Report On Business Ethics & Social Responsibility

Business Ethics & Social
Responsibility

EXECUTIVE SUMMARY
Business ethics are vital for the long term success of the business organisation. However
it is very challenging for the organisation to establish a balance between profitability and
corporate social responsibility. The report has provided a comparative analysis of difference
between pyramid-scheme and direct selling through a case example of Herbalife. It has also
analysed the approaches through which organisation has been contributing towards its social
responsibility. Thus from the study it can be concluded that with direct selling service providers
must assure that they does not neglect ethical perspectives and provide full support to social
responsibility.

TABLE OF CONTENT
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
Case study overview ...................................................................................................................1
MAIN BODY...................................................................................................................................1
Misinterpreting multilevel compensation model with pyramid scheme......................................1
Difference between pyramid scheme and legitimate business model ........................................3
Corporate social responsibility of Herbalife ...............................................................................6
CONCLUSION................................................................................................................................8
REFERENCES ...............................................................................................................................9

INTRODUCTION
Business ethics and social responsibility is termed as the contribution of the business
organisation towards society and for its welfare. The organisations must assure that their
operational activities are ethical and are not harmful for the environment or humanity. Multilevel
marketing (MLM) is defined as the direct selling approach in which profits and commissions are
earned by direct selling of products as well as encouraging the recruitments of new distributors
as they also made sales. MLM is also known as the network marketing and a huge network of
distributors is developed by imposing a specific entry fees or the investment (Bosley and
McKeage, 2015). There has been several legitimacy issues associated with multilevel marketing
and the fraudulent pyramid schemes in which only top layers of pyramid earns profits and the
investment of remaining or joining layers is earned only by encouraging recruitment of other
distributors instead of selling products and services. The report will provide analysis of this case
study of Herbalife so that multilevel model can be distinguished with pyramid scheme and
legitimate business model. It will also discuss the corporate social responsibility policy of
organisation so that ethical and business issues and their management can be evaluated.
Case study overview
MAIN BODY
Company and situational analysis related to case
Herbalife is one of the well known and successful multilevel marketing organisation. It deals in
the personal care, weight management and nutritional care products. Despite great success and
popularity all over the world, the organisation faced allegations of having pyramid scheme
instead of MLM operations. However through providing appropriate proofs towards social
responsibilities and validating differences between pyramid-scheme Herbalife successfully
proved the allegation to be false. It also leads to a debate to have more strict approach to ethics
so that direct marketing are not misinterpreted as pyramid-scheme.
Misinterpreting multilevel compensation model with pyramid scheme
Multilevel marketing has been adopted as legitimate business model but still there are
several countries and organisation which consider this direct selling approach as pyramid
scheme. One of the reason for strong resemblance and association of pyramid scheme and MLM
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is that they both involves the recruitment of new participants for selling the products (Watkins,
2016). The MLM model of Herbalife is also misinterpreted as pyramid scheme and these
accusations were claimed by one of the potential investor of the organisation, William Ackman.
The fundamental basis in the research and claims of Ackman was on the fact that most of the
profits of Herbalife are earned only due to new recruitments.
The increasing recruitment chain all the over the world gives more revenue to the
organisation then the direct sales of products. Thus, a significant proportion of the contractors
were loosing their investment and profits due to low sales. This aspects is similar to the pyramid
schemes in which recruitment of the lower new members is given more priority than the product
selling (Pang and Monterola, 2017). To strongly support this claim, evidences were also
presented by Ackman that Herbalife pays more profits and amount to individuals for new
recruitment than making more sales. This is also one of the key feature of pyramid schemes that
profitability of individuals or upper layer of pyramid are based upon number of recruitments,
instead of sales. Due to this reason, multilevel model of the organisation is confused with
pyramid scheme several times.
As compare to the overall product sales, the major source of profits for the top level
contractors was claimed to be from the sales made by down line commissions in recruitment
chain. In addition to this, for supporting strong claims against Herbalife as pyramid scheme, it
was also claimed that at the top level or by recruitment process, huge profits can be earned.
