Former ambassador Shelby Cullom Davis, the outgoing board chairman of Government Employees Life Insurance Co., suggested yesterday that stockholders of the Washington company may have been shortchanged in recent months.

Davis dumped his bombshell - along with the sensitive words "possibility of increased conflict of interest" - at the annual meeting of Gelico in Georgetown. A director since 1973 and chairman since 1976, Davis was attending his last meeting in those capacities, having reached a mandatory retirement age.

But Davis remains a major minority stockholder, with 125,000 shares, and his comments yesterday came as a surprise to colleagues and officers of Geico Corp., the holding company for Government Employees Insurance Co. and currently owner of 65 percent of the life insurance affiliate's stock.

Geico Corp. subsequently blasted the Davis allegations as "innacurate and contrary to fact."

The unusal message from a departing chairman - who said he must speak out about a "possible cloud on the horizon" to fulfill his duties - was the highlight of annual stockholder meetings by area corporations yesterday.

In Richmond, meanwhile, Financial General Bankshares officers disclosed that legal costs of a takeover battle reduced earnings by up to 7 cents a share last year. (See story, Page D2)

Simply put, the Davis scenario of possible conflict of interest centers on Geico Corp's. tender offers for stock of the life insurance firm. Geico, an automobile insurer, was founded here more than 40 years ago, and several separate but affiliated firms were established later through offerings of stock to the Geico owners.

A new holding company, Geico Corp., was set up last year to become the sole owner of the automobile insurance firm, and Geico Corp. also has purchased controlling interests in the affiliates.

"It is quite plain that [Geico] wishes to acquire Gelico as cheaply as possible . . . stockholders of Gelico on the other hand . . . naturally wich to [sell] at the most advantageous price possible," Davis said yesterday.

He suggested the possibility that owners of the life insurance firm had not been informed adquately about their company's recent business operations while a Geico Corp. stock offering was in effect, and he raised questions about what he called a "reapportionment of expenses" among affiliated companies of the Geico group, which he hinted may have had an adverse impact on reported earnings of the life insurer.

Davis also revealed that, as a result of his complaints at several board meetings:

Geico's accounting firm will make a special report to Gelico and Geico (and another affiliate, Criterion) as to whether recent allocations of expenses were "appropriate and correct."

A special committee of the Geico board, headed by American University President Joseph Sisco, will investigate "the possibility" that Gelico stockholders did not receive all "pertinent and substantive current information" when Geico Corp. recently offered $14 apiece for shares of the life insurance company.

Davis charged that stockholders had been aware of Gelico earnings declines early last year but not the realocation of expenses. He said some owners may not been informed properly about more recent sales rebounds and increased earnings, before they agreed to sell out their holdings at $14 a share-"a fraction of their price a few years ago . . . He suggested that Geico consider buying more shares at a higher price.

Geico Corp. Chairman John Byrne said after the meeting that the issues raised yesterday by Davis had been the subject of discussions at recent board meetings. And, in a formal statement issued later in the day through spokesman Robert Jackson, Geico said "it should be noted" that Davis was a director of all four Geico firms and Geico chairman since 1976, and that he had voted "in favor"on all matters raised in his suprise comments yesterday.

Separately, Gelico President Thomas Hefner told the meeting that individual life insurance sales were $48 million in the first quarter, up 21 percent from a year ago and the sixth consecutive quarter of sales gains after a depressed period. Premium income rose 9 percent to $8 million while group credit insurance-a new business-is being expanded sharply and should contribute to profits by 1980.

Assets topped the $200 million level in the first period, and Hefner said he is "confident that Gelico is recovering from the problems of the last few years and is entering a new period of growth." Sales had declined because of the financial problems that previously plagued a sister firm, Geico. The company expanded its marketing operations substantially to attract new business.

In other developments, former Geico chairman David Lloyd Kreeger also retired from the Gelico board, and former Gelico president George Fries, 68, was elected chairman to succeed Davis. Fries retired as president in 1976 and has been a director since 1961. Directors also approved a regular quarterly payout of 11 cents a share on June 29 to owners of record June 1.

New directors elected yesterday were William Alden, associate development director at Williams College; Shelby M. C. Davis, senior vice president of Fiduciary Trust Co., New York, and son of the retiring chairman; and Denie Weil, program officer of the German Marshall Fund here and the first woman on Gelico's board.

At other annual meetings there were these developments:

Pargas Inc.

Chairman William Hill told the meeting in suburban Waldorf that first-quarter profits were a record $4.36 million ($1.20 a share), up 33 percent from $3.28 million (90 cents) last year. Propane earnings were the highest for any quarter in history, despite a slight decline in volume because of warmer weather during March, Hill added.

Coal operations continued to show a loss in the recent quarter, but agreements have been reachrd to end restrictions on rail shipments and tonnage should be up sharply in the current quarter, thereby improving earnings. Directors approved a quarterly dividend of 27 cents a share payabla May 28 to owners of record May 14.

Madison National Bank

Marjorie M. Lawson, the first black woman ever appointed to a judgeship by a U.S. president, was elected to the board of Madison National Bank of Washington. Henry Goldberg, president of the Artery Organization, a construction and real estate firm, also was named to the board.

Former D.C. Juvenile Court Judge Belford Lawson, the new director's husband, resigned from his position as a director because of pooe health, Chairman Donald Menefee told the meeting.

Menefee also revealed an agreement with American University for a 24-hour electronic banking terminal at the northwest Washington campus-the first such remote facility by a D.C. bank. An application to open the electronic banking terminal has been filed with the comptroller of the currency and it should be open by next fail, Menefee added.

First Virginia Banks Inc.

Meeting in Staunton, Va., stockholders of the Falls Church-based bank holding company approved an increase in authorized preferred shares to 3 million from 1.5 million. Chairman Thomas Malone Jr. said the firm needs the extra shares for possible expansion by acquisition or for refinancing capital notes due within several years.

First-quarter profits from operations were at record level-$3.3 million (32 cents a share), an increase of 26 percent over the 1978 period. Malone vowed to continue "aggressive marketing" of transfers between checking and savings accounts at his banks, despite a court ruling last week that such plans are illegal even though approved by bank regulators. Malone said he expects Congress to pass legislation to correct the situation.

Government Employees Financial Corp.

Reflecting the continued impact of high borrowing costs, first-quarter earnings declined 10 percent to $718,000 from $798,000 for Gefco, a consumer loan firm affilated with Geico Corp., President Earnest Marks told the annual meeting in Georgetown. Credit volume was up 5 percent to $54.5 million.

Stockholders elected one new director, retired Army Lieut. Gen. Julian Ewell.

Criterion Insurance Co.

Active policies in force declined 2 percent from a year ago in the first quarter for this company, another Geico affiliate that sells auto insurance. Glaim sattlement costs rose sharply in the January-March period.

Three new directors were elected: Alden, of Williams College; and Shelby M. C. Davis and Weil, all of whom also wre named to the Geico board. CAPTION: Picture, SHELBY CULLOM DAVIS . . . harsh words at meeting