How One Association Defended Herbalife From Scrutiny

The direct-selling market has had a number of success stories, but investors have raised just as many questions.

And with one of its brightest lights, Herbalife  (opens in a new tab), the subject of a hedge-fund investor’s ire, the pressure is on the industry more than ever. Here’s how an association has helped ease the burden on one of its largest corporate members:

History of criticism: Commission-based direct-selling business models, such as those used by Amway and Medifast, have often faced criticism and legal complaints that they were inherently unethical or even illegal. (The Federal Trade Commission issued a key ruling for the direct-selling industry in 1979, In re Amway Corp.  (opens in a new tab), in which it held that Amway was not a pyramid scheme but found some of its selling processes suspect.) Over the years, the Direct Selling Association (DSA), which in 2011 represented 15.6 million sellers with $29.87 billion in sales in the U.S., has defended the industry’s business model, emphasizing through websites like Direct Selling 411  (opens in a new tab) that the model benefits both consumers and sellers.

The current controversy: Hedge-fund manager Bill Ackman has been particularly critical of Herbalife, accusing it of being a pyramid scheme. Ackman has banked his reputation on taking down the company, putting a $1 billion financial bet on the idea the company will fail. He launched his first attack in December through a detailed presentation  (opens in a new tab) [PDF] on his company’s Facts About Herbalife  (opens in a new tab) site, and on Thursday he stepped up his attack, releasing a 40-page document  (opens in a new tab) raising numerous questions about the company’s business model and legal cases. “I believe it’s good for America for this company to disappear,” Ackman was recently quoted as saying  (opens in a new tab). Earlier this week, an erroneous report claiming the company was the subject of an FTC investigation caused the company’s stock to drop significantly  (opens in a new tab); Ackman’s most recent report, on the other hand, didn’t have an effect.

The association’s defense: In a January news release, the group laid out a defense  (opens in a new tab) of the direct-selling business model, claiming in response to Ackman’s December news release, “DSA can assure the public that the presentation made an ill-informed, grossly inaccurate representation of the direct-selling business model.” DSA cites its lengthy code of ethics  (opens in a new tab), which takes tough stances on deceptive practices, pyramid schemes, and the use of ethical training materials. In its statement, the association was steadfast in defending its members: “The DSA exists to protect and promote the direct-selling industry by educating policymakers, the business community, and the general public about the nature of the industry and how it works; and ensuring DSA member companies behave ethically in all aspects of their businesses through enforcement of the DSA Code of Ethics.”

When faced with difficult challenges to your industry’s fundamental model, what’s the best way to respond to criticism? Let us know your thoughts in the comments.

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