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Why
public ownership is such a risky proposition for a network marketing company… and how it threatens YOU
 If you're like me, you get lots of spam — even legitimate email — touting different
MLM opportunities. They claim all kinds of wonderful attractions, and public ownership is often viewed as a prize feature. NASDAQ or other stock exchange listings have
them positively foaming at the mouth with excitement.
Other "trophy" features typically include membership of the Direct Selling Association and registration with the FDA as a nutraceutical
manufacturer. The assumption is always that these features are highly desirable and proof of credibility.
DSA membership is neither a negative nor undesirable thing... it's just
not a yardstick of MLM company probity or ethical dealing, as some notorious examples
have shown over the years. As for FDA registration... it's a kind of ritual form
of corporate suicide that defers the coup de grace to a time of the FDA's — or,
more to the point, the giant drug companies' — choosing. See the report "Nutraceutical
Nonsense"
for insight into this mindless move.
But surely
public ownership offers a more secure future for the company than relying on private
funding?
Well... maybe. Then again, maybe not.
You have to wonder about the benefits when companies like Amway® and Herbalife®,
which both opted for public listing a few years back, changed their minds and began
buying back their shares.
You have to wonder when companies change hands several times in a spate of corporate
takeovers — especially when their position on the corporate totem-pole sinks gradually
lower, and they become just another facet of the conglomerate's overall marketing
strategy.
The real problems with public ownership are these...
- The bottom line rules, totally.
- Share price and shareholder dividends become the
Holy Grail of management.
- Management time, energy
and resources are increasingly directed away from the business operation to shareholder relations, compliance with stock exchange and government corporate
affairs and governance regulations and procedures, reporting — all major distractions.
- Takeovers and other financial
hi-jinx are a constant threat — management can become totally preoccupied with
defending against hostile takeovers, rumours and threats, and contingency planning.
- In corporate wars, your
company can end up in the same camp, under the same ownership, as one or more of
your major competitors. Survival of the fittest applies. You could end up being
merged, sold off or closed down. (Both Enrich and Rexall Showcase went
through that scenario after their acquisition by global giant Royal Dutch Numico.)
- Distributor networks
rate lower priority. Loyalty between company and distributors evaporates. Disillusionment
often sets in like a festering ulcer.
- Even well-intentioned
company founders, who want the best for their networks, can be overridden by boards
interested only in stock prices and shareholder profits.
- Company insiders can
become pre-occupied with their personal stockholdings, making decisions that
are not necessarily in anyone's interest but their own, despite insider trading laws
and tight scrutiny... greed is a powerful motivator to tread close to the line dividing
legal from illegal, ethical from unethical.
- The history of publicly-owned
MLM companies is NOT encouraging.
Prelude to the
end of a network marketing company
Some years ago, I wrote a hypothetical scenario that alluded to the end of network
marketing as we know it. In the years since then, I've seen nothing that would persuade
me from my original view. Here it is... think about it.
It's an imaginery dialogue between a Fund Manager for a major investment
institution with significant shareholdings in the MLM company and the Chief
Executive Officer (CEO) of a publicly-listed MLM company that employs technology
to service its massive consumer database.
Fund Manager: I've
been studying the figures for this last quarter. What's this "distributor network"
it keeps referring to? Seems to me they get a disproportionate amount of revenues.
Almost 35% according to the report.
CEO: Those are the folks out there who distribute our products. They get rewarded
for introducing new customers and distributors.
Fund Manager: You mean we're running one of those pyramid selling scheme things?
CEO: No... not at all. It’s network marketing, a legitimate, vertical distribution
operation. Perfectly legal and above board.
Fund Manager: Well... I don't know. We have a number of very conservative
investors who wouldn't be comfortable with anything that even looks like one of those
deals. I’ll need to check it out thoroughly.
CEO: My people will
be happy to provide you with any information you need. There's no problem.
Fund Manager: Anyway, I thought we dealt directly with our customers? They
order direct and we ship direct?
CEO: True... but we pay them residual income for having introduced new customers
and new distributors. They only earn it if the volume is supported by repeat sales
each month.
Fund Manager: Well...
according to these latest figures, 92% of our sales are direct to our customers.
We have all our customers databased. Why do we need this network any more?
CEO: Because they introduce more customers and distributors. That's how we
get our growth.
Fund Manager: But according to the figures, the vast majority do nothing.
Most don't even buy from us regularly.
CEO: If that's the case, they gain no benefit... they get paid only on the
volume generated by their downlines.
Fund Manager: Well... we invest in a number of companies — major retailers — who have pretty strong growth through more conventional direct response promotion
to their databases. It seems to me that this network is consuming a whole pile of
revenues that could be better used to reward our stockholders and support our stock
price.
CEO: I'm not sure
I agree with you on that. Our network has been very loyal over the years.
Fund Manager: That's
another point... how long do they get rewarded for introducing a new customer?
CEO: Permanently.
That's one of the attractions of network marketing.
Fund Manager: PERMANENTLY??
Are you kidding? That’s absurd... NO sales team I ever heard of gets permanent residuals
just for introducing a customer. Do we have agreements or contracts with these people?
CEO: We sure do.
Fund Manager: Are those agreements permanent or renewable?
CEO: Annual renewal — they pay a renewal fee each year. That's how we weed
out the dead wood.
Fund Manager: Do those agreements stipulate that we have to renew their
distributorships every year?
CEO: Well... no. There are no guarantees of continuity.
Fund Manager: Is there
anything in those agreements that prevents us from terminating them at the end of
the current period?
CEO: Umm... no. I guess not.
Fund Manager: Better put it on the agenda for the next Board meeting, okay?
CEO: It's going to cause us some pain — the bigger distributors earning six
and seven figure incomes could band together to challenge it in court. Could bring
us adverse media coverage.
Fund Manager: Let 'em. We can outlast 'em financially. Besides, we can suspend
their earnings for the duration of any dispute. Dry up their money supply really fast. And any court I know of in the equity arena will agree that they've had more
than a fair return on their initial introductions. As for negative publicity, the
media has never liked that MLM stuff... they’ll jump at the chance to stick the
knives in again. Especially if our PR flacks run the media campaign. Not a
problem. And certainly worth a try. Our stockholders will sure appreciate our efforts
to get them a better return on investment, at least, so we can't really lose, can
we?
CEO: Well... I don't feel good about this. Our people will see it as a betrayal
of trust.
Fund Manager: What do you mean, "our" people? You work for
US. "Our" people are the stock-holders. And if we DON'T do this,
they'll sure see it as a betrayal of THEIR trust, don't you think? Sounds like you
need to sort out which side of the fence you're on here. Before the next Board meeting
would be wise, I suggest. Better put THAT on the agenda, too.
You can imagine the rest.
It's not hard.
I hope you've found this report useful.
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