Comparative Analysis: Herbalife Reborn Business Ethics and Practices

This case study report analyzes the business ethics and social responsibility of Herbalife Reborn, a multilevel marketing company. It examines Herbalife's compensation model, its accusations of operating as a pyramid scheme, and the differences between legitimate business models and pyramid ...Read More

RNNING HEAD: HAERBALIFE REBORN 0
Business ethics and social responsibility
Student’s Details-
SEPTEMBER 21, 2019

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Executive Summary
Business Ethics are the moral principles or the guidelines that an organization has to follow
within their operations. Moreover, business ethics and social responsibilities both are different
concepts but both have huge importance within the business and it is the obligation for the
business to fulfill social responsibility for maintaining sustainability. The main aim of the report
is to make a comparative analysis of the business ethics with respect of business model of
Herbalife Reborn. The research made in this report is being carried out through journal articles,
academic books and the website sources relevant to the associated company. The results of the
report are helpful in the comparing the business models and determining the ethical concepts of
the business model and also determining the social responsibility of the business to ensure
sustainability.

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Contents
Introduction......................................................................................................................................3
Herbalife’s Multilevel Compensation model...................................................................................3
Herbalife accused of using Pyramid Scheme...............................................................................4
Difference between Legitimate Business Model and Pyramid Scheme..........................................5
Social Responsibility.......................................................................................................................8
Corporate Governance.................................................................................................................8
Business Ethics............................................................................................................................9
Philanthropic Efforts....................................................................................................................9
Employee Wellness......................................................................................................................9
Environment Friendly System.....................................................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
Business ethics within an organization are the principles and moral values that an organization
has to adhere with (Crane, et al., 2019). Social responsibility is regarded as the obligations of the
organization towards the different stakeholders such as customers, employees, society and the
government (Grayson & Hodges, 2017). Business ethics and social responsibility is crucial for
the organization for maintaining long-term sustainability. Ethical decisions are taken into the
organization in order to ensure that the best profitable decision within the framework of moral
principles (Crane, et al., 2019). Here, the report is prepared on the Herbalife Reborn which is the
multi-level marketing company that supplies nutrition products and other dietary supplements
having headquartered at California. The report highlights the Herbalife multilevel compensation
model and the way it is being accused of becoming a pyramid scheme which is considered to be
fraudulent scheme. Also, the report has clearly discussed the legitimate business model and
pyramid scheme which are crucial concepts of business model. Lastly, a forgone discussion of
social responsibility which is being demonstrated by Herbalife is also being highlighted into the
report.
Herbalife’s Multilevel Compensation model
Multilevel marketing is the kind of direct selling where the sellers recruit people or distributors
to sell their products and earn commission from through them along with the profits that the
sellers are earning from their own sales. Nearly all the countries accept Multi-level marketing as
the compensation model (Jain, et al., 2015). However, this activity is carefully scrutinized as it
has the capacity to be fraudulent. However, there are regulations pertaining to the multilevel
marketing which are necessary for the companies to follow in order to prevent the emergence of
pyramid scheme (Good & Hassay, 2015). However, pyramid scheme is considered to be
unsustainable and fraudulent business model as the people make an investment into the business
to participate in it and they are being compensated for selecting or recruiting other people or the
further sellers to sell others (Mason & Chakrabarti , 2017). Thus, the profits or the money being
made from this model is the commission earned for recruiting people rather than the actual profit
derived from the selling of the products. Thus, this model is considered to be unethical from the
legal point of view.

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However, Herbalife has a huge distribution network and sells their products through ongoing
networks that they make. Herbalife has 3.7 million members through whom they sell their
products in about 90 countries throughout the world (Partnoy, 2014). Moreover, the
compensation under this company is made either from selling the Herbalife products or through
the bonuses that the company gives to recruit the new members who will further sell the
products. The company as a start-up sells Mini Herbalife Member Pack whose cost is 60$ each
kit that includes the product samples, forms and applications. It also includes a training material
in which the marketing plan and business basics are explained which guides the seller in selling
the products. After becoming the member of Herbalife, sellers can avail the discounts and can
sell the products to another party. However, all the activities under this are within the legal
framework and are restricted by the rules and regulations. The company has been able to make a
huge profits due to the strong network of contractors. Also, the company has 100% pay back
policy in consideration to the ethical guidelines to be prescribed by Direct Selling Association.
Herbalife accused of using Pyramid Scheme
As already discussed earlier, pyramid scheme is considered to an unethical practice as it involves
the contract of employing more people into the business rather than the sale of products. Thus, it
can be said that at each stage in the pyramid, the person being employed has to pay a fixed sum
of money which is usually expensive and is being circulated to the people at the top. Further,
Federal Bureau of Investigation (FBI) gives warning to the companies having pyramid schemes
by examining the companies. If the profits of the company are earned through the offered
contractorship for selling the products rather than the profits made from actual profits, then this
sort of activity is said to be coming into the category of pyramid scheme. However, Herbalife has
been accused of using the pyramid scheme which is a fraudulent and unethical practice to be
carried out within the company (Elliott, 2017). This allegation was being imposed by William
Ackman who is billionaire investor and also an activist investor. The following are some of the
major reasons of the accusations being imposed on the Herbalife for using pyramid scheme as
the business model:
 Herbalife has misleading practices for convincing the people that they can earn the
money of top people which is unrealistic.

