Tuesday, July 30, 2013

Battle Over Genesis Land's Board

If you follow Genesis Land (GDC), your head may be spinning by now. It's almost every day now that the current board and the activists trying to take it over are claiming some sort of injustice permeated by the other side. (To watch this battle in real-time, sign up for filing notifications for GDC here.) But surely, behind all the "Our directors are superior to yours" puffery, there are some differences in how each group would run the company differently.

To get to the bottom of this question, I had a conversation with Stephen Griggs, the CEO of Smoothwater Capital, the firm looking to upend GDC's current board:

Me: Considering your org has bought up 20%+ of Genesis' shares, you have likely done some work to understand how much its real estate is worth. What do you think is Genesis' current net asset value?

Griggs: We have done our own valuation work and believe that there is significant value in the assets that is not embedded in the current stock price.

Me: The company's new CEO had been at the helm for barely 3 months when the first signs of your activism came to light. Why do you believe his actions can be negatively judged over such a relatively short time period?

Griggs: We do not believe that the CEO has done anything inappropriate and in fact have asked him to be on the board. We have never proposed to change the CEO, and support current management. The issue is that the board itself has responsibility for strategy as a matter of good governance and law, and they have done nothing.

Me: Generally, activists tend to promote good corporate governance practices in my experience, so it surprised me to learn you want the CEO to also have a seat on the board. Why do you prefer this unified structure, other than the fact that other Canadian companies have it?

Griggs: It is normal, good governance for the CEO to be a director, just not chair of the board (which is the governance issue that activists often focus on).

Me: What do you see specifically that needs to be fixed so that the company's performance improves?

Griggs: We believe that a great board, like the one we have nominated, will quickly develop a strategy that all shareholders will find satisfactory, and that without access to corporate information it would not be sensible for us to do so alone.

Me: So what specifically would you like to see in a new strategy? Are you looking for growth, or returning capital to shareholders or something else?

Griggs: We want to see value for shareholders, such as a better stock price with liquidity, dividends and possibly a sale of the business.

--------------------------------End of interview---------------------------------

Obviously, I was a little caught off-guard by the fact that the activists are not looking to replace Genesis' current CEO. I don't think I've ever seen an activist situation where the activists are actually happy with management. (The reason becomes a little bit more clear when you read a release issued by the company yesterday, which states that it was the activist's brother, a current board member, who essentially selected the current CEO.)

I'm pretty confused by this whole thing. If everybody's happy with management, why is a board overhaul necessary? I understand the activist doesn't think the current board strategy is a good one, but when I asked what strategy he'd rather see in place (the last question above), he answered with a bunch of goals rather than strategies that would help achieve those goals. The current board also says it wants "value for shareholders" (and who doesn't? It's a nice BS line used by both those who work for shareholders and those who work against them) so I can't really tell what the activists plan to do differently!

But although I'm unmoved by the activist's answers, there is one major thing the activists have that makes them more trustworthy than the incumbents: share ownership. The activists are likely to act like owners of the company, as they have $40 million on the line. The incumbents? Not so much; they got to take home an average of $65K each last year for a few days' work, and they're spending shareholder cash in this proxy battle in order to protect that stream.

Good luck with whatever decision you make, Genesis shareholder!

Disclosure: Author has a long position in shares of GDC


Anonymous said...

Hey Saj,

I have been following this proxy battle for a few weeks now and this makes no sense to me. Its actually quite funny. Like u, I have never seen this before. Atleast Smoothwater has money on the line but this still makes no sense to me. Hopefully they actually do something for shareholders.


Anonymous said...

The current Board of Genesis is totally useless - just look at the returns of the Limited Partner Investors in their land projects - completely dismal.