Comparative Business Ethics: Herbalife Case Study Report, T2 2019

This report provides a comprehensive analysis of Herbalife, focusing on the ethical issues and legal challenges the company has faced. The report begins with an introduction to Herbalife, its business model, and its history, including the role of its founder Mark Hughes. The core of the report examines the complaints raised by the Federal Trade Commission (FTC) against Herbalife, particularly regarding its distribution strategies and compensation structure, which were deemed unfair and in violation of marketing norms. The report details the FTC's actions, including the requirement for Herbalife to restructure its sales practices and reimburse consumers. It evaluates the specific issues with Herbalife's operations, such as distributors acting as recruiters and the use of a pyramid scheme-like compensation system. The report also evaluates the advantages and disadvantages of Herbalife's business practices, and concludes with recommendations for improving the company's ethical and compensation structure. This analysis includes references to relevant academic and professional sources, offering a well-rounded perspective on the Herbalife case study. The report also includes a detailed discussion of the compensation structure, and the need for direct selling functions.

HERBALIFE

Introduction
 The presentation is about the company named Herbalife.
 The major objective of the presentation is to understand the
key reason behind the complaints that was raised by FTC
( Federal Trade Commission) on Herbalife.
 The report also derives a key understanding on the social
responsibility scheme that is pertaining to the organization.

About the company
 Herbalife international is considered as the premiere
wellness company which basically focus to enhance healthy
life and healthy living to individuals all over the world.
 The organization was incorporated in the year 1980, the
headquarter is situated at Los Angels, CA.

About the company contd.
 The founder of the company is Mark Hughes, who started
Herbalife at the age of 23.
 The major objective was to enhance better health standards
for individuals all over the world.
 Currently the organization operates in 90 countries all over
the world.

Case study details
 As per the issues made by FTC ( Federal State Commission)
on Herbalife, the major reason was related to the
distribution strategies of the organization (Thompson 2018).
 The company's compensation structure was unfair in the
market for creating issues that was against the marketing
norms and conditions.

Case study details contd.
 According to FTC the actions made by Herbalife in their
marketing operations were completely unfair and unreliable.
 Herbalife was asked to restructure and reform the sales and
distribution practices that were adopted in the organization.
 FTC announced that Herbalife had to reimburse $200
million to the consumers for the inconvenience made and
created by them in the business.

Evaluation of Herbalife Issues
 The distributers were acting as recruiters for the organization
which was considered to be a negative act according to marketing
norms and conditions. (Bäckman and Hanspal 2019).
 They made the consumers believe that, the products had high
demand in the market and selling any products of Herbalife can
be a better source of income for them.
 Rewarding system in the organization was corruptive and acted
against the business norms and values.
 They followed pyramid scheme where the incentives were given
for recruiting new distributors rather than selling a product of
Herbalife.

Evaluation of Herbalife Issues contd.
 According to FTC, the participants were asked to reward
on the selling system rather than creating unfair
recruitment practices.
 Many consumers around the world lost their trust for
getting involved in Herbalife sales activities.
 Distributers were asked by FTC to compensate for getting
involved in negative practices that were not a part of their
job.

Major Issues
 Compensation structure was based on certain basis that it
must focus on selling products to customers rather than
paying distributors for recruitment function.
 It was strictly announced that the discounted buyers were
not allowed to sell the company's product for their own
benefit.
 Distributers were compensated only for selling those
products that were tracked and verified by the company.
 The participants were not allowed to purchase nutrition
clubs on their interest, Which requires FTC permissions and
license for the functioning.

Evaluation of Alternatives (pros and cons)
Disadvantages of Herbalife
 Compensation structure of the organization is not as per the terms
and guidelines of FTC (Federal Trade Commission).
 The distributors were involved in the functioning of selling the
Herbalife products without adequate training and licensing system.
Advantages of Herbalife
 The organization had a better sale and stability in the market as
they were involved in the in the direct selling process.
 Licensed distributors of the organization had a better compensation
structure on the basis of selling strategies adopted by them.

Recommendation
 The distributors must be given adequate compensation
structure that are based upon the sale of those products
which are checked and verified by the company.
 More emphasis of the compensation structure should be
based on direct selling function rather than adopting
unfair recruitment strategies.
 Licensed and trained distributors must be involved in
compensation scheme rather than adopting unfair
compensation strategies.

Conclusion
 Herbalife is the organization that was well known for the
nutrition products in the market all over the world.
 The company operations were declared wrong by FTC for
performing marketing actions that was against the norms
and condition created by them.
 They were following pyramid scheme, where the distributers
were involved in the recruitment process rather than selling
the products in the market.
 As per the norms and conditions of FTC, the company was
asked to compensate the consumers for the losses caused to
them.

References
Bäckman, C. and Hanspal, T., 2019. Participation and losses in
multi-level marketing: Evidence from an FTC settlement (No. 207).
SAFE Working Paper.
Thompson, G., 2018. Social gains from the public relations voice of
activist investors: The case of Herbalife and Pershing Square
Capital Management. Public Relations Review, 44(4), pp.481-489.
Appleby, B.L., Burstein, R.S. and Doroghazi, J.M., 2016. Cause of
Action Alchemy: Little FTC Act Claims Based on Alleged
Disclosure Violations. Franchise LJ, 36, p.429.
Bosley, S. and Knorr, M., 2018. Pyramids, Ponzis and fraud
prevention: lessons from a case study. Journal of Financial
Crime, 25(1), pp.81-94.