Hi mooz23.
The GMAT is not alone in considering nouns in the possessive form acceptable referents for personal pronouns. For instance, some style guide writers agree that nouns in the possessive form are acceptable referents for personal pronouns.
The many who consider such a reference acceptable reject the idea that a noun in the possessive form is merely an adjective and say that it's clear what a pronoun that has such an antecedent refers to.
Meanwhile, the use of such a reference has long been a common convention in English.
Now, in some older official SC questions from a question provider that no longer makes questions for the GMAT, the presence of such references was considered a reason to consider a choice incorrect. However, more recently, in at least one released official question, such a reference appears in a credited choice. So, currently, it's generally believed that such references should not be considered errors in SC.
At the same time, I personally don't 100 percent trust the GMAT to be consistent in SC. So, my approach is to refrain from eliminating a choice just because it produces a sentence with such a reference. However, I'm also open to the possibility that there will be a case in which the only possible way to choose between choices will be to use the presence of such a reference to eliminate a choice. I doubt I'll ever see such a case, but that's the strategy I'd use if I ever were to.