1. Running head: Herbalife International 1 Herbalife International Jake FreemanORG530-1: Business Ethics and Sustainability Colorado State University – Global Camus Victoria Figiel, Ph.D. March 3, 2013
2. Herbalife International 2 Herbalife International Herbalife International LLC was founded in 1980 by Mark Hughes as a direct toconsumer nutritional supplementation company. Herbalife started as a simple idea of Hughes’ to“change the nutritional habits of the world” (iChange, 2012). Hughes’ mother died due to anoverdose brought on by a cocktail of diet pills prescribed by doctors to assist with weightproblems which were in turn brought on by a poor nutrition plan. After the death of his mother,Hughes determined to find or found a simple and effective nutritionally complete healthy mealreplacement program.Within one year it grew into a multi-million dollar company and within 13years it grew into a billion dollar company (Beach, 2013). For Fiscal Year 2012 the companyenjoyed strong corporate financial performance, netting a profit of $4,100,000,000 (InvestorRelations, 2013). The company is organized into two parts: corporate and sales. Corporate Herbalifefocuses on research, development, marketing, sponsorships, ethical and legal considerations ofthe company as a whole. As such, it is answerable to outside agencies and organizations such asthe FDA and FTC. The sales portion feeds off of the product development, brand recognition,and marketing drives created by corporate. Each sales distributorship is an independent entitywho has gained permission to use Herbalife logos, products, and support (Distributor Policies-Code of Honor, 2013).In the following paragraphs, these two main entities which make upHerbalife will be discussed. Due to the complexity of sustainability practices within a dynamictwo part company, some sustainability issues will be discussed throughout, including theCorporate Sustainability Model as well as structure and accountability.
3. Herbalife International 3 Corporate The corporate wing of the company is broken up into separate entities. Germane to thispaper are the ethics, research and development, and community outreach departments. Eachdepartment is staffed with full time employees. Corporate employees may not also beindependent distributors of Herbalife products due to conflict of interest issues. The ethicsdepartment has significant authority within the company and is known by the mantra “Protectingthe Golden Goose” (Herbalife Today Magazine, 2011). Their task is to enforce stringent ethicalguidelines corporate has in place to protect consumers and distributors from unethical behaviorson the part of errant distributorships. As a personal experience, recently there was a MillionaireTeam member who posted photos of his income pay checks as part of a power point presentationto a large seminar. This is considered as unethical baiting by Herbalife rules and guidelines.After investigation, Herbalife ethics shut down the member’s distributorship and nutrition clubsand banned him from the organization for two years, costing him millions. Ethics are constantlydiscussed at Herbalife meetings and events and distributors will frequently observe each otherand give guidance on ethical questions. Herbalife has a robust team of recognized scientists working within research anddevelopment, to include Dr. Louis Ignarro, Nobel Laureate, and Dr. David Heber, named “BestDoctor in America” at least once (Herbalife Science, 2013). Lead by this team, productdevelopment is relatively slowly. The deliberate pace is for sustainability purposes, often takinga year or more per product. Each product goes through a conceptualization stage, feasibility stagewhere distributor stakeholders are asked for input, and formulization stage where refinement andexploration on the long term ingredient availability and quality are determined. Through thismethod, Herbalife releases at least one key market product per year (Product Development,
4. Herbalife International 42013). The inclusion of distributors allows the company to avoid marketing disasters where aproduct is generated with excitement in the lab, but met with complacency in the marketplace.Products under development will often be hinted at or even sampled in larger gatherings calledSuccess Training Seminars, Leadership Development Weekends, or the annual keynote event,the Herbalife Extravaganza. In view of philanthropy and like external outputs, the community outreach departmenthas several initiatives through which distributors can volunteer time and money. The three mostpopular are the Herbalife Family Foundation, Casa Herbalife, and the African AmericanInitiative. (Social Responsibility, 2013). Herbalife Family Foundation and its subsidiary, CasaHerbalife, focus on humanitarian services around the world and provide“$2 million in fundingand volunteer assistance each year to more than 90 organizations worldwide. These funds bringnutrition to more than 8,165 children in over 50 countries on a daily basis” (Herbalife, 2009;Herbalife Family Foundation, 2013).The African American Initiative is the result of Herbalifeleadership recognizing that as a demographic, the African American community is hard hit bynutritional and economic issues (African American Initiative, 2013). Herbalife recruits risingAfrican American sales and corporate representatives within its sales and corporate wings to actas emissaries to African American communities about proper nutrition as well as the possiblefinancial benefits that can be derived from Herbalife Wellness Coaching. Sales Distributors are the only mechanism through which the company markets its products.Through its well-developed recognition programs, easily accessible training and distributorservice programs, thorough research into new and existing products, and corporate focus onenvironmental and community synergy, Corporate Herbalife protects its lifeline of distributors.
