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- CannTrust (CTST) announced on Thursday that it would suspend the sale of all of its cannabis at the moment.
- The company may lose its license.
- Cannabis companies struggled in the second quarter. We explain why.
CannTrust hints at concern for cannabis stocks
On Thursday, CannTrust (CTST) alluded to a big problem that few people talk about. The company has announced that it will suspend the sale of all its cannabis at the moment, but corporate governance is the underlying problem.
Bloomberg also indicated that CannTrust could lose its license. The report quotes Charles Taer, CEO of a hedge fund that invests in cannabis shares through its Ninepoint Alternative Health Fund.
The fight is real
Cannabis companies struggled in the second quarter. Poor earnings performance is the main reason why cannabis stocks lost value in the second quarter. Subsequently, stocks of cannabis companies continued to decline, eroding the wealth of investors. We have discussed this issue in some of our recent analyzes, so we will not be interested in it.
Cannabis companies continue to hint at a bigger problem, which nobody talks about: corporate governance. Let's take a closer look.
Government business problem of cannabis companies
The CannTrust announcement was an extension of its efforts to comply with Health Canada. In a recent inspection, the Canadian government found that the company used five non-compliant growing rooms. For more details, see CannTrust Fell, Sent other stocks of cannabis in the red.
Just this morning, the Financial Post reported that the problem would not have been uncovered without the help of a whistleblower. In a similar case, Aphria (APHA) has also struggled with corporate governance issues in the past.
Corporate governance is linked to the overall practices of a company. It tends to focus on maximizing shareholder wealth. Companies that apply best corporate governance practices also have higher valuations and attract investors.
Returning to CannTrust, consider that this announcement shows how some corporate governance practices have failed. Health Canada's non-compliance report was a direct result of an apparent control of corporate governance. Investors paid the price with a 46% decline in the value of the CannTrust share since the news.
Best practices matter
A weak board composition can often lead to weak corporate governance issues. Best practices require board members to have sufficient independence, which is particularly important for the position of chair. Usually, former employees, including founders, are not considered independent members of a board of directors. In the case of CannTrust, its current president is Eric Paul, who was also founder and former CEO of the company.
If you're interested in the best ways to invest in the cannabis sector, see Finding an attractive choice among 12 cannabis stocks.
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