Why has Herbalife’s multilevel compensation model been accused of being a pyramid scheme?
Bill Ackman, an “activist investor,” decided to blow the whistle after identifying a lot of red flags in Herbalife’s multilevel business scheme, which portrayed characteristics similar to those of a pyramid scheme. Ackman cited that Herbalife’s contractor was losing money, the company earned more when the employees recruited new contractors than selling products. The original contractors were given false illusions for their investments. Additionally, the company’s top 1 was increasingly gaining a lot of money, while the contractors were losing their money. And after the Federal Trade Commission and the Hispanic federation conducted their investigation, a strange pattern emerged as Herbalife’s business model targeted poor Hispanic and African Americans claiming to multiply their invested money without much effort. The findings of these investigations became controversial when an ethical business decision is implemented. Looking at the above scenario, Herbalife seems to be violating the individual factor by exploiting people while claiming to follow the moral issue intensity when they recruit new contactors and making them lose money. The opportunity the company provides seems to have come from organizational factors; hence it fails to describe their decisions and intentions while laying out the elements and process for ethical decision making.
Describe the differences between a legitimate business model and a pyramid scheme.
A legitimate business model should have a valid product or service that will be paying when they interact with the company. On the other hand, a pyramid scheme chooses to recruit customers and contractors by encouraging them to pay the company for them to access other services and products while hiring other new contractors to earn more money. A legitimate business model helps contractors and retailers to buy their goods for a higher price due to high quality, mainly when producing them. Alternatively, a pyramid scheme sells products on a third party basis, and they are high prices despite having little knowledge of the quality of these goods. In many cases, they tend to forego the quality and focus on the cost of their products. A legitimate business model allows anyone to profit from them through investment, partnership, or sales of products and services with fewer people losing money on them. On the contrary, contractors and retailers have a higher chance of losing money in a pyramid scheme due to the collapse of the company or lack of new contractors to recruit or buying of low-quality products at a high price.
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How has Herbalife demonstrated social responsibility
After the FTC commission closed the investigations into Ackman’s allegations against Herbalife, the New York Stock Exchange forced the company to increase accountability in their governance towards the company’s stakeholders. Additionally, the company was conditioned to include ethical framework into their business model as business ethics to help protect an individual in the company through moral intensity issues and the organizational factors to make the right ethical decisions. Finally, the company’s code of business conduct and ethics help protect contractors, employees, suppliers, and business partner while partnering with the regulatory authorities. All the company workers and stakeholders have a chance of achieving physical and mental wellness through the internal programs created. And the employees from the lower division should have health insurance for a better quality of life.
Herbalife had to have philanthropic efforts to fulfill its social responsibility. The company runs and maintains the program through the Herbalife Family Foundation and the Casa Herbalife program. The two organization runs disaster and nutrition reliefs programs and charity that helps the minor groups fulfilling their basic needs to have comfortable lives.