5. Herbalife International 5The following paragraphs outline how Corporate Herbalife supports its human resources andgleans financial resources from them, Perhaps this is why not only has the new distributor corpsgrown but experienced distributors have stayed within the organization and a rate of 50%, aboveindustry average (Press Release 2012). High quality products, if not married with an effective marketing system, may not be ableto last. In view of this, corporate has established an inexpensive and robust online platform sothat distributors can sell products online.Distributorscan order (wholesale) a customer’s product(retail) which is sent from central warehouses “just in time” without ever seeing those specificproducts themselves. As such, there is no need to keep an inventory on hand, which minimizedoverhead costs. Using this model, fledgling distributors with limited financial options can createon online business for under $130, including an partnered outside merchant account servicessuch as ProPay, which benefits the company by opening their doors to individuals with desireand sufficient skills or willingness to learn who do not have the capital available to launch atraditional business. It assists communities by opening up the doors for entrepreneurship tocommunity members who desire self-employment. Distributors can purchase wholesale productsin large quantity and keep a stock on hand for instant sales, but this is typically not recommendedfor reasons discussed later. In short, massive quantities are purchased for operation of so called“nutrition clubs” rather than using the “just in time approach” Regardless of the method oftransacting business, there is no fault or fee associated with not creating a certain sales volume.The online sales nomenclature allows people up several levels in the organization to monitorvolume point production and identify inappropriate activity. In regards to labor practices and employee benefits, the sales portion is organized afterthe multiple-income stream model, commonly called multi-level marketing. It encompasses
6. Herbalife International 6some 2.7 million independent distributors (Annual Report, 2012), called “Wellness Coaches”,and their subsidiary distributors.In a business context this model is easily corruptible and oftenresults in poor returns for entering members (Greene, 2012). However, it is important todifferentiate between a legitimate MLM and a pyramid or Ponzi scheme. In essence, in a Ponzischeme there is not a legitimate end product available, and the method by which participantsmake money is by bringing new members into the actual organization. In Herbalife,distributorships derive no benefit from simply recruiting new distributors. To keep rosters clean,every year on the date of original purchase of membership, each distributorship is charged a $14processing fee. If a distributor does not pay it, they are scrubbed from the Herbalife distributoraccount and unable to become distributors again for two years. For those who wish to remain active either as wholesale purchasers for personal use oractual Wellness Coaches for others, independent distributors are able to purchase product at a25% wholesale and then sell retail, essentially keeping $25 of each $100 sold. The intent is toproduce enough “volume points” (approximately $1 per volume point) to attain 35%, 42%, andfinally 50% wholesale savings, which increases their retail profit margins. The 50% level isreferred to as the “Supervisor” level.Once a Supervisor, a person can bring interested individualsinto the business and train them how to successfully act as a Wellness Coach to clients usingpracticable and duplicable business methods. Recognizing the effort it takes to train a newperson, corporate Herbalife will match 25% of each new distributor’s sales revenues as anoverride to their trainer, payable no later than the 15th of each month. Beyond attaining “Supervisor” status, a distributorship can, completely alone and with nodistributor organization built under them, build enough consecutive volume point production toattain World Team. This means that for four months in a row a distributor has achieved 4000
