Which company inspires more confidence in its financial results, one that has had a publicized auditing misstep in the past, or one with a pristine history? Surprisingly, the first company may be more credible. The reason is that for positive corporate governance changes to occur, the problems with poor corporate governance often have to surface. The company that has experienced serious enough issues to take notice, but not so serious that they proved fatal, has been provided a catalyst for change.
Consider Genesis Land Development (GM:GNLAF), a company we have previously discussed as a potential value investment. The company is preparing for its annual meeting by issuing press releases recommending "that a strong independent slate of directors be elected...to assist with the ongoing efforts to improve governance, oversight and shareholder value".
The release goes on to say that "additional steps must be taken to strengthen governance, management oversight and management itself" and "a strong independent board of directors is critical to the future success of the Corporation".
Of course, a strong independent board is something that shareholders would like to see at many companies, but it is not often made a point of focus by companies with otherwise poor governance.
But GDC has seen what poor governance can lead to. Two years ago, the company's CEO and CFO were dismissed with cause following findings that they misled auditors. As the recession started to threaten the company's viability, the CEO was re-hired and has engineered the company's return to profitability.
However, shareholders have not forgotten the mistakes of the past. Shareholder groups have stated that "it is clear that [CEO] Gobi Singh, with his inexcusable history when it comes to transparency and good governance, needs to report into a strong, independent Board" and that they will put forth an independent slate if the company does not.
This brush with the pitfalls of a poor corporate governance structure has provided Genesis shareholders with the burning platform they need to effectuate positive change. Hopefully, this will lead to a stronger company better able to raise its share price such that it is commensurate with the value of its assets.
Disclosure: Author has a long position in shares of GDC