Monday, June 7, 2010

Internal Strife

Shareholders are not usually privy to the internal bickering that often takes place in corporate boardrooms. When companies communicate with shareholders via press releases, quarterly reports and other filings, they generally do so with one voice, implicitly conveying a sense of unity. As such, recent events at Genesis Land Development (GDC) are rather surprising!

As we discussed, Genesis recently issued a press release detailing some Special Committee findings that the company's CEO engaged in some wrongdoing and that the company wished to move towards a better corporate governance structure. Or so it seemed. To the surprise of shareholders, the release was rebutted by the company itself just a few days later:

"The Corporation not only does not ratify the releases, but disavows any responsibility for the actions of [company directors] Messrs Reed and Ferrel"

The company's rebuttal release even claims that the "Special Committee" referred to in the original release does not even exist! Apparently, two directors (Reed and Ferrel) decided to release a statement on behalf of the company that the other two directors did not agree with!

Further complicating the matter is the fact that the company's CEO (accused of perpetrating the wrongdoing) is also the Chairman of the Board! In many cases, this would constitute a major warning sign for shareholders, as the board is there to represent shareholders in overseeing management. But in this particular case, the CEO is also the major owner of the company, holding around 25% of the company's shares. His salary as CEO is around half a million dollars, but his ownership stake is almost $50 million, suggesting his loyalty lies with increasing shareholder value.

While the two sides have issued public statements that all is now well, the incidents raise questions for how small shareholders should react to these events. Who should investors side with, the directors pushing for more independence or those with large equity stakes? Should investors even remain in a situation where management actions appear to have been questionable?

The first question is a difficult one, as both board independence and large equity stakes (by both management and the board) should be desired features of small shareholders. But there's no reason why there can't be both. Since the spat, the company has appointed another independent director, which is hopefully another step towards a better corporate governance structure at Genesis.

To answer the second question, it's important for the value investor to consider an investment's price versus its value. Warren Buffett has looked for companies with such strong characteristics that even poor management would have a hard time reducing the moat. While Genesis is clearly no Coke (i.e. it will never generate the ROIC numbers), it does own valuable properties seemingly worth much more than the company's current stock price. Selling at this point because of a board-level spat ignores the large margin of safety that appears present at these prices. When the dust settles, the value of the properties will still belong to the company, even if the company isn't able to be all it can be in the interim.

An e-mail to Mr. Reed requesting comment sent May 31st has so far gone unreturned.

Disclosure: Author has a long position in shares of GDC



hey saj,
got an email from old school value showcasing keytronic and of course gamestop, boy if stock picks could b patented u sure kud ve sued jae jun!lol
(but he kud explain gamestop more clearly to low watt lightbulbs like me ) anyways must say gamestop was an inspired decision.anyways wen r the results coming up?

Saj Karsan said...

Thanks, Rayhaan.

The quarter's not over yet! Results will be out in about a month.