7. Herbalife International 7volume points. In theory, these volume points can be from personal consumption or personalsales.Although a subsidiary organization of distributors can be built by a distributor prior to thispoint, no more real growth can occur after this point unless an organization is created.Regardless of personal sales or revenue after World Team, no more advancement can comeunless a distributor can show leadership enough to teach others top do what they have done. After World Team, a distributor can achieve Tabulator Team status which entails eachsubsequent level above it. Established by strict business and ethical guidelines as set forth bycorporate these levels includeGlobal Expansion Team, Millionaire Team, President’s Team, andFounder’s Circle. It must be noted that these additional levels are not based on the raw amount ofdistributors a supervisor brings into the organization. Subsidiary distributorship is irrelevant. Asa sustainability check, a distributorship gains nothing if a new distributor joins their organization,unless that new distributor experiences some modicum of success themselves.This aids ineliminating the risk of the organization becoming a “pyramid scheme”, as product must bepurchased and consumed. The various levels are simply a measuring stick to success. The realbenefit comes from additional training and networking with those who have discoveredpracticable methods for success. A simple way to view the levels is this: Global Expansion Team(GET) requires any number of subordinate supervisors attaining a net of 20,000 volume points(approximately 5 fully active supervisors creating 4000 volume points per month each, of whichthe GET member will receive royalty overrides of 5% from the three levels of distributors belowthem); Millionaire team requires 4000 royalty points for three consecutive months; President’sTeam requires 10,000 royalty points for three consecutive months. The royalties overridepercentage earned are typically the same per level, but the larger organizations make the higherlevels more lucrative.There are reports from time to time that some distributorships try and
8. Herbalife International 8influence their team members to purchase massive quantities of product themselves in order toinflate their own numbers. Unless purchases are made to operate a nutrition club, large purchasesrun counter to corporate ethics guidelines and are looked at as unsound business practice(Distributor Policies- Expenditures, 2013). Common sense rules of business apply. The company responds well to external requirements of sustainability. An example ofthis is the companies’ use of ephedra, the popular but now banned organically derived weightloss ingredient. The US Food and Drug Administration banned the substance in 2004, which sentmany manufacturers scrambling to find a quick alternative to avoid catastrophic market shareloss. Herbalife, however, faced no such issue. Although used in products during the 1990s,Herbalife discontinued its’ use in 2002 due to emerging research on the dangers of the ingredientprior to any dictate from the government. Internal correction is a truly sustainable practice(Epstein, 2008). An oft heard challenge on both the corporate and sales venues is to “change thenutritional habits of the world” (iChange, 2012). Based on that internal drive and even after thedeath of Hughes in 2000, the company researches and develops new products at a slow andhighly vetted rate. As a safeguard against falling for short term marketability pressures at apossible risk of long term sustainability, Herbalife CEO, Michael O.Johnson hired VasiliosFrankos M.S., Ph.D., former head of the Food and Drug Administration’s SupplementationDivision to oversee Herbalife’s consumer safety and quality control (Press Release, 2010).Frankos and his team have the autonomy and responsibility to audit and, if necessary, shut downany manufacturing or processing cycle at any point based on professional assessment ofsustainability violation. Often, this leads to shortages in key products. However, the HerbalifeDistributor Relations Center responds to complaints by stating that product integrity takes