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 Moreover, it has been asserted that most of the money made by the top contractors
comes from the commissions of the people that are present in the recruiting chain rather
than the profits attained from the actual sales.
 It is also being claimed that the customers buying the product are convinced to recruit
other people rather than convincing them to purchase the product again. Also, the
company has been making profits only from the recruiting business and that proves to be
the main reason why the company has been entering into the new countries.
 Herbalife has poor research and development and their products are of poor quality.
Also, the number of contractors is more than the number of end users.
 It is also being claimed that the company as suspicious recruitment process and is not
available publically for scrutiny.
 Herbalife has allegation that they have fraud accounting records as they do not have any
proof of sales of the product. Also, all the sales made by the contractor are shown as the
retail sales into the books (Bissonnette, 2018).
 Moreover, it can be noted that the activities of the company are highly unethical and are
expected to be accused of using pyramid scheme.
 Also, the company has fraudulent means to sell the products as the customers are being
given suggestions to recruit other people to make money rather than purchasing the
product again in the lifetime.
 Herbalife forces the people to recruit new people and also misleads them by showing
them the wrong path to earn money which is the activity prevalent in the pyramid
scheme used by the company in the multilevel compensation model (English, 2017).
Difference between Legitimate Business Model and
Pyramid Scheme
A legitimate business model focuses on the sale of the product rather than recruiting people and
misleading them. The model is precisely based upon doing investments in the products and their
marketing rather using unfair means to convince people to recruit others. It only includes
activities that lead to higher sales of the products (van Werven, et al., 2015). On the other hand,
pyramid scheme is considered illegal in the eyes of the laws and the compensation is decided
upon the intensity of people being recruited in order to increase the chain of selling (Sullivan,

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2019). Moreover, it can be noted that Herbalife has been facing accusations for using pyramid
scheme as the business model. The company is gives more compensation to the people for
engaging more people into the chain than for the actual selling of the product. The following
table shows a clear understanding of major differences between legitimate business model and
pyramid scheme:
Basis Legitimate Business Model Pyramid Scheme
Basic concept A legitimate business model is
considered to be following
legal business model where
the main motive of the
business to enhance the sales
rather than engaging in the
fraudulent activities.
Pyramid scheme is regarded as
illegal activity that engages
people to recruit others via
giving a promise of payments
and are expected to get the
share of money by adding
additional member into the
scheme.
Compensation Here, the compensation is
made for selling more
products to more customers.
Whereas, the compensation in
pyramid scheme is precisely
derived from the recruitment
process.
Main goal The main purpose of
legitimate business model is to
increase the revenue through
increase in the revenue earned
from making more sales and
gives commission when it
refers or markets the products
to other users (Tribune, 2013).
However, the main goal of this
model is to recruit new people
in the scheme and the profit is
earned for adding new
members.
Investment Here, the investment is made
to make maximum sales.
However, investment in this
model is made to add new
members into the chain.
Legality of the Model This model is considered as
legal and ethical as it does not
Pyramid scheme proves to be
illegal and is banned in many

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involve into any unethical
practices that might be against
the law.
countries. If any company is
expected to exercise this as the
business model, then there are
severe penalties as per the
circumstances.
Ethical Dilemma From the society’s point of
view, legitimate business
model is entirely ethical as the
activities in this model does
not hurt the sentiments of the
society and is an acceptable
model to be followed the laws
of the country.
On the other hand, pyramid
scheme is regarded as fraud
and is an unethical practice as
the people engaged under this
model are use misleading
practices to make more money
through adding more
members.
Further on making a comparative analysis of the diverse ethical approaches, it can be noted that
pyramid scheme is an unethical practice that can lead to reduced customer satisfaction and may
affect the reputation of the company. However, Herbalife has been facing allegation for using
pyramid scheme and the activities of this model are highly unethical. The company has received
several complaints from the customers for being ethical and their marketing technique is fraud.
However, it can be noted that legitimate model is legal and ethical from the business point of
view. Also, multilevel marketing is regarded as a legitimate model and is ethical against the
pyramid scheme. The product under the multilevel marketing is tangible and has value whereas
there is no product in the pyramid scheme and fake investment is made for getting the profits.
It can be noted that Herbalife has a tangible product to do multilevel marketing which ultimately
appears as the legitimate business model. There is a thin line between the two model as the
primary activities in the legitimate model is to make an increase in the sales and which is quite
different from the pyramid model whose primary job is to recruit others (Karp, 2013). However,
in the entire process of being accused by Ackman to be using the pyramid model, it is being
supported by the consumers and many organizations who utilize the nutrition supplements of the
company. The supporters claimed that the company does not seem to be operating under the

