value for shareholders. Am I telling him inaccurate information if I say that the value of the company isn’t based on the growth, it is based on the return on equity capital. He doesn’t understand that the value is based on a stream of cash flow (high steady dividends or increasing stock value and potential higher capital gains). In either scenario, if the return on equity is at a level that destroys value, growth isn’t going to solve the problem. He keeps saying “we have to grow”. It is so frustrating. I feel like the time and effort I have put so far getting where I am in the CFA program isn’t getting me anywhere. Advice, comments, and words of encouragement are appreciated.
If your return on equity is below the required return then injecting more equity and earning the same rate is not a good idea. However, what says that you will earn the same rate, and what is the required return for you company? Impossible to say for us of course. If you have a lot of fixed costs then growth could perhaps improve the margins? If growth is associated with higher sales while using the same amount of resources ie the sales force can easily sell more, then growth will definitely improve margins and value. There is no given answer I believe. For encouragement; If you have one good boss in five then you should be satisfied, learn to live with it. Some day your efforts will be appreciated.
his equity compensation, the growth of the company, and his motivation are all very related… this is what some CEOs do, they do not care too much about sustainable growth, only growth to see their pay go up. I am not saying that this is what your CEO is doing, because I do not have all the company’s details, but it is possible.
What kind of bank and is your boss a large equity holder?