However, in response to these claims, Herbalife released data and statistical records showing
that though recruitment process is integral part of their multilevel modelling, but its maximum
profits is result of sales only, not recruitment of contractors.
In pyramid schemes, high quality products are not offered by the suppliers or
organisation (Lee, Lau and Loi, 2016). Critics of Herbalife believed that served products does
not meet the quality standards and there is no ethical guidelines followed by company in its
direct selling procedure. The claims that organisation is presenting falsified accounting
statements also served as strong factors in misleading its multilevel operations as pyramid
scheme.
Another critical factor which gave strong support to Ackman and other critics was
internal consumption. It has been observed that many contractors and stakeholders of Herbalife
purchase products for self use. Thus, there is high percentage of internal consumption. Though
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high rates of internal consumption does not assure or certified pyramid scheme, but for MLM it
can be an alarming situation. There have been evidences of practices similar to inventory loading
which makes MLM suspicious of pyramid scheme. On many occasion with the new recruitment
of contractors in Herbalife, products are purchased for the self consumption along with that for
selling. The critics of Herbalife assumes that this approach demonstrates the inventory
overloading.
However, to clarify this misinterpretation, organisation stated that it has policy that
contractors are not compulsive to buy products for personal user or for internal consumption
(Liu, 2018). Even if they desired to buy, they are required to purchase additional volume with the
volume of their multilevel marketing. Due to this approach, misinterpretations get strong support
that Herbalife is supporting a pyramid scheme. However, with the investigations, no such
records or falsified account statements were obtained which claimed that mere recruitment is the
profit source for the organisation (Good and Hassay, 2015). Instead, the positive support from
the good number of customers or the product users along with the well managed and clear
documentation helped Herbalife to clear these allegations and misinterpretations of pyramid
scheme.
Difference between pyramid scheme and legitimate business model
A legitimate business model incorporates the profits by selling their products with high
quality and all participants gets fair share of return against their investments. Contrary to this,
pyramid scheme is considered as the fraudulent business model in which there is high probability
that investors may not get their profits and only few members of the pyramid may get benefits.
The businesses based upon pyramid scheme may gradually collapse (Nordin and Yaacob, 2017).
Legitimate models such as multilevel marketing and pyramid scheme both are similar in way that
people are required to pay specific amount to organisation for participating and they also get
compensation for selling products and recruiting others.
However, in both the cases this aspect is distinguished by a critical factor that in pyramid
scheme the compensation is strictly and primarily based upon recruitment. It does not have any
correlation with the sales made. Thus, pyramid scheme forces their distributors to increase the
recruitments so that lower lines can be expanded. A legitimate business model such as multilevel
marketing is characterised by the feature that it cannot pressurise or force distributors for
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recruitment or sales for earning profits. Contrary to pyramid scheme, legitimate model provides
compensation on the basis of products sold and performance only.
Another significant difference observed in both of these models is that the fundamental
approach or strategy to gain profits in legitimate model is to use marketing strategy and
networking which can increase the sales. However, in case of pyramid marketing the key source
for earning profit is to offer franchise or contractor-ship to others (Bosley and et.al., 2019). It has
been also analysed that pyramid schemes are highly unstable because after certain period or
length of expansion of pyramid scheme, the availability of new participant become short and
investment return for the lower level of pyramid reduces. It has been also observed that pyramid
schemes are also characterised by inventory loading. There is no such limitations observed in
legitimacy models.
In case of inventory loading, newly recruited participants are forced to purchased good
amount of non-refundable inventory. Beside, In order to consider the multilevel marketing
opportunity which is also known as legitimate model of direct selling method. This method is
quite challenging and difficult for the businesses for distributing the products to the consumers.
This type of approach is not practised within legitimate business model (Ciongradi, 2017). The
inventory loading has similar characteristics to that of legitimate internal consumption. However,
there exist a huge difference between both of these practices.