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pyramid scheme. Thus, both the models are different and they have different impact upon
Herbalife.
Social Responsibility
Social responsibility of the business is to take care of the interest of society along with increasing
the shareholders’ value. Thus, it relates to the duty of the company to serve the interest of the
stakeholders which are crucial for the business. There are various policies that are made by the
company in order to reduce the negative impact of the stakeholders and encouraging a positive
environment for the customers and the society (Jamali & Karam, 2018). It suggests that the main
purpose of the business should not only to make economic benefit but also serving the needs of
the society. A company is seems to be ethical when it makes ethical decisions which are fair and
transparent to all the stakeholders. There is huge importance of social responsibility as it helps an
organization to be ethical and being highly responsible for the fulfilling the needs of the
stakeholders. Socially responsible companies have policies (Kang, et al., 2016) that are
supportive to the increased wellbeing of the society and the environment and making a reduction
in the negative impact of the stakeholders to be considered within the business.
However, Herbalife has corporate social responsibility program that elaborate that “the right,
honest and ethical thing”. The company believes that it is the moral duty of the company to
fulfill the commitments towards the customers and employees. The following points explain the
corporate social responsibility of Herbalife in a better way:
Corporate Governance
Corporate governance is regarded as the business model that has laws and regulations that are
highly supportive to the needs of the stakeholders being considered within the company and
making a long term benefit of the company as well (Tricker & Tricker, 2015). Similarly,
Herbalife has the methods and policies that provide direction to the long term goals of the
company in order to ensure effective administration, accountability and improved economic
condition of the company. Also, the company has created a director in charge for conducting the
meetings on daily basis and taking important decisions and meeting the required compliances.

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Business Ethics
Business ethics are considered to be the guidelines or the moral values that a company has to
adhere in order to meet the social responsibility of the company (Pearson, 2017). Similarly,
Herbalife has ethical standards in the entire operations and it is operated with the belief of doing
the honest, right and ethical thing to the customers. The company has work ethics and has strict
penalizations for the violations of the ethical standards by the employees. Moreover, CEO of the
company Michael Johnson has incorporated the business conduct to be ethical and ensured that
the employees are engaged into the fair practices when making interactions with the external
stakeholders. Also, the company has strict legal compliances for the conditions of bribe and gifts
for hospitality.
Philanthropic Efforts
In the light of the corporate social responsibility of Herbalife, it has introduced programs such as
Herbalife Family Foundation and Casa Herbalife program that provides charitable resources to
children. Also, the company has made collaborations with Global Alliance for Improved
Nutrition (GAIN) for the purpose of providing nutritious products and ingredients to the women
and children (Herbalife , 2019).
Employee Wellness
Employees are the important stakeholders for a company as the efforts of the employees can lead
to the organization’s productivity and also serving the interest of the employees can lead to the
increase in the morale of the employees and that ultimately lead the organization towards success
(Calvo & Calvo, 2018). Similarly, Herbalife takes care of internal stakeholders and has
developed initiatives for the purpose of serving the needs of employees. The company has
availed nutrition support to the employees which can be either outer or inner for the purpose of
keeping the employees fit and healthy. Also, Herbalife has provided incentives and
complimentary products to the employees in order to boost their morale and keep interacting and
getting new members.
Environment Friendly System
It is the social responsibility of every organization to be engaged in eco-friendly activities and
maintain the integrity of the environment. Therefore, the products of the company should be
environment friendly in order to maintain a sustainable business. Similarly, Herbalife have live

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green approach where they have made significant investments in the undertaking of initiatives
which are environmentally conscious. Live green approach includes 3Rs reduce, recycle and
reuse which provides the significant ways to take steps to (Baland, et al., 2018) protect the
environment. Also, the headquarters in California has received LEED certification for their
environment friendly design for making renewable materials. The company has also developed
initiatives for the education of the employees through live green approach. Herbalife has
successfully utilized biodegradable materials and reduced the use of hazardous elements like
plastic bags.
Conclusion
It conclude, it can be said that business ethics are crucial for the business as it helps in meeting
the ethical responsibility of the company towards the society and the stakeholders that the
business has. A business with ethical decision making can lead the organization towards the
success and helps in the meeting of ethical standards pertaining to the society and environment.
Here, the report is prepared on the comparative ethics and social responsibility of Herbalife
Reborn which is the multilevel marketing company having nutrition and fitness products to serve
to the consumers. The report discusses the multilevel compensation model and pyramid scheme
in relation to Herbalife. Also, the report discusses the reasons for the accusations being imposed
upon the company to use pyramid scheme. The report clearly states the major differences in the
legitimate business model and pyramid scheme which are the major ethical dilemmas in the
business ethics. Lastly, social responsibility of Herbalife is being discussed on the areas such as
corporate governance, ethical standards for serving the interest of stakeholders, employee
engagement programs and environmental friendly schemes. These are the major areas where the
company fulfills their social responsibility.

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