One More Letter to $FHCO After they Blocked my Effort to Improve Exec Comp

A few weeks ago I sent a letter to the Chairman and Board of $FHCO asking for a proposal to be included in the proxy re: chg'd exec comp.

With a board that avgs 71 y/o and +13 years of svc I'm not surprised they responded with obstructions and not open arms. Since I am not a shareholder for the continuous year (thank goodness for my portfolio) they won't consider it.

But the thing is, the same people running the company are the same people who've been there since the product was approved by the FDA in 2009, and its still not on drugstore shelves, which means either the product sucks, they suck, or somewhere in between. I'm in the group that thinks its somewhere in between.

Yet, even if the product sucks (and I've been assured by some it does and others it doesn't) there are so many condoms on the shelves of every drugstore I've ever been to, at least one female condom can fit there as well, even if its just a novelty. If it ain't the FC2 it will be something else someday.

And thus this letter (see below). I cut the part where I pan their decisions to hire an ex-pharma exec and an ex-marketer of IUD's (who is also on the board), b/c it seemed appropriate to be nice. But I am dumbfounded, speechless, nonplussed in the true definition of the word, why they'd hire execs with those kinds of expertise for a product that's the anti-IUD and the anti-pharmaceutical. It's like hiring a vasectomy surgeon to sell condoms. They need brand strategy and consumer distribution expertise not ex-pharma folks.

In my view, at least if we can align comp structure, I know they won't be paid unless my capital is put to best use, which so far, it hasn't.

Here is the full letter going out to the board today and please remember this is not a solicitation to buy / sell / transact business just shared out loud thoughts and ideas.

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Dear OB:


I was disappointed by your response to my letter regarding my shareholder proposal for changing executive compensation. I had hoped you would welcome the proposal not put up roadblocks to cause its exclusion.

My goal in recommending an alternative comp structure is simple and threefold
To find a system that is fair to executives
To find a system that incentivizes good long term capital allocation not short term goals
To find a system that aligns the interests of shareholders and management

The current compensation plan isn’t fair.
As your filings point out, you have no control over the timing of public sector purchasing patterns. Since the public sector remains your largest customer, one order, the timing of which you have no control over, can determine whether or not executives are compensated.

Last year, executives did not receive bonuses. This year, because of the Brazil tender, they likely will (including yourself). The key point is that your current executive compensation system doesn’t reward decisions from the FHCO C-suite, but rather decisions made in developing world health departments thousands of miles away.

Executives should be compensated for the decisions and efforts they make, not someone else’s.

The system doesn’t motivate long term planning or capital allocation.
Your current plan is based on one year sales and margins over which – as you’ve long established - executives have limited control. As a result, spending on marketing campaigns or strategies with long term payoffs negatively impacts the compensation for executives, disincentivizing long term planning.

Executives should not be compensated solely on short term results as your current policy now holds.

The system doesn’t align interests of shareholders and management.
Ending the dividend to invest in your business is an equivalent indication that you can allocate capital better than your shareholders can. The system I recommended in my proposal rewards good capital allocation and ensures that the capital you’ve taken from shareholders is put to the best and highest use, as your shareholders themselves likely would have done with their dividends.

A plan that promotes good capital allocation would incent better decisions and might improve outcomes.

I hope you and the board will address the shortcoming of your current executive compensation plan and consider implementing one – perhaps along the lines of the ones I recommended in my earlier letter - that is forward thinking and rewards good long term capital planning.

Above all, I want to see evidence of a management team that makes sound long-term high-return capital decisions while providing safe, low cost and accessible choices in women’s reproductive health. I imagine we stand on common ground with respect to that goal.

A few additional comments.
As you are aware, I previously recommended in prior communications with you and Ms. King two low cost ideas to help expand your product reach.

1. Explore a partnership with SHE Sustainable Health Enterprises.

SHE, as you know, has created a program to locally manufacture and distribute affordable menstrual pads in Africa (Saathi does a similar program in India). They have a partnership with J&J and their founder, Elizabeth Scharpf, is an advocate for expanded use of the female condom.

In fact, in an interview I read online, she is asked: “You’re going to a desert island, and you’re allowed one food, one drink and one feminist. What do you take?” and she answers: “Cherry pie, champagne and whoever invented the female condom.”

It is easy to imagine a wealth of opportunities available through a partnership with SHE to reach a shared customer base in Africa, your largest market. I previously recommended you reach out to her and I've emailed with her several times. In response to my suggestion, both you and Ms. King replied: “She didn’t return a phone call”. That is not leadership regarding a potential partnership with an influential advocate of your product.

2. Expand your creative / brand development.

I have also suggested that you hire a creative / brand team from one or two “innovator cities” (perhaps offering equity as a form of long term alignment) to test creative programs and get your product on shelves. This suggestion was simply ignored and I see no evidence to support your statements that you have already initiated a successful brand building strategy.

I think we both agree that bending the consumer sales curve will require smart long-term investments in sales, marketing and distribution today, with the benefits in years 2, 3 and beyond. I also think we both agree that getting the right consumer brand strategy is the key to fixing recent cash flow degradation, stagnant shareholder equity, rising competition, and risks associated with a being one-product company.

So please consider changing your incentives to align them towards the long term investments required to bend the sales curve. Doing so will help provide shareholders more faith and trust that decisions from management and the board are made with optimal long-term capital allocation in mind.