The inventory loading of pyramid scheme is compulsory and in order to become direct
seller or the distributor, it is compulsively practised. However, legitimate internal consumption is
voluntary and does not serve as requirement for getting authority for direct selling (Antler,
2018) . Another difference between pyramid scheme and legitimate business model is that
legitimate models always have some sort of retail or selling exterior to their network. For
instance, in the given case study of Herbalife, though organisation has multilevel marketing but it
also allows online platform to purchase the products by retain customers.
However contrary to this, in pyramid scheme products are purchased only by the
distributors or contractors who are supposed to sell the products. There has been very thin line
between the two models and business approaches. In pyramid schemes the top layer of pyramid
or the management chain receive profits by encouraging recruitments while in legitimate models,
individuals get benefits and profits on the basis of their performance and contribution in making
external sales (Williams, 2018). The pyramid schemes are considered to be less concerned about
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the ethical aspects in terms of retaining interest and welfare of end service users as well as
distributors. In these context, pyramid schemes are known to be illegal and affecting the interest
of their distributors in adverse manner.
Legitimate business mode is the process of selling product or services in direct manner.
On the same side, Pyramid scheme model is the another major effective model which helps to
attract business proposition to many people (Bosley and McKeage, 2015). As compare to
Legitimate business model, pyramid is work on the low quality goals which somehow impact the
business product or services. However, this gives the negative impact on the company outcomes
and performance. Besides, that it also affect the customer expectation to the company. Another
comparison between both the models is over pricing. Under which on the one side, Legitimate
model using the equal pricing strategies of the product and on the other side, Pyramid scheme
model set the high prices of the product which is unnecessary and ineffective for the customers
to purchase. However, this situation makes difficult for the company to maintained the customer
satisfaction which might be affect the company reputation and create bad relationship with the
stakeholder. Herbalife has been used pyramid scheme which is totally illegal in the context of
law which also makes the bad reputation in front of the company's clients and suppliers. Another
major difference between both the term is on the basis of lack of external sales due to which
company not focused on the employees as well as the profit generated from the external sales.
Apart from this, it affect the whole business activities and make the system inappropriate
(Schiffauer, 2018). As compare to pyramid, Legitimate business model focuses more on the
external sales rather than other aspects.
it has been critique that direct selling who manipulate the facts to discredit legitimate
companies (Walsh, 2016). However, it has been observed that popular culture preferably connect
to the pyramid schemes. Also it analyses that legitimate model of business helps to promote the
consumer protection and level of guarantee and security in the process of purchasing the product
or services. The biggest difference identified from the study is Legitimate model is legal and
pyramid model of business is illegal in business terms. As according to the promised
compensation legitimate model more focus on the customer satisfaction and there secondary
objective is to earn profit. But on the same side, Pyramid scheme is always focus on the profit
making unless the product is selling or not. In other words, pyramid schemes are mainly focus on
the money for simply hiring people. Also this comes as a commission from the sales of a starter.
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Corporate social responsibility of Herbalife
Herbalife is one of the leading company across the world who provides nutrition products
and services to their target audience (Agoglia and et.al., 2017). The main focus of the company is
to avail the best quality nutrition products, weight management and personal care services. As
according to the statement of former CEO that the company's reputation is the most crucial assets
which created from employee contribution. Therefore, the company also well focused on the
needs of their employees that helps them to maintained the fair relationship. It has been analysed
from the study that Herbalife actively engaged with the programs related to the social
responsibility around the world like Russian programs demonstrate the company's philosophy of
contributing positively to the communities in which it operates its business activities.
Therefore, Herbalife and its team actively connected with the activities to promoting
healthy and active living practices to customers (Kummamuru, 2016). In 2012, Herbalife has
more than 4000+ distributors which shows that company having good reputation in the
competitive market. Besides, the company also engaging with the activities which helps to
provide the services to the children as well. In order to conclusion, it has been observed that
company maintained the good relation with the stakeholders and customers which makes the
company's reputation good and sustaining. However, this has been cleared that how CSR
activities and practices can impact the overall business activities and how it affect the overall
business growth.