9. Herbalife International 9precedents over available supply. Certainly, distributors will likely not be happy nor successful ifkey products are constantly out. As such, Herbalife maintains high standards for productdevelopment, to include ingredients and manufacturing (Holistic Therapies- Belfast, 2013). Herbalife manages inputs into the organization rather well and the processes by whichthey do it are interesting. For instance, leadership in Herbalife is a results based enterprise. Onthe sales side of Herbalife, only high and consistent producers are invited to speak and mentor atmain events. Outside speakers are not hired. Typically in national or regional events, Millionaireteam, President’s team, and Founder’s Circle lead the training. Rising leaders within theorganization are able to mentor within their own organizations or organizations to which they areinvited. However, promising Supervisors and World Team members are sometimes invited tospeak and convey their strategies for success. Enabling fairly new coaches to be recognized is aninvigorating practice for other new distributors. Many may regard such recognition as evidencethat they too could be recognized for achievements. As a specific example of the type of leadership Herbalife attempts to instill, the casestudy could be Michael O. Johnson, former CEO of Walt Disney International, who Herbalifehired as their new CEO. Upon the untimely death of Mark Hughes, Herbalife was leaderless andfaced a crisis. Johnson filled the void and took company into its new future. With his tenure aspresident, Herbalife has shown renewed and deepened dedication to sustainability. He currentlyleads Herbalife Corporate and communicates the organizations values and development of acorporate sustainability strategy (Epstein, 2008).Johnson has led the organization toward greatersustainability practices and active sustainability audits, making results and metrics reportsavailable to the public (Audit Committee Charter, 2013).His tenure has led to awards andrecognition for Herbalife’s sustainability practices. (Awards and Recognition, 2013). This entails
10. Herbalife International 10building design (Press Release, 2009) to product development. From explanations gatheredfrom current Herbalife distributors who were distributors prior to Hughes’ death, while Hughes’initial vision and charisma led the company to the success it had, the direction Johnson has takenhas been an increasingly sustainable and lucrative one. When Johnson took over, the company’spopular Formula 1 meal replacement shakes was its primary marketing success (Beach, 2013).Desiring to develop greater market diversity, Johnson led the company’s expansion into highgrade athletic meal replacements, pre-workout, post-workout mixes, and 12:1 carb-to-proteinduring workout mixes, the Lift-Off® energy drink supplement, and so forth. On product development, the story of Herbalife’s new athlete’s line of supplements isuseful. Johnson happened upon Dr. John Heiss, a recent UCLA PhD graduate, while on a hillclimb cycling exercise in the hills above Los Angeles.Dr. Heiss was marketing from the trunk ofhis car a new nitric oxide pre-workout blend he had developed. After speaking with the scientistand having a good first impression, he took samples back to the Herbalife lab for testing. Oncethe composition and quality of the sample was proven to be legitimate, Johnson and Herbalifehired Heiss, the company gained proprietary rights for the supplement, and provided funding andlabs for Heiss’ further research and development of what became the popular line of productscalled “24”. According to Heiss’ vision, the line is so termed as it is designed for “the 24 hourathlete” (Calbay, 2011). That expanded the market for Herbalife and took pressure off of thefoundational meal replacement program, which in turn made the company more sustainableeconomically. It also showed Johnson’s willingness to support local scientists and entrepreneurs,bringing them into the framework of Herbalife.With the previously mentioned team of scientistsand researchers on staff, an argument could be made to keep idea generation inside the company.That Johnson would entertain the research and product development of a new Ph.D. vending his
