Free Argumentative Essay About Herbalife International: An Issue Of Ethics In The Pyramid Scheme

Total number of words: 1,994

Many companies nowadays sell products for marketing nutrition and food supplements, since it is one of the most productive industries in the globe. One of these is Herbalife International, which has its headquarters stated in Los Angeles, California under CEO Michael Johnson and President Desh Walsh. The company markets products for weight management and better health, as well as for skin care and nutrition supplement. However, the company was accused of implementing “pyramid scheme” and in November 2014, the company was under pressure for having received scrutiny from its investors (Alden, 2014, p.1). Earnings fell short by $1.51 per share, as reflected in Thomson Reuters (Alden, 2014, p.1). This is a case of ethics, and it is not a simple thing, mainly because it can destroy a company’s future, as a result of fraudulent investment operations, which are unethical.

An ethical issue

Herbalife International is a multi-level marketing company that earns profits by what other recruited distributors have sold. They call them the “downline distributors”, which submit payments in geometric progression to those who are in higher positions. Those who had been recruited were compensated for having recruited other employees to the organization, instead of having made legitimate retail sales of the product. It was in this aspect that Bill Ackman, head of Pershing Square Capital Management, accused Herbalife of implementing a pyramid scheme, as they recruit distributors instead of selling products.
For this, about 2.6 million distributors in the bottommost of the sales pyramid earn little or no income, while only a handful of the topmost personnel earn millions (Pfeifer & Hamilton, 2012, p.1). But by February of this year, the total earnings of Chief Executive Michael Johnson of Herbalife International was cut short by 36%, with a total compensation of $6.73 million for 2014, from $10.5 million in 2013 (Kerber, 2015, p.1). Herbalife was closely watched, ever since Achkman accused them of implementing the pyramid scheme in 2012 that, according to Herbalife, was a malicious attack based on outdated information (Pfeifer & Hamilton, 2012, p.1). This issue is very important, as it may lead the company to a range of downfall, as stocks fell by 21% in the third quarter results of last year, with earnings of $1.45 per share, instead of the estimated $1.51 per share (Alden, 2014, p.1).
Herbalife International had been in a scrutinizing spotlight ever since, when Ackman accused the company of implementing an “abusive pyramid scheme” while wagering that shares will soon drop to zero (Alden, 2014, p.1). The company denied the claims, and then implemented a new scheme policy in 2014 that aimed at giving benefits to distributors, which allowed them to buy products with discounts at a much lower price. This was to cover the failure in the performance goals, as the company failed to meet the target amount, with a drop in shares by 11% (Kerber, 2015, p.1). From the case of Herbalife International, it is evident that unethical operation can largely affect net utility and the shares of a company, as there will be less investors and recruiting agents to support the marketing of the products.

Facts & key assumptions

The pyramid scheme—like multi-level marketing—is an unethical operation centering on fraudulent operation in which “promoters of so-called investment or trading schemes enrich themselves in a geometric progression through the payments made by recruits to such schemes” (Albaum & Peterson, 2011, p.351). Those who were recruited earn money by recruiting more distributors of the product, instead of producing more sales to the end consumers. This, however, would reward the recruiters with profits, even if they were not related to the sale of the product. In a pyramid scheme, profits are being distributed according to recruitment of distributors, with more profits to those who are in higher levels of the pyramid. Others require payment for joining the organization, while other pyramid companies pressure the distributors to purchase some inventory, without policy for the “buy-back”. Because of these falsified policies, only those in the higher levels tend to earn more, with greater percentage of the profits for them, while those in the lower levels are usually forced to recruit more distributors, for them to earn more rewards and greater profits.
With all these, there are five assumptions that can be formed out of the given case. First, it can be assumed that, the ethicality of a business is based on whether the wages are being distributed evenly among members of different levels, or if they benefit only those who are in the higher levels. Second, in spite of being successful in the business arena, a firm or organization can be managed effectively but still fail in terms of ethicality. Third, a failure in ethicality could also mean failure in sustainability, since they are both related in the sense that ethicality affects the net utility, which is one of the basics of sustainability. Fourth, there is unethicality in the pyramid scheme mainly because the company seems to buy other distributors, and then give the profits to those who are in the topmost level of the pyramid. Fifth and final, multi-level companies like Herbal International should also be managed effectively, for profits to enter the business company, even through the use of the pyramid scheme. Anything that takes place within the company should be carefully organized and for this, leadership appears to be the centermost piece significant in managing a company. From these assumptions, it seemed to profess that in business, ethicality can affect the overall net utility, as well as the overall profits that should sustain and enhance the company.

