Herbalife Locked in IR War of Words With Detractors

Most public companies endure a major PR crisis or two in their existence, but when the company in question is called a “fraud,” it doesn’t get much worse than that.

The company in question is nutritional supplement maker and distributor Herbalife, which is locked in a battle with hedge fund manager William Ackerman, who in Dec. 2012 announced that his company, Pershing Square Capital Management, was betting against Herbalife’s stock.

Ackerman called Herbalife a “pyramid scheme,” a charge that on Jan. 10 company executives denied in a two-and-a-half-hour presentation to investors and analysts.

The trouble: Herbalife’s business model, which is termed “multilevel marketing.” The company sells its products through a network of independent distributors, who earn money from selling the products to others while earning commissions from sales made by people they recruit into Herbalife.

Ackerman contends this model benefits people at the top, while Herbalife answers that 80% of the 100 top distributors make more than their sponsors—those who are above them on the totem pole (note we chose not to use the word "pyramid").

To make matters worse the company is now being investigated by the Securities and Exchange Commission. So Herbalife is trying to explain itself to the investment community—some who support the company and others who do not. So far, Herbalife’s messaging has been pretty weak. During the presentation, CEO Michael O. Johnson said, “Girl Scouts sell cookies on a direct-selling method, and nobody attacks them.” Surely they can do better than that.

Johnson also said that Herbalife’s terminology in describing its business model could be confusing, particularly the use of the word “distributor.” The company is working to revise that messaging. One communications tack that might help: Herbalife’s longevity. The company is 32-years-old and appears to have a bevy of “distributors” who are willing to attest to the company's business model.

But when Time writer Christopher Matthews calls the controversy “One of the more entertaining spectacles in the financial world this past month,” and Herbalife’s stock fluctuates wildly, strong, smart action needs to be taken, and quickly.

Follow Scott Van Camp: @svancamp01