11. Herbalife International 11work from the back of a car shows a local attitude underneath the power and prestige of aninternational multibillion dollar publicly traded firm. Seemingly, the company’s reputation amongst stakeholders and their reaction to thecompany’s sustainability performance has been mostly positive. Revenues are increasing whichmeans more products are being purchased, which means positive brand recognition. Enoughcapital has been created to purchase and build a new botanical refinement plant in Changsha,Hunan Province, China, and stocks are on the rise. The Changsha refinement plant is aninteresting evolution for Herbalife. Herbalife is striving towards a sustainability lifecycle conceptfirst spoken by Mark Hughes prior to his death called “Seed to Feed”. According to the concept,Herbalife would own the entire process of their production from the fields ingredients are grownin to the manufacturing plants where the products are created (Holistic Therapies- Belfast,2013).While this has not happened in every Herbalife department, the Changsha botanical plantis a major step. This is evidence of Herbalife’s capital budgeting and sustainability strategy: thecompany wishes to own its resources for greater sustainability in the future. Since Herbalife’sfocus is on balanced nutrition and wellness, it seems logical that the company would attempt tomanage the risk of unreliable third party supplier stakeholders by owning their own farms,processing plants, and refinement centers.That way, the company can ensure that unwantedchemicals or cross contamination are kept to a minimum. One recent negative point was raised by stock specialist William Ackman when he madea 3 hour presentation on what he saw as the unsustainability of the Herbalife model andlikelihood of the FTC suddenly declaring Herbalife’s business model an illegal pyramidscheme.(Herbalife, 2012; Hotaling, 2013). Essentially, his argument was that Herbalife relies onnew distributors to enter the company for established distributors to make revenue and as such
12. Herbalife International 12should be closed by the FTC. When this happened, he predicted, Herbalife stock would fall tozero. He shorted the company 20 million shares. Conversely, Carl Icahn,John Hempton (Taub,2013) and Daniel Loeb (Greenberg, 2013) derided his conclusions, pointed out that distributorsdo not make revenue from simply recruiting, and that even if the FTC closed Herbalife’s USmarket, 80% of Herbalife’s revenue is international and thus a zero dollar stock is highlyunlikely. The two brokers purchased large amounts of stock in the company. Herbalife could strengthen its position as a world leader in wellness products, education,and sustainability by creating more available information on plant certification, metrics utilizedfor audits, and as Ackman stated in his critique, tighter accounting of which distributors actuallydistribute and which simply purchase for personal use (Hotaling, 2013). The building of a newplant in China and recently unveiled plans to open a new 500 employee factory in Winston-Salem, NC (Associated Press, 2012) seems to indicate that the company expects growth. Growthwill likely not be unnoticed, which likely means additional scrutiny. As the previous pages mayhave indicated, Herbalife is not slow or reluctant to adapt. Both outsiders and insiders wouldbenefit from more clear documentation and records of fiscal and sustainability activity within thecompany(Schaefer, 2013). This will not only make it less of a target for the Ackmans of theworld, but likely give distributors greater confidence in dealing with those who have questions. Herbalife, the 33 year-old multi-billion dollar international wellness, weight-loss, andphysical performance company, has strong sustainability characteristics. With a professional anddedicated corporate staff, a strong focus on ethics, and a talented team of scientists and marketanalysts behind it, the sales side of Herbalife is set up for success in marketing Herbalifeproducts. This would not be so without the code of honor and attitude toward sustainable thoughtand action by corporate leadership, which percolates throughout the organization. Community
13. Herbalife International 13outreach and volunteer programs give back to the areas where Herbalife distributors operate, andcertain demographics can benefit from programs such as the African American Initiative. Aswith any large, successful organization, Herbalife has its critics. Yet, if certain corrections aremade and the organizations remains as sustainable and flexible as it has in the past, perhapsHughes goal of changing the nutritional habits of the world can be realized, at least in part.