Company also run the Herbalife family foundation which is an non profit corporation
dedicated to improving children lives by helping them towards the organization which provides
healthy and nutrition to the required people. It has been noticed that CSR is the most necessary
and important key element for the company which majorly affect the organization objectives and
goals and sometimes on its reputation as well. However, this is the self regulating business
model that helps a company to be a socially responsible entity within the sector. Also company
getting several benefits by socially involved with the society like good reputation, customer
loyalty, high promotional brand value etc (Pérez and Rodriguez del Bosque, 2015). Apart from
that, it also helps companies to closely connected with the external environment in order to
measure the threats and opportunities for the growth and development in future. In contrast to
that, CSR activities sometimes very costly and unmanageable for the company because of higher
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costs. Sometimes, it may also creates shareholder resistance which also creates conflict
situations.
As per the company's corporate social responsibility status, it defines that the company
proud on its corporate social responsibility program as they running its own program like the
right, honest and ethical thing (Walsh, 2016). Also they provides good services and fulfils their
stakeholder expectations with the company as well. As according to the company they tried to
maintained the transparency in between the relationship with stakeholder.
Company stresses legal compliance and sets boundaries on gifts and entertainment so that
employees can tell the difference between small gifts for hospitality and bribes (Schäfer, 2016).
In case of any misconduct and violated the rules company directly eliminate and terminate the
employees.
Likewise, Herbalife also engaging with the activities which is related to the philanthropy.
The main purpose of this program is to provide needful services and support to the disaster relief
peoples. Company also work on the projects like Herbalife Family Foundation which was
founded in 1994 by mark Hughes. Such programs helps people who got hurt or destroyed by any
natural disaster. On the other hand, HFF's main focus is to provide support to the families,
women and children (Strand, Freeman and Hockerts, 2015). Another contribution of Herbalife
towards corporate social responsibility is to build a one year partnership relationship with global
health strategies institute to enhance the nutritional intake of over 10,000 children in India.
Somehow, Corporate social responsibility is very fruitful for the company's development. CSR
provides distinct opportunities to the company like boosts value and profitability. CSR policies
demonstrate energy efficiency strategies and build the good image in front of their customers
and clients worldwide. As results, it increases the brand value too across the different
competitors as well.
Therefore, it has been identified that corporate social responsibility is the most important
concern for the business organization to develop the business growth and profitability
opportunity. Like contribution in CSR gives the better reputation to the company that makes the
study more clearly defined and effective (Walsh, 2016). Being responsible, sustainable and
attentive towards the business goals, it become easier for the companies to recruit new
employees and skilled employees for the company (Walsh, 2016). Somehow, CSR activities and
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practices of the company support this outcomes which is useful and competitive for the company
too.
CONCLUSION
On the basis of above report it has been identified the models which is used by company
which is pyramid scheme. Report also outlined about the importance of such models used by the
company in order to gain the market approach. Like it concluded that multilevel marketing
interpretative as a legitimate business model. In the next segment study differentiated between
legitimate business model and pyramid scheme on the basis of low quality, pricing strategies and
lack of external sales. Besides, study also concluded that Herbalife was using pyramid scheme
model which is totally illegal in the eye of law. Such as pyramid scheme is strictly and primarily
based based on the recruitment or on the same side, legitimate which is not required to pay any
specific amount to organization for participating. It has been concluded from the study that for
the company Legitimate business model is more effective and legally applicable on the business
practice rather than Pyramid scheme. Along with that, study also discussed about the Corporate
social responsibility in the context of the study and covered the important initiatives taken by the
organisation company in order to gain the business success and growth opportunity.
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REFERENCES
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Transilvania University of Brasov. Economic Sciences. Series V. 10(2). pp.11-16.
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Walsh, J., 2016. Tis the Time's Plague when Madmen Lead the Blind: How the IRS Can Prevent
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Watkins, D., 2016. Behind the pyramid schemes: Broken families in struggling communities.
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Online
Ward,. S., 2019. The Difference Between MLM and Pyramid Schemes. [Online]. Accessed
through <https://www.thebalancesmb.com/is-it-multilevel-marketing-or-a-pyramid-
scheme-2947159>
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