Herbalife continues to be a successful direct selling company despite various accusations of improper activity over the years—most recently Bill Ackman’s campaign to prove it is a pyramid scheme. In 2016 the company reached worldwide net sales of \($4.5\) billion in spite of Ackman’s efforts against the company. Herbalife’s stock price has remained strong enough to retain the confidence of many investors, although it has fluctuated significantly over the past few years.

The products of Herbalife are exclusively sold by 2.3 million independent contractors in over 90 different countries. Herbalife sponsors several professional athletes, teams, and sporting events. Additionally, the company is proud of its corporate social responsibility initiatives. Herbalife is a successful company, but it will continue to face ethical issues as it moves forward, especially because multilevel marketing and direct selling firms often receive additional scrutiny due to their apparent similarities to fraudulent ventures such as pyramid schemes.

Certain aspects of Herbalife’s business as a direct seller have come under special scrutiny.

Internal consumption, for example, is often considered a red flag for pyramid scheme activity when it is found in multilevel marketing models. However, internal consumption exists in nearly all businesses, and U.S. court decisions have made it clear that internal consumption itself is neither illegal nor problematic even in the multilevel marketing context;

much more is required before a pyramid scheme can be suspected. Similarly, inventory loading is another common pyramid scheme warning sign. Herbalife has rarely been accused of inventory loading considering its low startup fee and generous inventory refund policies, but due to the nature of its business, it must always pay close attention to this part of its model to avoid suspicion and ambiguity.

Herbalife, like all companies, can fight against criticism of its operations by maintaining transparency concerning how its business works. Herbalife should also focus on due diligence in ensuring its contractors are not exploited in any way. Herbalife continues to have many loyal sellers and customers throughout the world, showing that the firm has many supporters who believe the company is a legitimate and successful business operation.

Questions:-

1. Why has Herbalife’s multilevel compensation model been accused of being a pyramid scheme?
2. Describe the differences between a legitimate business model and a pyramid scheme.
3. How has Herbalife demonstrated social responsibility?