Analysis

Based on the theory of John Stuart Mill, Utilitarianism should be based on the effects of the act. Feldman (1978) quoted the words of John Stuart Mill when he stated,
[A]ctions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness. By “happiness” is intended pleasure, and the absence of pain; by “unhappiness” pain, and the privation of pleasure. (Feldman, 1978, p.17)
Secondly, Feldman (1978) quoted the theory of Mill when he mentioned the three categories of actions: first is obligatory; second is permissible; and third is forbidden (p.19). Based on the opinion of Herbalife, what they did was permissible, which meant that it was an acceptable deed or act, and that they were morally right. As Herbalife International stated,
Today’s presentation was a malicious attack on our business model based largely on outdated, distorted and inaccurate information. We are not an illegal pyramid scheme. (Pfeifer & Hamilton, 2012, p.1)
However, Ackman believed that the company implemented a scheme that was “forbidden”, mainly because of the fraudulent manner in which there was inequity in distributing the income. In this debate comes the question on what exactly is ethical and/or unethical.

Applying Kant’s “categorical imperative”

According to the theory of Immanuel Kant, actions are based on personal principles that take into account the moral duties of a person, in relation to the environment. In his version of the “categorical imperative”, a person has his/her own will, whether or not to perform an action. To be categorical is to accept unconditionally, with rational will and “without reference to any ends that we might or might not have” (Stanford Encyclopedia of Philosophy, 2004). It does not apply any condition and without any anticipated end but rather, because of being rational in all senses, would enable them to act out the deed without any reserves but as an effect of having a rational will, which allows them to set up a goal.
This is very much related to Utilitarianism in the sense that, people should act with reference to an anticipated end that is imperative, such as happiness. The imperative becomes problematic when the end becomes a “possible” end and not an unconditional one, such as happiness. This is mainly the reason why Herbal International had an imperative that was problematic, since the anticipated end was not imperative—such as happiness, pleasure, or comfort—but things that are material, such as an increasing profit or gains. As it was said, “almost all non-moral, rational imperatives are problematic, since there are virtually no ends that we must will” (Stanford Encyclopedia of Philosophy, 2004). However, if there should be a rule that authorizes Herbalife International to implement the act, this can be summarized as the following: Actions derived from a will that operates on the basis of subjective volitional ideologies is both moral and prudential. It is as if to say that, anything done for the individual, personal pursuit of a will should be counted as both moral and prudential. It is in this rule that Herbalife chose to implement the deed, since it is their will to operate in terms of “subjective volitional ideologies”, which for them is counted as moral and prudential.
However, this rule reflected in the act of Herbalife International cannot be made into a universal law. According to Kant’s Universal Law of Nature, the first formulation says that one should act “only in accordance with that maxim through which you can at the same time will that it become a universal law” (Kant, 1996, p.73). This single categorical imperative, when applied in the case of Herbalife, would then propose that their maxim become a universal law that would govern every rational agent. If this would be the universal law of all agents, then each agent in the universe would act according to subjective volitional ideologies, with each one doing what would provide utmost pleasure to oneself. There will be no basis for categorical imperative to be willed, with no unconditional anticipated end that is applicable to all agents in the universe. This rule will be problematic, as it is a non-moral imperative with no ends that must be willed. The act becomes unethical, and it cannot be applied as a universal law, since the “maxim” of the action appears to be irrational.

Conclusion

As it is reflected in the theory of Utilitarianism, an act or deed is right and rational if and only if it will promote happiness, once it becomes a universal law. If, however, it tends to promote pain and privation of pleasure, then it is not universally applicable and cannot be made to promote happiness to all beings. An act should not be forbidden, for it to be rational and morally right. If, however, the act is based on subjective principles or ideologies, having its own will and principles, with no unconditional anticipated end, then it cannot be counted as a moral principle that can be made into a universal law. Although it contains a rational will, the maxim is not imperative but is materially subjective to only a few agents, and not to the universe as a whole. It is a non-moral, rational imperative, with no ends that must be willed. What is performed in action is a rule that is subjective and non-universal, and by the Universal Law of Nature, should not have been applied by Herbalife International, since it is not unanimously applicable. It seemed that, what was supposed to provide unconditional happiness became pleasure only to a few chosen ones in the higher levels of the pyramid.

References:

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