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 listing has 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 becomes 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 M|L|M company and the Chief Executive Officer (CEO) of a publicly-listed M|L|M 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 40% 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 schemes?

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, 93% 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. Many 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 M|L|M 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.

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