Markets

Herbalife's reticence cedes control of narrative to critics, consultant says

19-Mar-2014
Last updated on 19-Mar-2014 at 18:32 GMT - By Hank Schultz
Herbalife's reticence cedes control of narrative to critics, consultant says
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Network marketing giant Herbalife is being investigated by the Federal Trade Commission and has gone dark from a communications standpoint. While such a strategy is understandable, it can have the effect of allowing the company’s critics to control the narrative, said a crisis communication expert.

Dan Hill, president of Ervin Hill Strategy, said the strategy that Herbalife is pursuing is a common one in cases of official probes or of lawsuits. A company’s legal team naturally might not want to say anything that could jeopardize the outcome of court proceedings.

Criticisms extend over severall-year period

Herbalife’s public difficulties extend back a couple of years to a couple of questions posed by influential David Einhorn in an Herbalife earnings call with analysts. Einhorn sought clarification of how Herbalife categorized its distributors, many of whom bore the title but accounted for little in the way of sales. The markets reacted strongly to what it perceived as Einhorn’s attack on Herbalife’s business model, sending the stock price plunging in the following days.

Later, William Ackman, prinicipal of the investment firm Pershing Square, took a $1 billion bet against the company in the form of a short position. He then embarked on an unprecedented public campaign to impugn the company’s reputation, including alleging the company was a Ponzi scheme and that it had violated direct selling laws in China.  Ackman has also brought lobbying pressure to bear on Capitol Hill, a campaign which seems to have borne fruit in the form of the FTC investigation.

In response to the FTC probe, Herbalife issued the following statement, which the company said would be its only communication on matter until substantive issues arise from the inquiry: “Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations. Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years.”

Cascading impact

“That’s not a bad lead,” Hill told NutraIngredients-USA. “But I think this investigation poses a much bigger issue than maybe they realize. There has been so much smoke for more than a year now and this investigation provides maybe a little bit of flame that might have a cascading impact.”

Hill said there is a natural tension within companies in this situation. The legal team wants to control the flow of information so as to give them the most leverage either in court or in settlement negotiations. But there’s another court, too, that of public opinion, and it can be powerful and capricious.

“I often sit in the offices of companies in this situation with their legal team and they say their job is to win in court. Well, my job is to defend the repuation of the company and the brand,” Hill said.  The damage done to a company’s image while court proceedings progress can have dire consequences and can take years to repair.  Or it might prove to be irreparable, Hill said.

“Arthur Andersen is a good example. They won in court, but the firm was gone by the time they had their victory,” he said. “I tell clients that a perfect storm can develop. That was a nearly 100-year-old institution that had one of the best reputations, with well-respected employees working in every Congressional district in America and Congress took them down.”

Coming out of the shell

Herbalife’s reticence can be attributed in part to the nature of network marketing organizations. The prime communications functions at such companies are between the core company and its distributor network and in the case of publicly-traded entities like Herbalife, between management and investors. Hill said Herbalife (and other companies facing similar situations) might want to broaden its scope in order to be able to better control the narrative. Communicating with the market and the community happens mostly through the company's distributors, all of whom operate independent businesses in a network marketing model (Herbalfe does have high-level marketing partnerships with various athletes and sports teams such as the LA Galaxy soccer club). Herbalife did respond to criticisms of its business model with a webinar in early 2013 featuring top executives, but that presentation was aimed primarily at stock analysts.

“I'm not saying Herbalife is in danger of going out of business. But if I were advising them I’d do a few things. I’d be more aggressive in public in responding to attacks and it would be any and all attacks. You kind of have to have a truth squad, if you will, with a script of what they are going to say. I would speak publicly about best practices and the governance of the organization,” he said.

“Whoever is speaking controls the narrative, and that can become the conventional wisdom. Now that there is this FTC investigation, everything that Ackman and others say might have more credence in the public eye.

“I would also be thinking about third party campaigns. I’d be working with thought leaders in academia, in think tanks, economists—people who are credible who support our point of view. People who could, for example, talk about how Herbalife supports local economies with jobs,” Hill said.

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