14. Herbalife International 14 ReferencesAfrican American Initiative. (2013). Raising awareness and helping to reverse the obesity trends in the African American community. Dallas African American Initiative. Retrieved from http://www.dallasaai.com/Audit Committee Charter (2013). Herbalife audit committee charter. Retrieved from http://ir.herbalife.com/documentdisplay.cfm?DocumentID=8107Annual Report. (2012). Herbalife 2011 annual report – Form 10-k – February 21, 2012. Retrieved from www.secdatabase.comAssociated Press. (2012). Herbalife to hire 500 at NC plant. Charlotte Observer. Retrieved from http://www.charlotteobserver.com/2012/12/19/3736318/herbalife-to-hire-500-at-nc- plant.htmlAwards and Recognition. (2013). Herbalife investor relations. Retrieved from http://company.herbalife.com/recognition-and-awardsBeach, E. (2013). History of Herbalife. eHow. Weight management &body image. OTC weight loss products. Herbalife. History of Herbalife. Retrieved from http://www.ehow.com /about_5292905_history-herbalife.htmlCalbay, C. (2011). Herbalife launches new product line for the 24 hour athlete. Competitor. Retrieved from http://running.competitor.com/2011/05/nutrition/herbalife-launches-new- product-line-for-the-24-hour-athlete_28114Distributor Policies-Code of Honor. (2013). Herbalife distributor’s code of honor, revision 03/11. Retrieved from https://www.myherbalife.com/Account/Profile/DocumentsAnd Policies.aspx?type=policies
15. Herbalife International 15Distributor Policies- Expenditures. (2013). Policy Statement On Expenditures By New Distributors 07/16/12. Retrieved from https://www.myherbalife.com/Account/Profile/ DocumentsAndPolicies.aspx?type=policiesEpstein, M. J. (2008). Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Greenleaf Publishing Limited. Sheffield, UKGreene, Jody. (2012). Is MLM a bad word? Chic CEO. Forbes Magazine. Retrieved from http://www.forbes.com/sites/chicceo/2012/09/27/is-mlm-a-bad-word/Greenberg, H. (2013). Selling the American dream. Herb Greenberg- Linkedin. Retrieved from http://www.linkedin.com/today/post/article/20130114160252-29478030-selling-the- american-dreamHerbalife, L. d. (2009). Herbalife Family Foundation provides grant to help bring good nutrition to children in Beijing. Business Wire (English).Herbalife, L. d. (2012).Herbalife statement in response to Ackman presentation.Business Wire (English).Herbalife Bios. (2013). Michael O. Johnson. Herbalife Bios. Retrieved from http://www.herbalifebios.com/Herbalife Family Foundation. (2013). Our mission is simple. Retrieved from https://www.herbalifefamilyfoundation.orgHerbalife Science. (2013). David Heber, PhD. Retrieved from http://www.herbalifescience.com/quality/product-developmentDavid Heber, M.D., Ph.D., F.A.C.P., F.A.C.N.
16. Herbalife International 16Herbalife Today Magazine. (2011). Protecting the golden goose. Herbalife Today Magazine. Retrieved from www.herbalifetoday.com/tm_download/TM_en-GB_166.pdfHolistic Therapies- Belfast. (2013). Seed to Feed. About Herbalife. Herbalife. Home. Retrieved from http://www.holistictherapiesbelfast.com/index.php/herbalife/about-herbalife/seed- to-feed.htmlHotaling, Scott. (2013). Is the Herbalife squeeze coming? Seeking Alpha. Retrieved from http://seekingalpha.com/article/1234511-is-the-herbalife-squeeze- coming?source=google_newsiChange (2012). The Mark Hughes story. Herbalife iChange. Retrieved from http://www.ichange.com/user/Herbalife/journal/the-mark-hughes-storyInvestor Relations. (2013). Herbalife- Investor relations. Retrieved from http://ir.herbalife.com/Press Release. (2010). FDA official joins Herbalife. Release detail. Herbalife. Retrieved from http://ir.herbalife.com/releasedetail.cfm?ReleaseID=543461Press Release. (2009). Herbalife offices earn LEED certification. Release detail. Herbalife. Retrieved from http://ir.herbalife.com/releasedetail.cfm?releaseid=543776Press Release. (2012). Herbalife Ltd. Announces record Fourth Quarter 2011 and full year results, record sales leader retention, and raises 2012 earnings guidance. Release detail. Herbalife. Retrieved from http://ir.herbalife.com/releasedetail.cfm?ReleaseID=650343Products Development. (2013). Product Development. Retrieved from http://www.herbalifescience.com/quality/product-development
17. Herbalife International 17Schaefer, S. (2013). Herbalife says it will clarify distributor disclosures, Ackman doesnt buy it. Forbes.com, 14.Social Responsibility. (2013). Social Responsibility. Herbalife. http://company.herbalife.com /social-responsibilityTaub, Stephen. (2013). The morning brief: Bronte Capital CIO joins Herbalife supporters. Institutional Investor’s Alpha. Retrieved from http://www.institutionalinvestorsalpha.com /Article/3137425/The-Morning-Brief-Bronte-Capital-CIO-Joins-Herbalife- Supporters.html